10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 000-17157

Novellus Systems, Inc.

(Exact name of Registrant as specified in its charter)

California	77-0024666
(State or other jurisdiction of incorporation of organization)	(I.R.S. Employer Identification Number)

4000 North First Street, San Jose, California 95134
(Address of principal executive offices including Zip code)

(408) 943-9700
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, no par value	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:
None

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

Indicate by check if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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).

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

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

As of July 1, 2006 the aggregate market value of voting and non-voting stock held by non-affiliates of the Registrant was $3,061,932,456 based on the average of the high and low price of the Common Stock as reported on the NASDAQ National Market on such date. Shares of Common Stock held by officers, directors and holders of more than 5% of the outstanding Common Stock have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the Registrant’s Common Stock outstanding on February 21, 2007 was 125,751,401.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates information by reference from the Registrant’s Proxy Statement for its 2007 Annual Meeting of Shareholders. Except as expressly incorporated by reference, the Registrant’s Proxy Statement shall not be deemed to be a part of this Annual Report on Form 10-K.

NOVELLUS SYSTEMS, INC.

2006 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

			Page
PART I
	Item 1:	Business		2
	Item 1A:	Risk Factors		10
	Item 1B:	Unresolved Staff Comments		18
	Item 2:	Properties		18
	Item 3:	Legal Proceedings		19
	Item 4:	Submission of Matters to a Vote of Security Holders		20
PART II
	Item 5:	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		20
	Item 6:	Selected Financial Data		23
	Item 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
	Item 7A:	Quantitative and Qualitative Disclosures about Market Risk		40
	Item 8:	Financial Statements and Supplementary Data		43
	Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		80
	Item 9A:	Controls and Procedures		80
	Item 9B:	Other Information		83
PART III
	Item 10:	Directors, Executive Officers and Corporate Governance		83
	Item 11:	Executive Compensation		83
	Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		83
	Item 13:	Certain Relationships and Related Transactions, and Director Independence		84
	Item 14:	Principal Accountant Fees and Services		84
PART IV
	Item 15:	Exhibits and Financial Statement Schedules		84
Signatures				87
EXHIBIT 10.23
EXHIBIT 10.24
EXHIBIT 10.25
EXHIBIT 10.26
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I

The following information should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K.

Item 1.   Business

The Company

Novellus Systems, Inc. is a California corporation organized in 1984. Novellus develops, manufactures, sells and supports equipment used in the fabrication of integrated circuits, which are commonly called chips or semiconductors. Customers manufacture chips for sale or for incorporation in their own products, or provide chip-manufacturing services to third parties.

Integrated circuits are generally built on a silicon wafer substrate and include a large number of different components, such as transistors, capacitors and other electronic devices. These components are connected on the silicon wafer by multiple layers of wiring, also called interconnects. To build an integrated circuit, transistors are first fabricated on the surface of the silicon wafer. Wiring and insulating structures are then added as alternating thin-film layers in a series of manufacturing process steps. Typically, a first layer of dielectric (insulating) material is deposited on top of the transistors. If the conductive material used is aluminum, subsequent metal layers are deposited on top of this base layer, etched to create the conductive lines that carry the electricity, and then covered with dielectric material to create the necessary insulation between the lines. When copper wires are being constructed, the manufacturing process is a mirror image of that described for aluminum: the insulator is etched, and the copper wiring is deposited within the etched insulator using a high-technology combination of PVD deposition and an electrochemical deposition process. Building either copper or aluminum wiring requires these manufacturing steps to be repeated many times: advanced chip designs may require more than 500 process steps.

Novellus provides products that are used in a number of different manufacturing process steps. The current advanced deposition systems use chemical vapor deposition (CVD), physical vapor deposition (PVD), and electrochemical deposition (ECD) processes to form the interconnects in an integrated circuit. Our High-Density Plasma CVD (HDP-CVD) and Plasma-Enhanced CVD (PECVD) systems employ a chemical plasma to deposit dielectric material within the gaps formed by the etching of aluminum or as a blanket which can then be etched with patterns so conductive materials can be deposited into the etched dielectric. Our CVD Tungsten systems are used to deposit tiny tungsten plugs between layers of metal. Our PVD systems use direct-current electrical power to deposit conductive metal layers by sputtering metal atoms from the surface of a target source. Our Electrofill^tm ECD systems are used for depositing copper on wafers which form the conductive wiring on the integrated circuit. Beginning in 2001, Novellus expanded beyond deposition technologies with a series of business acquisitions. In 2001 we acquired GaSonics International Corporation, a manufacturer of systems used to clean and prepare a wafer surface. In 2002 we acquired SpeedFam-IPEC, Inc., a manufacturer of chemical mechanical planarization (CMP) products. In 2004 we further diversified by acquiring Peter Wolters AG, a 200-year-old German company specializing in lapping and polishing equipment. These systems are sold into a broad range of industrial applications. With the acquisition of Peter Wolters, Novellus entered into market sectors beyond semiconductor manufacturing for the first time. In November 2005 we acquired Voumard Machine Co. SA (Voumard) a privately-held manufacturer of high-precision machine manufacturing tools based in Neuchatel, Switzerland. This acquisition further expanded Peter Wolter’s product offering to include specialized, high-precision grinding equipment. In December 2004, the Board of Directors approved the creation of Novellus Development Company LLC, with funding of up to $10 million, for investment in private companies at various stages of development.

The headquarters of Novellus Systems, Inc. is located at 4000 North First Street, San Jose, California 95134. The main telephone number is (408) 943-9700.

Additional information about Novellus is available on our web site at www.novellus.com. Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as

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amended (Exchange Act) are available on the web site free of charge. These reports are available as soon as reasonably practicable after we electronically file them with the Securities and Exchange Commission (SEC). Information contained on the web site is not part of this Annual Report on Form 10-K or of other filings with the SEC.

Semiconductor Industry Background

Over the past twenty years or more, the semiconductor industry has grown rapidly as a result of increasing demand for personal computers, the expansion of the Internet and the telecommunications industry, and the emergence of new high technology products for the consumer. In recent years, growth has moderated, and there are signs that the industry is beginning to mature. While unit demand for chips continues to rise, their average selling prices continue to decline. There is growing pressure on chip manufacturers to reduce manufacturing costs while increasing the performance of their products. The semiconductor equipment industry is a major factor in the cost structure in the semiconductor industry. The semiconductor industry has also been historically cyclical, with periods of rapid expansion followed by periods of over-capacity.

Several technological trends characterize integrated circuit manufacturing. Perhaps the most prominent of these trends is the increasing density of the integrated circuit. Moore’s Law, first postulated in the mid-1960s and still substantially accurate some 40 years later, states that the density of circuitry on an individual semiconductor chip doubles every 18 months. Today’s advanced devices are being manufactured with line widths as small as 45 nanometers, and with up to eleven layers of interconnect circuitry. By increasing circuit density, manufacturers can pack more electronic components per silicon area and thereby provide higher performance at substantially the same cost.

Another trend worth noting is the transition to copper from aluminum wiring as the primary conductive material in semiconductor devices. Copper has a lower electrical resistance value than aluminum and provides a number of performance advantages. Because of the superior properties of copper, a device made with copper will need fewer metal layers than one made with aluminum. This provides a considerable reduction in manufacturing cost. Copper wiring allows a substantial improvement in device speed and a significant reduction in power compared to aluminum.

A similar transition is under way from traditional insulating films made of silicon oxide to insulators with a low dielectric constant, or “low-k.” Low-k dielectrics reduce the capacitance between metal lines in a device. This improves the speed and lowers power consumption in the device. However, low-k materials are more fragile than silicon oxide, and this poses a host of new challenges to the industry in integrating the new materials into existing manufacturing processes.

Another trend in the industry is to continue to increase the wafer size. Semiconductor device manufacturers have migrated to larger, 300mm wafers because of the potential manufacturing cost advantages of these larger wafers compared to 200mm. The 300mm wafers provide in excess of 2.25 times the number of chips per wafer and may provide significant economies of scale in the manufacturing process. More than 75% of all wafer fabrication equipment sold during 2006 was for 300mm wafer manufacturing.

These trends shape the equipment and process demands of our device-manufacturing customers. These customers generally measure the cost and performance of their production equipment in terms of “cost per wafer,” a ratio determined by factoring in the costs for acquisition and installation of a system, its operating costs, and net throughput rate. In a fixed period of time, a system with higher net throughput allows a manufacturer to recover the purchase price over a greater number of wafers, thereby reducing the cost of ownership of the system on a per-wafer basis. Yield and film qualities are also significant factors in selecting processing equipment. The increased cost of larger and more complex semiconductor wafers has made high yields extremely important to customers. To achieve higher yields, systems must be able to deposit high quality films repeatably, consistently and reliably. This characteristic is critical in achieving commercially acceptable yields. Systems that operate at desired throughput rates with wide process windows can achieve repeatability more easily than those with narrow process windows.

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Semiconductor Business Strategy

Our business objective is to increase our market share in semiconductor manufacturing process equipment sold to the semiconductor industry. The following are the key elements of our strategy:

Emphasize High-Productivity Systems — We established our current position in the industry by emphasizing high productivity as the principal benefit that our products and technologies deliver to customers. Our unique multi-station sequential architecture, which is incorporated in many of our products, is an example of our commitment to productivity. We intend to retain our historical focus on productivity by applying our multi-station sequential architecture in product enhancements and new product offerings.

Be Recognized for our Technology in our Served Available Markets — In the new era of nanoelectronics manufacturing, technology becomes critically important, given the difficulties in manufacturing chips at ever smaller line widths. It is our strategy to anticipate the technologies the customers need and design innovative products which will enhance their manufacturing capabilities.

Focus on Reducing Customer Costs — Cost is an important component when measuring overall productivity. Recognizing that, we strive to provide products and technologies that reduce the customer’s overall cost of ownership by continuing to increase our systems throughput, improving our deposition quality and improving the reliability of our products.

Broaden our Interconnect Offerings — As semiconductor manufacturing technology becomes more complex, the interconnect structures on a device become more critical to overall performance. We have expanded beyond deposition technology with the acquisitions of Gasonics and SpeedFam-IPEC, which give us expertise in dry photoresist removal and chemical-mechanical polish. In addition, in 2005 we introduced our internally developed ultraviolet thermal processing (UVTP) system for post deposition treatment of films to control stress and improve mechanical integrity. Other areas may offer opportunity for future product portfolio expansion.

Differentiate our Service — A vital element of success in the systems business is the service and repair of those systems. Service is critical to the support of our mission, but service is not the ultimate goal of our mission.

Expand Operational and Customer Support Presence in Asia — In the fourth quarter of 2006, we announced the establishment of Novellus International Systems, BV, in Singapore, our new international headquarters for systems sales that more closely aligns our operational structure with our customer base. The semiconductor industry is steadily moving to Asia. We have offices in the key locations necessary to compete and are actively increasing our worldwide sourcing of materials to this region as well.

Leverage our Low-Cost Manufacturing Structure — We perform all system design, assembly and testing in-house, and outsource the manufacture of most subassemblies. This manufacturing strategy allows us to minimize our overhead costs and capital expenditures and gives us flexibility to increase capacity as needed. Outsourcing also allows us to focus on product differentiation through system design and quality control, and helps to ensure that our subsystems incorporate the latest third-party technologies in robotics, gas panel designs and power supplies. We work closely with our suppliers to achieve cost reduction through joint development projects.

Semiconductor Manufacturing Products

Deposition Technologies

Our historical strength is rooted in deposition products. We currently offer products that address the needs of manufacturers across a number of different deposition technologies — CVD, PVD and ECD.

Since the introduction of our Concept One^® dielectric platform in 1987, we have offered a range of processing systems for dielectric and metal deposition. In 1991, we introduced the Concept Two^® platform — a modular, integrated production system capable of depositing both dielectric and conductive metal layers by combining

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one or more processing chambers with a common, automated wafer handler. The Concept Two enabled semiconductor device manufacturers to increase production throughput and system capability by adding process modules without having to replace existing equipment. In 1997, we introduced the Concept Three^® platform, which built on the foundation of Concept Two to offer greater throughput in 300mm wafer manufacturing applications.

CVD Products

In the CVD process, manufacturers place wafers in a reaction chamber, introduce a variety of pure and precisely metered gases into the chamber, and then add a form of energy to activate a chemical reaction that deposits a film on the wafers. The CVD process is the traditional method used to deposit dielectric films on wafers. Manufacturers also use CVD to deposit conductive metal layers, particularly tungsten, as it is difficult to deposit such layers on devices with very small features when using conventional PVD or other deposition technologies.

HDP CVD Products

Concept Two SPEED^® — Introduced in 1996, Concept Two SPEED was the semiconductor industry’s first high-density plasma system capable of high-volume manufacturing. Concept Two SPEED is a single-wafer processing system for 200mm substrates, and was originally designed to deposit dielectric materials in an aluminum interconnect manufacturing process. Today, Concept Two SPEED is primarily used to deposit shallow trend isolation (STI) films as part of the transistor formation as well as to deposit pre-metal layer dielectrics (PMD) in both aluminum and copper based devices.

Concept Three SPEED — Introduced in 1997, the Concept Three SPEED is designed to deposit dielectric material on the 300mm wafer. It is based on our production-proven Concept Two product.

SPEED NExT — Introduced in 2004, the SPEED NExT system for 300mm wafers is designed specifically to address the challenges of dielectric gap fill at 65 nanometers and beyond.

W-CVD Products

Concept Two ALTUS^® — In 1994, we introduced the Concept Two ALTUS, used to deposit the tungsten plugs and vias that connect aluminum interconnect lines in aluminum-based chips. The Concept Two ALTUS combines the modular architecture of the Concept Two with an advanced tungsten CVD dual-process chamber.

Concept Three ALTUS — The Concept Three ALTUS, introduced in 1997, provides the same capabilities to 300mm wafer tungsten deposition as its Concept Two ALTUS predecessor delivers for 200mm wafer applications.

ALTUS DirectFill^tm — Introduced in 2004, the ALTUS DirectFill tungsten nitride/tungsten deposition system is designed for advanced contact and via-fill applications at 65 nanometers and below. ALTUS DirectFill simplifies the tungsten deposition process by replacing the standard multi-tool approach with a single three-module system.

PECVD Products

Concept Two SEQUEL^® Express — Introduced in 1999, the Concept Two SEQUEL Express is designed to deposit our CORAL^® family of low-k dielectric films, as well as other advanced films required for manufacturing 0.18 micron-and-smaller semiconductor devices.

VECTOR^® — Introduced in 2000, VECTOR is a PECVD system for depositing dielectric films on 300mm wafers. VECTOR delivers dielectric films required for a low-k device at 90 nanometer-and-smaller design rules.

SOLA^® — Introduced in 2005, SOLA is a UVTP system used for the low-temperature, post-deposition treatment of dielectric films. SOLA is designed for advanced materials such as high stress nitrides and porous

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low-k dielectrics that are used to deliver increased device speeds and lower power consumption in sub-90 nanometer chips.

PVD Products

PVD, also known as “sputtering,” is a process in which ions of an inert gas such as argon are electrically accelerated in a high vacuum toward a target of pure metal, such as tantalum or copper. Upon impact, the argon ions sputter off the target material, which is then deposited as a thin film on the silicon wafer. PVD processes are used to create the barrier and seed layers in copper damascene interconnect applications. We entered the PVD marketplace with the acquisition of Varian Associates’ Thin Film Systems Division in 1997.

INOVA^® — The INOVA 200mm system was originally developed by the Thin Films Systems Division of Varian Associates. Novellus reintroduced the product in 1998 with the addition of a patented Hollow Cathode Magnetron (HCM)^® ionized PVD source that was designed specifically for the deposition of copper barrier and seed films.

INOVA^® xT — In 2000, we introduced the 300mm INOVA xT, which features HCM technology.

INOVA^® NExT^tm — In 2005, we introduced the INOVA NExT, a 300mm metallization system designed to deposit highly conformal copper barrier-seed films at 45 nanometers and beyond. On the INOVA NExT, the single target HCM technology has been extended to the 45 nanometer node; the system also features an integrated ion-induced atomic layer deposition (iALD) module to deposit tantalum nitride (TaN) barrier films below 45 nanometers.

ECD Products

Our Electrofill products are used to build the copper primary conduction layers in advanced integrated circuits. Electrofill uses a copper electrolytic solution to create lines and vias in a dielectric layer which has been etched with the pattern of the circuitry, in a process called copper damascene.

SABRE^® — The SABRE copper Electrofill system was introduced in 1998. The SABRE employs a proprietary electrofill cell. When coupled with the INOVA PVD system, SABRE provides a complete system for depositing advanced copper interconnects.

SABRE xT — The second generation SABRE xT, introduced in 1999, is an ECD platform for both 200mm and 300mm wafers. New features on the SABRE xT that were not found on the original SABRE include advanced plating chemistries, an integrated anneal module and closed-loop chemical monitoring.

SABRE NExT^tm — Introduced in 2003, the SABRE NExT builds on the SABRE xT’s production track record, offering a proprietary chemistry, a new anode cell design and other hardware refinements to tackle the complex process requirements of 90 nanometer, 65 nanometer and 45 nanometer interconnect structures.

SABRE Extreme^tm — In July 2006 we introduced the SABRE Extreme, an advanced Electrofill system that has been qualified at 45 nanometers and has demonstrated fill at 32 nanometers. The SABRE Extreme incorporates a number of technological innovations for advanced manufacturing applications, including advanced wafer entry control for thin seed layers (< 200A), tunable profile control for improved uniformities, and the capability to plate on non-copper seed materials.

Surface Preparation Technologies

Chip manufacturers use surface preparation products to remove photoresist from a wafer before proceeding with the next deposition step in the manufacturing process. We entered the market for this manufacturing process step in 2001.

GAMMA^tm 2100 — The GAMMA 2100 200mm photoresist removal system uses a plasma source to strip photoresist. The GAMMA architecture features a multi-station sequential processing design with six strip stations.

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GAMMA^® 2130 — The GAMMA 2130 system is our photoresist strip system for 300mm wafers. Our multi-station sequential processing architecture incorporates six stations within a single process chamber.

GAMMA^® Express — The GAMMA Express, introduced in 2006, is a high productivity resist strip system designed to meet the technology requirements for 45 nanometer manufacturing. GAMMA Express performs high dose implant strip (HDIS) and incorporates non-oxidizing processes for advanced silicides and low-k dielectric films. The redesigned GAMMA Express platform offers a new direct-drive wafer handling subsystem, as well as a new high ash rate source.

CMP Technologies

CMP systems polish the surface of a wafer after a deposition step to create a planar surface before moving on to subsequent manufacturing steps. Since copper films are more difficult to polish than the tungsten and oxide films used in previous-generation aluminum interconnects and since low-k dielectrics are much more porous than their predecessors, CMP has been elevated to the forefront of the enabling technologies required in a copper damascene manufacturing process. In recognition of this trend, in 2002 we acquired SpeedFam-IPEC, a global supplier of CMP systems used in the fabrication of advanced copper interconnects. We believe that the opportunity to understand the interactions between planarization, deposition and surface preparation steps and to optimize them for overall performance gives us an important advantage in extending copper and low-k processes to advanced semiconductor devices.

MOMENTUM^tm — MOMENTUM is a high-throughput, dry-in/dry-out CMP system for all 200mm wafer process applications. Designed with extendibility to accommodate future reductions in line widths, the MOMENTUM has four independent wafer-polishing platens. MOMENTUM also employs an orbital polishing motion and features a through-the-pad slurry delivery system.

XCEDA^tm — Introduced in 2004, the XCEDA copper CMP system is an advanced 300mm platform designed to exceed both the technical and economic requirements of CMP at 65 nanometers and beyond. The XCEDA has four polishing modules and a through-the-pad slurry delivery system.

Industrial Applications Group

We acquired Peter Wolters AG in June 2004, the same year in which it celebrated its 200th anniversary, and in 2005 further expanded our Industrial Applications Group with the acquisition of Voumard Machine Co. SA. Our Industrial Applications Group supplies high-precision machines for grinding, deburring, lapping, honing and polishing the outer surfaces of parts made of metal, glass, ceramic, plastic, silicon or similar materials. Our customers for these machines are manufacturers in sectors such as vehicles, aircraft and electronic products, parts and components. Other customers are in the glass and ceramics industries as well as manufacturers of products such as pumps, transmissions, compressors and bearings. In all of these areas, the demand for close tolerances for finish quality, thickness, flatness and parallelism is high. Our products include single-side machines, double-side machines, thru-feed grinding machines that feature the continuous feed of parts to be processed, and deburring systems.

Marketing, Sales and Service

We rely on a direct sales force to sell our chip manufacturing products in all geographic regions in the world where semiconductors are manufactured, which are Europe, the United States, Korea, Japan, China, Taiwan, and Southeast Asia. Our Industrial Applications products are also sold through a combination of a direct sales force and manufacturer’s representatives.

The ability to provide prompt and effective field service support is critical to our sales efforts, and we believe the support that we provide to our installed base has accelerated the penetration of certain key accounts. We also believe that our marketing efforts are enhanced by the technical expertise of our research and development personnel, who provide customer process applications support and participate in a number of industry forums, conferences and technical symposia.

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Customers

For the year ended December 31, 2006, Samsung, Intel Corporation, and Hynix accounted for 16%, 11% and 10% of our net system sales, respectively. For the year ended December 31, 2005, Samsung and Intel Corporation accounted for 20% and 13% of our net system sales, respectively. For the year ended December 31, 2004, Taiwan Semiconductor Manufacturing Company, Ltd., UMC (United Microelectronics Corporation) and Samsung accounted for 12%, 12% and 11% of our net system sales, respectively. System sales to our ten largest customers in 2006, 2005, and 2004 accounted for 72%, 71%, and 69% of our system sales, respectively. We expect that sales of our products to relatively few customers, none of which have entered into long-term agreements requiring them to purchase our products, will continue to account for a high percentage of our net sales in the foreseeable future.

Export sales outside of the United States for the year ended December 31, 2006 were $1.2 billion, or 72% of net sales. For the year ended December 31, 2005, export sales were $1.0 billion, or 73% of net sales. For the year ended December 31, 2004, export sales were $1.0 billion, or 77% of net sales.

Backlog

As of December 31, 2006, our backlog was $566.0 million of which $17.3 million was cancelled in the period from December 31, 2006 to February 26, 2007. As of December 31, 2005, our backlog was $382.2 million, with no cancellations in the period from December 31, 2005 to March 15, 2006. Our backlog includes transactions for which we have accepted purchase orders and assigned shipment dates within twelve months. All orders are subject to cancellation or rescheduling by customers, with limited or no penalties. Some products are shipped in the same quarter in which the order was received. For this reason, and because of possible changes in delivery schedules, cancellations of orders and delays in shipments, our backlog as of any particular date is not necessarily a reliable indicator of actual shipments for any succeeding period.

Research and Development

The highly cyclical semiconductor manufacturing industry is subject to rapid technological change and continual new product introductions and enhancements. Our ability to remain competitive depends on our success in developing new and enhanced systems, and introducing them at competitive prices on a timely basis. For this reason, we devote a significant portion of our personnel and financial resources to research and development programs.

Our current research and development efforts are directed at developing new systems and processes and improving the capabilities of existing systems. Research and development programs include advanced PVD systems, advanced gap fill technology, primary conductor metals, low-k dielectric materials, CMP systems and additional advanced deposition and surface preparation technologies for the next generation of smaller-geometry fabrication lines. All new systems under development are capable of processing 300mm wafers.

Expenditures for research and development, excluding charges for acquired in-process research and development, during 2006, 2005, and 2004 were $244.2 million, $247.3 million, and $252.1 million, respectively. These expenditures represented approximately 15%, 18%, and 19% of our net sales in 2006, 2005, and 2004, respectively. We believe that research and development expenditures will continue to represent a substantial percentage of our net sales in the future.

Manufacturing

Our manufacturing activities consist primarily of assembling and testing components and subassemblies that we acquire from third-party vendors and then integrate into a finished system. We utilize an outsourcing strategy for the manufacture of most subassemblies, and we perform all system design, assembly and testing in-house. Our outsourcing strategy enables us to minimize fixed costs and capital expenditures, and provides us with the flexibility to increase production capacity. This strategy also allows us to focus on product differentiation through system design and quality control. We believe that our use of outsourced product specialists enables our subsystems to incorporate the latest and most advanced technologies in robotics, gas

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panel designs and power supplies without the need for in-house expertise. We strive to work as closely as possible with all of our suppliers to achieve mutual cost reduction through joint development efforts.

Although we make reasonable efforts to ensure that such parts are available from multiple suppliers, certain key parts may only be obtained from a single source or limited sources. These suppliers are, in some cases, thinly capitalized, independent companies that generate significant portions of their business from us or from a small group of companies in the semiconductor industry. We seek to reduce our dependence on single or limited-source suppliers. However, disruptions in parts delivery or termination of certain suppliers may occur, and such disruptions and terminations could have an adverse effect on our operations. A prolonged inability to obtain certain parts could have a material adverse effect on our business, financial condition or results of operations, and could result in our inability to meet customer demands on time.

We manufacture our systems in clean-room environments similar to those used by semiconductor manufacturers for semiconductor device fabrication, which helps to minimize the amount of particulates and other contaminants in the final assembled system and to improve product yields for our customers. Following assembly, we package our completed systems in vacuum packaging to maintain clean-room standards of particulates and other contaminants during shipment.

Competition

Significant competitive factors in the semiconductor equipment market include system performance and flexibility, cost, the size of each manufacturer’s installed customer base, customer support capability and the breadth of a company’s product line. We believe that we compete favorably in all of the market segments we serve because of the fundamental advantages associated with our system performance and flexibility, low cost of ownership, high wafer yields and customer support. However, we face substantial competition from both established competitors and potential new entrants in each of these markets. Installing and integrating capital equipment into a semiconductor production line represents a substantial investment. For this reason, once a manufacturer chooses a particular vendor’s capital equipment, experience has shown that the manufacturer will generally rely upon that equipment for the useful life of the specific application. As a result, all of today’s semiconductor equipment makers typically have difficulty in selling a product to a particular customer to replace or substitute for a competitor’s product previously chosen or qualified by that customer.

In the CVD, PECVD, HDP and PVD markets, our principal competitor is Applied Materials, Inc. (Applied), a major supplier of systems that has established a substantial base of installed equipment among today’s semiconductor manufacturers. In the PECVD market, we also compete against ASM International. In the ECD market, our principal competitors are Applied and Semitool, Inc. Our principal competitors in the surface preparation product arena are Mattson Technologies, Inc. and Axcelis Technologies, Inc. In the CMP market, our major competitors are Applied and Ebara Corporation.

Patents and Proprietary Rights

We intend to continue to pursue patent and trade secret protection for our technology. We currently hold 594 patents. We have many pending patent applications, and we intend to file additional patent applications as appropriate. There can be no assurance that patents will be issued from any of these pending applications or future filings, or that any claims allowed from existing patents or pending or future patent applications will be sufficiently broad to protect our technology. While we intend to vigorously protect our intellectual property rights, there can be no assurance that any patents we hold will not be challenged, invalidated or circumvented, or that the patent rights granted will provide competitive advantages to us. See Part I, Item 3. “Legal Proceedings,” for further discussion.

We also rely on trade secrets and proprietary technology that we protect through confidentiality agreements with employees, consultants and other parties. There can be no assurance that these parties will not breach those agreements, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by others.

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There has been substantial litigation regarding patent and other intellectual property rights in semiconductor-related industries. We are currently involved in such litigation. Except as set forth in Item 3. Legal Proceedings, we are not aware of any significant claim of infringement by our products of any patent or proprietary rights of others; however, we could become involved in additional litigation in the future. Although we do not believe the outcome of current litigation will have a material impact on our business, financial condition or results of operations, no assurances can be given that current or future litigation will not have such an impact. For further discussion, see Part I, Item 3. “Legal Proceedings.”

In addition to current litigation, our operations, including the further commercialization of our products, could provoke additional claims of infringement from third parties. In the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how that we own, to defend ourselves against claimed infringement of the rights of others, or to determine the scope and validity of the proprietary rights of others. Any such litigation could result in substantial cost and diversion of efforts and could have a material adverse effect on our financial condition or operating results. In addition, adverse determinations in such litigation could result in loss of our proprietary rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties, or prevent us from manufacturing or selling our products. Any of these occurrences could have a material adverse effect on our business, financial condition or results of operations.

Employees

On December 31, 2006, we had 3,725 full-time and temporary employees. Certain employees outside of the United States are represented by labor unions. We have never experienced a work stoppage, slowdown or strike. We consider our employee relations to be good.

The success of our future operations depends in large part on our ability to recruit and retain senior management, engineers, sales and service professionals and other key personnel. Qualified people are in great demand across each of these industry disciplines, and there can be no assurance that we will be successful in retaining or recruiting key personnel.

Environmental Matters

Neither compliance with federal, state and local provisions regulating discharge of materials into the environment, nor remedial agreements or other actions relating to the environment, has had, or is expected to have, a material effect on our capital expenditures, financial condition, results of operations or competitive position.

Item 1A.   Risk Factors

Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements contained in this Annual Report.

Rapid technological change in the semiconductor industry requires substantial research and development expenditures and responsiveness to customer needs.

We devote a significant portion of our personnel and financial resources to research and development programs, and we seek to maintain close relationships with our customers in order to remain responsive to their product and manufacturing process needs. Our success depends in part on our ability to accurately predict evolving industry standards, to develop innovative solutions and improve existing technologies, to win market acceptance of our new and advanced technologies and to manufacture our products in a timely and cost-effective manner. Our products and processes must address changing customer needs in a range of materials, including copper and aluminum, at ever-smaller line widths and feature sizes, while maintaining our focus on manufacturing efficiency and product reliability. If we do not continue to gain market acceptance for our new technologies and products, or develop and introduce improvements in a timely manner in response to

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changing market conditions or customer requirements, or remain focused on research and development efforts that will translate into greater revenues, our business could be seriously harmed.

In the semiconductor capital equipment market, technological innovations tend to have long development cycles. We have experienced delays and technical and manufacturing difficulties from time to time in the introduction of certain of our products and product enhancements. In addition, we may experience delays and technical and manufacturing difficulties in future introductions or volume production of our new systems or enhancements. The increased costs and reduced efficiencies that may be associated with the development, manufacture, sale and support of future products or product enhancements relative to our existing products may adversely affect our operating results.

Our success in developing, introducing and selling new and enhanced systems depends upon a variety of factors, including product selection; hiring, retaining and motivating highly qualified design and engineering personnel; timely and efficient completion of product design and development; implementation of manufacturing and assembly processes; achieving specified product performance in the field; and effective sales and marketing. There can be no assurance that we will be successful in selecting, developing, manufacturing and marketing new products, or in enhancing our existing products. There can be no assurance that revenue from future products or product enhancements will be sufficient to recover our investments in research and development. To ensure the functionality and reliability of our future product introductions or product improvements, we incur substantial research and development costs early in development cycles, before we can confirm the technical feasibility or commercial viability of a product or product improvement. If new products have reliability or quality problems, reduced orders, or higher manufacturing costs, delays in collecting accounts receivable and additional service may result and warranty expenses may rise, affecting our gross margins. Any of these events could materially and adversely affect our business, financial condition or results of operations.

Cyclical downturns in the semiconductor industry negatively impact demand for our equipment.

Our business depends predominantly on the capital expenditures of semiconductor manufacturers, which in turn depend on current and anticipated market demand for integrated circuits and the products that use them. The semiconductor industry has historically been cyclical and has experienced periodic downturns that have had a material adverse effect on the demand for semiconductor processing equipment, including equipment that we manufacture and market. The rate of changes in demand is accelerating, rendering the global semiconductor industry increasingly volatile. During periods of reduced and declining demand, we must be able to quickly and effectively align our costs with prevailing market conditions, as well as motivate and retain key employees and maintain a stable management team. Our inventory levels during periods of reduced demand have at times been higher than optimal. We cannot provide any assurance that we will not be required to make inventory valuation adjustments in future periods. During periods of rapid growth, we must be able to acquire and/or develop sufficient manufacturing capacity to meet customer demand, and hire and assimilate a sufficient number of qualified people. In the period from 2001 through 2006, we implemented restructuring plans to align our business with fluctuating conditions. Future restructuring plans may be required to respond to future changes. Net orders and net sales may be adversely affected if we fail to respond to changing industry cycles in a timely and effective manner. We experienced an increase in demand in the first quarter of 2006 through the third quarter of 2006 and a slight decrease in the fourth quarter of 2006. We cannot provide any assurance that this increase will be sustainable, and our net sales and operating results may be adversely affected if demand does not continue to grow and if downturns or slowdowns in the rate of capital investment in the semiconductor industry occur in the future.

The competitive and capital-intensive nature of the semiconductor industry increases the difficulty of maintaining gross margin and maintaining and capturing market share.

We face substantial competition in the industry, from both potential new market entrants and established competitors. Competitors may have greater financial, marketing, technical or other resources, and greater ability to respond to pricing pressures, than we do. They may also have broader product lines, greater customer service capabilities, or larger and more established sales organizations and customer bases. To

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maintain or capture a position in the market, we must develop new and enhanced systems and introduce them at competitive prices on a timely basis, while managing our research and development and warranty costs. Semiconductor equipment manufacturers incur substantial costs to install and integrate capital equipment into their production lines. This increases the likelihood of continuing relationships with chosen equipment vendors, including our competitors, and the difficulty of penetrating new customer accounts. In addition, sales of our systems depend in significant part upon a prospective customer’s decision to increase or expand manufacturing capacity — which typically involves a significant capital commitment. From time to time, we have experienced delays in finalizing system sales following initial system qualification. Due to these and other factors, our systems typically have a lengthy sales cycle, during which we may expend substantial funds and management effort. Heightened competition may also force price reductions that could adversely affect our results of operations.

We are exposed to risks associated with outsourcing activities, which could result in supply shortages that could affect our ability to meet customer demands.

We outsource the manufacture of most subassemblies, which enables us to focus on performing system design, assembly and testing in-house, thereby minimizing our fixed costs and capital expenditures. Although we make reasonable efforts to ensure that third party providers will perform to our standards, our reliance on suppliers and subcontractors limits our control over quality assurance and delivery schedules. Defects in workmanship, unacceptable yields, manufacturing disruptions and difficulties in obtaining export and import approvals may impair our ability to manage inventory and cause delays in shipments and cancellation of orders that may adversely affect our relationships with current and prospective customers and enable competitors to penetrate our customer accounts. In addition, third party providers may prioritize capacity for larger competitors or increase prices to us, which will affect our ability to respond to pricing pressures from competitors and customers, and our profitability.

Our growth and ability to meet customer demands depend in part on our ability to obtain timely deliveries of parts, components and subassemblies for the manufacture and support of our products from our suppliers. Although we make reasonable efforts to ensure that such parts are available from multiple suppliers, certain key parts may only be obtained from a single source or from limited sources. These suppliers are in some cases thinly capitalized, independent companies who derive a significant amount of their business from us and/or a small group of other companies in the semiconductor industry. Our supply channels may be vulnerable to disruption. Any such disruption to or termination of our supplier relationships may result in a prolonged inability to secure adequate supplies at reasonable prices or of acceptable quality, and may adversely affect our ability to bring new products to market and deliver them to customers in a timely manner. As a result, our revenues and operations may be harmed.

The loss of key employees could harm our business and operations.

Our employees are extremely important to our success and our key management, engineering and other employees are difficult to replace. The expansion of high technology companies has increased demand and competition for qualified personnel. If we are unable to retain key personnel, or if we are not able to attract, assimilate and retain additional highly qualified employees to meet our needs in the future, our business and operations could be harmed.

We face risks related to concentration of net sales.

We currently sell a significant proportion of our systems in any particular period to a limited number of customers, and we expect that sales of our products to a relatively few customers will continue to account for a high percentage of our net sales in the foreseeable future. Although the composition of the group comprising our largest customers varies from year to year, the loss of a significant customer or any reduction in orders from any significant customer, including reductions due to customer departures from recent buying patterns, as well as economic or competitive conditions in the semiconductor industry, could materially and adversely affect our business, financial condition or results of operations.

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We are exposed to the risks of global operations.

We serve an increasingly global market. Substantial operations outside of the United States and export sales expose us to certain risks that may adversely affect our operating results and net sales, including, but not limited to:

•  Tariffs and other trade barriers;

•  Challenges in staffing and managing foreign operations and providing prompt and effective field support to our customers outside of the United States;

•  Difficulties in managing foreign distributors;

•  Potentially adverse tax consequences, including withholding tax rules that may limit the repatriation of our earnings, and higher effective income tax rates in foreign countries where we conduct business;

•  Governmental controls, either by the United States or other countries, that restrict our business overseas or the import or export of semiconductor products, or increase the cost of our operations;

•  Longer payment cycles and difficulties in collecting accounts receivable outside of the United States;

•  Inadequate protection or enforcement of our intellectual property and other legal rights in foreign jurisdictions;

•  Global or regional economic downturns;

•  Geo-political instability, natural disasters, acts of war or terrorism; and

•  We enter into forward foreign exchange contracts to hedge against the short-term impact of currency fluctuations, specifically transactions denominated in Japanese yen, however, there is no assurance that our hedging program will be effective. Exchange rate volatility may also increase the cost of our exported products for international customers and inhibit demand.

There can be no assurance that any of these factors will not have a material adverse effect on our business, financial condition or results of operations. In addition, each region in the global semiconductor equipment market exhibits unique market characteristics that can cause capital equipment investment patterns to vary significantly from period to period. We derive a substantial portion of our revenues from customers in Asia. Any negative economic developments or geo-political instability in Asia, including the possible outbreak of hostilities or epidemics involving China, Taiwan, Korea or Japan, could result in the cancellation or delay by certain significant customers of orders for our products, which could adversely affect our business, financial condition or results of operations. Our continuing expansion in Asia renders us increasingly vulnerable to these risks.

We face risks related to intellectual property.

We intend to continue to seek legal protection, primarily through patents and trade secrets, for our proprietary technology. Seeking patent protection is a lengthy and costly process, and there can be no assurance that patents will be issued from any pending applications, or that any claims allowed from existing or pending patents will be sufficiently broad to protect our proprietary technology. There is also no guarantee that any patents we hold will not be challenged, invalidated or circumvented, or that the patent rights granted will provide competitive advantages to us. Our competitors have developed and may continue to develop and obtain patents for technologies that are similar or superior to our technologies. In addition, the laws of foreign jurisdictions in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.

Adverse outcomes in current or future legal disputes regarding patent and intellectual property rights could result in the loss of our intellectual property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties on terms that may not be reasonable or favorable to us, prevent us from manufacturing or selling our products, or compel us to redesign our products to avoid incorporating third parties’ intellectual property. As a result, our product offerings may be delayed, and we may be unable to

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meet customers’ requirements in a timely way. Regardless of the merit of any legal disputes, we incur and may be required to incur in the future substantial costs to prosecute or defend our intellectual property rights. Even if there were no infringement by our products of third parties’ intellectual property rights, we have in the past and may in the future elect to seek licenses or enter into settlements to avoid the costs of protracted litigation and diversion of resources and management attention. However, if the terms of settlements entered into with certain of our competitors are not observed or enforced, we may suffer further costs. Any of these circumstances could have a material adverse effect on our business, financial condition or results of operations during any reported fiscal period.

Our ability to develop intellectual property depends on hiring, retaining and motivating highly qualified design and engineering staff with the knowledge and technical competence to advance our technology and productivity goals. To protect our trade secrets and proprietary information generally, we have entered into confidentiality or invention assignment agreements with our employees, as well as consultants and other parties. If these agreements are breached, our remedies may not be sufficient to cover our losses.

Changes in tax rates or liabilities could negatively impact our future results.

We are subject to taxation in the U.S. and other foreign countries. Our future tax rates could be affected by changes in the composition of earnings in countries with differing tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in the tax laws. We are also subject to regular examination of our tax returns by the Internal Revenue Service (IRS) and other tax authorities. The IRS and other tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of products, services, and the use of intangible assets. We could face significant future challenges on these transfer pricing issues in one or more jurisdictions. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe that our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals. Factors that could cause estimates to be materially different include, but are not limited to:

•  Changes in the regulatory environment;

•  Changes in accounting and tax standards or practices; and

•  Overall business conditions in the semiconductor equipment industry.

We are subject to litigation proceedings that could adversely affect our business.

Intellectual Property Litigation

We are currently involved in certain legal proceedings and may become involved in other such proceedings in the future. These proceedings may involve claims against us of infringement of intellectual property rights of third parties. It is inherently difficult to assess the outcome of litigation, and there can be no assurance that we will prevail in any specific proceedings. Any such litigation could result in substantial cost to us, including diversion of the efforts of our technical and management personnel, and this could have a material adverse effect on our business, financial condition and operating results. If we are unable to successfully defend against such claims, we could be required to expend significant resources to develop or license alternative non-infringing technology or to obtain a license to the subject technology. There is no guarantee that we will be successful with such development, or that a license will be available on terms acceptable to us, if at all. Without such a license, we could be enjoined from future sales of the infringing product or products, which could materially and adversely affect our business, financial condition and operating results.

Derivative Litigation

We and certain of our current and former officers and directors have been named as defendants in two derivative lawsuits claiming violations of the Securities and Exchange Act of 1934, as amended, in connection with our stock option administration practices. See Part I, Item 3 “Legal Proceedings” for a description of the claims brought against us. The outcome of legal proceedings of this kind is difficult to predict. Moreover, the

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complaints filed against us do not specify the amount of damages that the plaintiffs seek, and we are therefore unable to estimate the possible range of loss that we might incur should these lawsuits ultimately be resolved against us. We believe that the claims are without merit and that our stock option administrative practices do not require any material financial statement adjustment. Nevertheless, these lawsuits, if ultimately resolved against us, could seriously harm our business, financial condition and operating results. These matters, and any other derivative litigation in which we may become involved, could result in substantial costs to us and a diversion of our resources and the efforts of our management personnel, and this could materially and adversely affect our business, financial condition and operating results.

Other Litigation

In addition to the litigation risks mentioned above, we may become subject to legal claims or proceedings related to securities, employment, customer or third party contracts, environmental regulations, product liability or other matters. If we are required to defend against a legal claim or deem it necessary or advisable to initiate a legal proceeding to protect our rights, the expense and distraction of such a claim or proceeding, whether or not resolved in our favor, could materially and adversely affect our business, financial condition and operating results. Further, if a claim or proceeding were resolved against us or if we were to settle any such dispute, we could be required to pay damages or refrain from certain activities, which could have a material adverse impact on our business, financial condition and operating results.

We are exposed to risks associated with our diversification strategy.

Our core business and expertise has historically been in the development, manufacture, sale and support of deposition technologies, and more recently, wafer surface preparation and chemical mechanical planarization technologies. Our acquisitions of Peter Wolters and Voumard and the establishment of our Industrial Applications Group represent the first expansion of our business beyond the semiconductor equipment industry. We lack experience in the high-precision machine manufacturing equipment market, compared with our knowledge of the semiconductor equipment industry, and cannot give any assurance that we can maintain or improve the quality of products, level of sales, or relations with key employees and significant customers or suppliers that are necessary to compete in the market for high-precision machine manufacturing tools. Our efforts to integrate and develop the Industrial Applications Group may divert capital, management attention, research and development and other critical resources away from, and adversely affect our core business.

We are exposed to risks associated with our investment activities.

Our ability to compete in the semiconductor manufacturing industry depends on our success in developing new and enhanced technologies that advance the productivity and innovation advantages of our products. To further these goals, we have formed the Novellus Development Company, a venture fund that enables us to invest in emerging technologies and strengthen our technology portfolio for both existing and potentially new market opportunities. Although the fund intends to make inquiries reasonably necessary to make an informed decision as to the companies and technologies in which it will invest, we cannot provide any assurance as to any future return on investment or ability to bring new technologies to market. There are risks inherent in investing in start-up companies, which may lack a stable management team, operating history or adequate cash flow. The securities in which the fund may invest may not be registered under the Securities Act of 1933, as amended, or any applicable state securities laws, and may be subject to restrictions on marketability or transferability. Given the nature of the investments that may be contemplated by the fund, there is a significant risk that it will be unable to realize its investment objectives by sale or other disposition, or will otherwise be unable to identify or develop any commercially viable technology. In particular, these risks could arise from changes in the financial condition or prospects, management inexperience and lack of research and development resources of the companies in which investments are made, and evolving technological standards. Investments contemplated by the fund may divert management time and attention, as well as capital, away from our core operating business. Any future losses on investments attributable to the fund may materially and adversely impact our business, financial condition and operating results.

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Corporate governance and financial reporting requirements have led and may continue to lead to increased costs and may make it more difficult to attract qualified executive officers and directors.

To comply with the requirements of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), as well as new rules subsequently implemented by the SEC and adopted by The Nasdaq Stock Market in response to Sarbanes-Oxley, we have made changes to our financial reporting, securities disclosure and corporate governance practices. In 2006 and 2005, we incurred increased legal and financial compliance costs due to these new and evolving rules, regulations, and listing requirements, and management time and resources were re-directed to ensure current and implement future compliance initiatives. These rules may make it more difficult for us to attract and retain qualified executive officers and members of our Board of Directors, particularly to serve on our audit committee.

We are exposed to risks related to our indemnification of third parties.

From time to time, in the normal course of business, we indemnify third parties with whom we enter into contractual relationships, including customers and lessors with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third party claims that our products when used for their intended purposes infringe the intellectual property rights of such other third parties or other claims made against certain parties. We have been, and in the future may be, compelled to enter into or accrue for probable settlements of alleged indemnification obligations or subject to potential liability arising from our customer’s involvements in legal disputes. It is difficult to determine the maximum potential amount of liability under any indemnification obligations, whether or not asserted, due to our limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Our business, financial condition and results of operations in a reported fiscal period could be materially adversely affected if we expend significant amounts in defending or settling any purported claims, regardless of their merit or outcomes.

We face risks related to changes in accounting standards for stock option plans.

Beginning in the first fiscal quarter of 2006, we adopted Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which requires us to recognize compensation expense in our statement of operations for the fair value of stock options granted to our employees over the related vesting periods of the stock options. The requirement to expense stock options granted to employees reduces their attractiveness as a compensation vehicle because the expense associated with these grants results in compensation charges. In addition, the expenses recorded may not accurately reflect the value of our stock options because the option pricing models commonly used under SFAS 123R were not developed for use in valuing employee stock options and are based on highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Alternative compensation arrangements that can replace stock option programs may also negatively impact profitability. Stock options remain an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock option programs. Our employees are critical to our ability to develop and design systems that advance our productivity and technology goals, increase our sales goals and provide support to customers. Accordingly, as a result of the requirements of SFAS 123R, our profitability has and can be expected to continue to be reduced compared to periods prior to adoption of the new standard.

If our outside audit firm does not maintain its independence, we may be unable to meet our regulatory reporting obligations.

Our independent registered public accounting firm communicates with us at least annually regarding any relationships between the firm and Novellus that, in the firm’s professional judgment, might have a bearing on the firm’s independence with respect to Novellus. If our independent registered public accounting firm finds that it cannot confirm that it is independent of Novellus based on existing securities laws and registered public accounting firm independence standards, we could experience delays or otherwise fail to meet our regulatory reporting obligations.

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We face risks associated with acquisitions.

We have made, and may in the future make, acquisitions of or significant investments in businesses with complementary products, services and/or technologies. Acquisitions involve numerous risks, including, but not limited to:

•  Difficulties in integrating the operations, technologies, products and personnel of acquired companies;

•  Lack of synergies or the inability to realize expected synergies and cost-savings;

•  Revenue and expense levels of acquired entities differing from those anticipated at the time of the acquisitions;

•  Difficulties in managing geographically dispersed operations;

•  The potential loss of key employees, customers and strategic partners of acquired companies;

•  Claims by terminated employees, shareholders of acquired companies or other third parties related to the transaction;

•  The issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash;

•  Diversion of management’s attention from normal daily operations of the business; and

•  The impairment of acquired intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies.

Acquisitions are inherently risky, and we cannot provide any assurance that our previous or future acquisitions will be successful. The inability to effectively manage the risks associated with previous or future acquisitions could materially and adversely affect our business, financial condition or results of operations.

Our quarterly operating results and stock price are unpredictable.

We have experienced and expect to continue to experience significant fluctuations in our quarterly operating results, which may adversely affect our stock price. Our future quarterly operating results and stock price may not align with past trends. The factors that could lead to fluctuations in our results include, but are not limited to:

•  Building our systems according to forecast, instead of limited backlog information, which hinders our ability to plan production and inventory levels;

•  Unpredictability of demand for and variability of mix of our products in our forecast, which can cause unexpected positive or negative inventory adjustments in a particular period;

•  Variability in manufacturing yields;

•  Failure to receive anticipated orders in time to permit shipment during the quarter;

•  Timing and cancellation of customer orders and shipments, including deferring orders of our existing products due to new product announcements by us and/or our competitors;

•  Changing demand for and sales of lower-margin products relative to higher-margin products;

•  Competitive pricing pressures;

•  The effect of revenue recognized upon acceptance with little or no associated costs; and

•  Fluctuation in warranty costs.

Compliance with current and future environmental regulations may be costly.

We may be subject to environmental and other regulations in certain states and countries where we produce or sell our products. We also face increasing complexity in our product design and procurement operations as we

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adjust to new and prospective requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances in electronics that apply to specified electronics products put on the market in the European Union after July 1, 2006 (Restriction of Hazardous Substances in Electrical and Electronic Equipment Directive (EU RoHS)). The European Union has also finalized the Waste Electrical and Electronic Equipment Directive (WEEE), which makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for enacting and implementing this directive by individual European Union governments was August 13, 2004, although extensions were granted in some countries. Producers became financially responsible under the national WEEE legislation beginning in August 2005. Other countries, such as the United States, China and Japan, have enacted or may enact laws or regulations similar to the EU RoHS or the WEEE Directive. These and other future environmental regulations could require us to reengineer certain of our existing products.

Item 1B.   Unresolved Staff Comments

Not applicable.

Item 2.   Properties

Information regarding our principal properties at December 31, 2006 is as follows:

# of			Operating			Square
Buildings		Location	Segment	Use	Ownership	Footage
	7	San Jose, CA	Semiconductor Group	Corporate Headquarters, Manufacturing, Research and Development, Engineering, Applications Demonstration Lab, Customer Support, Administration and Warehousing	Owned		491,000
	4	Tualatin, OR	Semiconductor Group	Manufacturing, Research and Development, Engineering, Customer Support, Administration and Warehousing	Owned		442,000
	1	Phoenix, AZ	Semiconductor Group	Manufacturing, Research and Development, Engineering, Customer Support, Administration and Warehousing	Leased		40,000
	1	Des Plaines, IL	Industrial Applications Group	Manufacturing, Research and Development, Engineering, Customer Support, Administration and Warehousing	Owned		41,000
	1	Plainville, MA	Industrial Applications Group	Research and Development, Engineering, Customer Support, and Warehousing	Owned		25,000
	1	Leicestershire, UK	Industrial Applications Group	Manufacturing, Customer Support, Administration and Warehousing	Owned		9,000

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# of			Operating			Square
Buildings		Location	Segment	Use	Ownership	Footage
	1	Rendsburg, Germany	Industrial Applications Group	Manufacturing, Research and Development, Engineering, Customer Support, Administration and Warehousing	Owned		189,000
	1	Hauterive, Switzerland	Industrial Applications Group	Manufacturing, Research and Development, Customer Support and Administration	Owned		128,000
	1	La Chaux-de-Fonds, Switzerland	Industrial Applications Group	Manufacturing	Leased		13,000
				Total	Owned		1,325,000	Sq. Ft.
					Leased		53,000	Sq. Ft.

In our Semiconductor Group, we also lease several domestic field offices totaling approximately 26,000 square feet of space and several sites outside the United States totaling approximately 213,000 square feet of space that we use as sales and customer service centers. Our facilities in Europe include approximately 29,000 square feet of leased space in various countries including France, Germany, Italy, and Ireland. Our facilities in Asia include approximately 184,000 square feet of leased space in various countries including China, India, Japan, Korea, Malaysia, Singapore, Taiwan and Vietnam.

We have properties for sale of approximately 231,000 square feet in San Jose, California that are not included in the table above.

In our Industrial Applications Group, we also lease five field offices totaling approximately 41,000 square feet in Germany, Switzerland, China and Japan. We also sublease approximately 39,000 square feet of space in Mettmann, Germany.

We believe that our facilities are sufficient to meet our requirements for the foreseeable future.

Item 3.   Legal Proceedings

Linear Technology Corporation

In March 2002, Linear Technology Corporation (Linear) filed a complaint against Novellus, among other parties, in the Superior Court of the State of California for the County of Santa Clara. The complaint seeks damages (including punitive damages) and injunctions for causes of actions involving alleged breach of contract, fraud, unfair competition, breach of warranty and declaratory relief. On September 3, 2004, Novellus filed a demurrer to all causes of action in the complaint, which the Court granted without leave to amend on October 5, 2004. On January 11, 2005, Linear filed a notice of appeal of the court’s order and the appeal is now fully briefed. The Court of Appeal has not yet set a date for oral argument. Although we prevailed on these claims in the Superior Court, it is possible that the Court of Appeal will reverse the ruling of the Superior Court, in which case Novellus could face potential liability on these claims. We cannot predict how the Court of Appeal will rule on this issue or, if it does rule against Novellus, estimate a range of potential loss, if any. However, we currently believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Derivative Litigation

On May 31, 2006, a complaint titled “Joshua Teitelbaum, in the right of and for the benefit of Novellus Systems, Inc., v. Richard S. Hill, Jeffrey C. Benzing, D. James Guzy, Tom Long, Robert H. Smith, Neil R. Bonke, Youssef A. El-Mansy, J. David Litster, Yoshio Nishi, Glen G. Possley, Ann D. Rhoads, William R. Spivey and Delbert A. Whitaker, as defendants, and the Company as a Nominal Defendant” was filed in the United States District Court for the Northern District of California. The complaint alleges that our practices in connection with certain stock option grants to executives caused a diversion of assets from Novellus to the executives and caused us to make false and misleading statements to the SEC. The complaint also alleges,

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among other things, violations of sections 10(b) and 14(a) of the Exchange Act, a breach of fiduciary duty, abuse of control, gross mismanagement, corporate waste, and unjust enrichment. The complaint seeks unspecified monetary damages and other relief against the defendants. On June 21, 2006, a separate complaint titled “Alaska Electrical Pension Fund, on behalf of Novellus Systems, Inc., v. Richard S. Hill, Jeffrey C. Benzing, William H. Kurtz, Neil R. Bonke, Youssef A. El-Mansy, J. David Litster, Yoshio Nishi, Glen G. Possley, Ann D. Rhoads, William R. Spivey and Delbert Whitaker, as defendants, and the Company as a Nominal Defendant” was filed in the United States District Court for the Northern District of California with similar allegations. The complaints seek unspecified monetary damages and other relief against the defendants. We have, through outside counsel, conducted an inquiry into each of the option grants referenced in the complaints. As a result of this inquiry, Novellus and its Board of Directors believe the claims of both complaints to be without merit. However, we cannot predict the outcome of this case or if the outcome is unfavorable, estimate a range of potential loss, if any. However, we currently believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

The two complaints were consolidated on September 8, 2006. The plaintiffs filed an amended, consolidated complaint on December 8, 2006. Novellus and the individual defendants filed motions to dismiss on January 19, 2007. Briefing on these motions will be complete by March 9, 2007. The Court will hear argument on the motions on March 23, 2007.

Other Litigation

During the year ended December 31, 2006, we reached an agreement to settle a customer indemnity claim, and the $3.3 million cost of this settlement was included in our results of operations.

We are a defendant or plaintiff in various actions that have arisen in the normal course of business. We believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or results of operations. However, due to the uncertainty surrounding litigation, we are unable at this time to estimate a range of loss, if any, that may result from any of these pending proceedings.

Item 4.   Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

Item 5.   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Stock Information

Novellus’ common stock is traded on The NASDAQ Stock Market and is quoted on the NASDAQ Global Select Market (formerly the Nasdaq National Market) under the symbol “NVLS.” The following table sets forth the closing high and low prices of our common stock as reported by the NASDAQ Global Select Market for the periods indicated:

	2006
	High		Low
First Quarter	$	30.62	$	23.85
Second Quarter		26.57		22.28
Third Quarter		28.91		22.55
Fourth Quarter		35.00		26.13

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	2005
	High		Low
First Quarter	$	30.18	$	24.66
Second Quarter		27.33		23.43
Third Quarter		29.13		24.57
Fourth Quarter		26.02		21.36

As of February 26, 2007, there were 1,051 holders of record of our common stock. We have not paid cash dividends on our common stock since inception, and our Board of Directors presently plans to use the cash generated from operations to reinvest in the business and to repurchase common shares. Accordingly, it is anticipated that no cash dividends will be paid to holders of common stock in the foreseeable future.

On February 24, 2004 we announced that our Board of Directors had approved a stock repurchase plan that authorized the repurchase of up to $500.0 million of our outstanding common stock through February 13, 2007. On September 20, 2004 we announced that our Board of Directors had authorized an additional $1.0 billion for repurchase of our outstanding common stock through September 14, 2009. We may repurchase shares from time to time in the open market, through block trades or otherwise. The repurchases may be commenced or suspended at any time or from time to time without prior notice depending on prevailing market conditions and other factors.

We did not repurchase any of our shares during the quarter ended December 31, 2006. As of December 31, 2006, we had approximately $613.3 million of remaining authorized funds for the repurchase of shares of our common stock.

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The following graph compares the cumulative 5-year total return attained by shareholders on our common stock relative to the cumulative total returns of the S & P 500 index and the RDG Technology Composite index. The graph tracks the performance of a $100 investment in our common stock and in each of the indices (with the reinvestment of all dividends) from December 31, 2001 to December 31, 2006.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Novellus Systems, Inc., The S & P 500 Index
And The RDG Technology Composite Index

* $100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.

Copyright^© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm

	December 31,
	2001		2002		2003		2004		2005		2006
Novellus Systems, Inc.	$	100.00	$	71.18	$	106.59	$	70.70	$	61.14	$	87.25
S & P 500	$	100.00	$	77.90	$	100.24	$	111.15	$	116.61	$	135.03
RDG Technology Composite	$	100.00	$	62.44	$	92.49	$	95.27	$	97.49	$	106.14

This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

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Item 6.   Selected Financial Data

Set forth below is a summary of certain consolidated financial information with respect to Novellus as of the dates and for the periods indicated. The Consolidated Statements of Operations data set forth below for each of the five years in the period ended December 31, 2006 and the Consolidated Balance Sheet data at each respective year end have been derived from our Consolidated Financial Statements, which have been audited. We acquired Voumard Machine Co. SA (Voumard) on November 18, 2005, Peter Wolters AG on June 28, 2004 and SpeedFam-IPEC, Inc. on December 6, 2002. These transactions were accounted for as purchase business combinations and the Selected Consolidated Financial Data includes the operating results and financial information of these companies from their respective dates of acquisition.

Selected Consolidated Financial Data

The following selected consolidated financial data has been derived from our historical Consolidated Financial Statements and should be read in conjunction with the Consolidated Financial Statements and the accompanying notes for the corresponding fiscal years:

	Years Ended December 31,
	2006			2005			2004			2003			2002
	(In thousands, except per share data)
Consolidated Statements of Operations Data:
Net sales	$	1,658,516		$	1,340,471		$	1,357,288		$	925,070		$	839,958
Gross profit		824,349	(1,2)		599,126	(4,5)		665,130	(6)		380,000	(8)		378,523
Income (loss) before cumulative effect of change in accounting principle		189,068			110,107			156,690			(5,034	)		22,920
Cumulative effect of change in accounting principle		948	(2)		—			—			(62,780	)(9)		—
Net income (loss)	$	190,016	(1,2,3)	$	110,107	(5)	$	156,690	(7)	$	(67,814	)(8)	$	22,920	(10,11)
Per common share:
Income (loss) before cumulative effect of change in accounting principle
Basic	$	1.51		$	0.80		$	1.07		$	(0.03	)	$	0.16
Diluted	$	1.49		$	0.80		$	1.06		$	(0.03	)	$	0.15
Cumulative effect of change in accounting principle, net of tax
Basic	$	0.01		$	—		$	—		$	(0.42	)	$	—
Diluted	$	0.01		$	—		$	—		$	(0.42	)	$	—
Net income (loss)
Basic	$	1.52		$	0.80		$	1.07		$	(0.45	)	$	0.16
Diluted	$	1.50	(1)	$	0.80		$	1.06		$	(0.45	)	$	0.15
Shares used in basic per share calculations		125,286			137,447			145,956			150,680			144,371
Shares used in diluted per share calculations		126,483			138,423			147,937			150,680			148,748

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December 31,	2006		2005		2004		2003		2002
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	853,328	$	654,983	$	592,187	$	1,009,312	$	1,023,454
Working capital	$	1,143,924	$	1,019,168	$	1,045,294	$	1,350,906	$	1,252,324
Total assets	$	2,362,492	$	2,290,249	$	2,401,832	$	2,338,900	$	2,493,994
Long-term debt	$	127,862	$	124,858	$	161,103	$	—	$	—
Shareholders’ equity	$	1,834,705	$	1,779,283	$	1,861,834	$	2,071,860	$	2,055,688

(1)	On January 1, 2006, we adopted SFAS 151, which increased gross profit by approximately $2.5 million. This resulted in an increase to net income of $1.5 million, net of tax, or $0.01 per diluted share for fiscal year 2006 (see Recent Accounting Pronouncements of Item 7).
(2)	The fiscal year 2006 results include a $0.9 million, net of tax, benefit from the cumulative effect of a change in accounting principle due to the adoption of SFAS 123R (see Recent Accounting Pronouncements of Item 7). Stock-based compensation recorded in cost of sales, SG&A and R&D expenses increased by $0.7 million, $20.2 million and $9.9 million, respectively, from amounts recorded in 2005, primarily as a result of adopting SFAS 123R.
(3)	The fiscal year 2006 results include a pre-tax net restructuring charge of $10.7 million, a pre-tax charge of $3.3 million for a legal settlement and a tax charge of $46.1 million related to the implementation of a new global business structure. The tax charge was partially offset by an $8.5 million tax benefit attributable to the settlement of an IRS audit.
(4)	In 2005, we recorded a credit to cost of sales of approximately $15.1 million related to the sale of inventories previously written down.
(5)	In 2005, we recorded net restructuring and other charges of $9.2 million and inventory write-downs due to restructuring of $5.3 million.
(6)	In 2004, we recorded a credit to cost of sales of approximately $9.0 million related to the sale of inventories previously written down.
(7)	In 2004, we recorded net restructuring and other charges of $1.5 million, acquired in-process research and development write-offs of $6.1 million, net recovery from legal settlements of $2.6 million and the reversal of previously accrued royalty payments of $8.1 million.
(8)	We recorded $59.8 million of pre-tax charges for the year ended December 31, 2003 as a result of a restructuring plan to align our cost structure with business conditions. The charges consisted of an inventory write-down of $44.0 million (included in gross profit), asset write-offs of $7.9 million, facilities charges of $4.1 million, and severance of $3.8 million. In addition, we recorded a charge for litigation settlements of $2.7 million.
(9)	As a result of the early adoption of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” we recorded a non-cash charge of $62.8 million, net of tax, for the year ended December 31, 2003, as a cumulative effect of a change in accounting principle from the consolidation of properties previously accounted for as synthetic leases.
(10)	We adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), in the first quarter of 2002. As a result of its adoption, we no longer amortize goodwill, which resulted in an increase in net income of $3.6 million for the year ended December 31, 2002.
(11)	We recorded $32.5 million of pre-tax charges for the year ended December 31, 2002 associated with restructuring and severance activities of $6.5 million, write-off of debt issuance costs of $17.0 million, and an acquired in-process research and development charge relating to the acquisition of SpeedFam-IPEC of $9.0 million. Additionally, we recorded a pre-tax benefit of $12.3 million for the year ended

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December 31, 2002 associated with the recovery of a previously written-off receivable of $7.7 million and a gain on the sale of an equity investment of $4.6 million.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K, other than statements that are purely historical, are forward-looking statements and are based upon management’s present expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future. As such, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated. We do not undertake, and expressly disclaim, any obligation to update this forward-looking information, except as required under applicable law.

The following information should be read in conjunction with “Part I, Item 1. Business,” “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 8. Consolidated Financial Statements” and the notes thereto. Forward-looking statements in this Annual Report on Form 10-K may be identified by words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” or similar expressions, and include, without limitation:

•  Statements about the growth of the semiconductor industry; market size, share and demand (particularly demand for corporate and consumer electronic devices); product performance; our expectations, objectives, anticipations, intentions and strategies regarding the future; expected operating results, revenues and earnings; and current and potential litigation, which statements are subject to various uncertainties, including, without limitation, those discussed in “Item 1A. Risk Factors”;

•  The statements under the heading “Item 1. Business — Semiconductor Industry Background” regarding our beliefs that (1) unit demand for semiconductor devices will continue to increase; (2) there is a trend toward increasing density of the integrated circuit; (3) there is a trend toward copper conductive material and away from aluminum wiring; (4) there is a trend toward low-k dielectric insulators and away from traditional silicon oxide insulating films; and (5) there is a trend toward larger wafer sizes, which statements are subject to various risks and uncertainties, including, without limitation, periodic downturns in the semiconductor industry; slowdowns in the rate of capital investment by semiconductor manufacturers; the inaccuracy of our expectations regarding the future direction of the semiconductor industry; and our inability to develop, improve and market products that respond to industry trends;

•  The statements under the heading “Item 1. Business — Semiconductor Business Strategy,” concerning (1) our focus on reducing customer costs; (2) our intent to broaden our interconnect offerings; (3) our strategy to expand our market presence in, and our belief in future growth potential of, Asia; and (4) our plan to leverage our low cost manufacturing structure, which statements are subject to various risks and uncertainties, including, without limitation, shifts in demand from expensive, high-performance products to lower priced, conventional products, resulting in reduced profit for semiconductor manufacturers; increases in the costs of material, labor or conducting a global business, or inability to enhance our systems’ productivity, which may preclude us from containing costs to customers; the current and other periodic downturns in the semiconductor industry and the global or domestic economy; political or economic instability in Asia, and fluctuations in interest and foreign currency exchange rates;

•  The statements under the heading “Item 1. Business — Semiconductor Manufacturing Products” of our beliefs in the performance and effectiveness of our products, including that we have an important advantage in extending copper/low-k processes to advanced semiconductor devices based on our understanding of interactions between planarization, deposition and surface preparation, which statements are subject to various risks and uncertainties, including, among others, the inaccuracy of our assessment of our products’ capabilities; technical difficulties which preclude our products from performing as expected; competitors’ greater financial, marketing, technical, customer service or other resources, broader product lines, and larger

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and more established sales organizations and customer bases; future competition from new market entrants; competitors’ design and performance product improvements that may offer superior price or performance features over our products; difficulties integrating, developing and commercializing SpeedFam-IPEC CMP systems; and difficulties in selecting, developing, manufacturing and marketing our new products or enhancing our existing products;

•  The statements under the heading “Item 1. Business — Marketing, Sales and Service” of our beliefs that (1) our strategy of supporting our installed base through customer support and R&D groups has accelerated penetration of certain key accounts and (2) our marketing efforts are enhanced by the technical expertise of our R&D personnel, which statements are subject to certain risks and uncertainties, including, without limitation, that during periods of rapid growth, we may not be able to hire, assimilate and retain a sufficient number of qualified customer support and R&D personnel;

•  The statement under the heading “Item 1. Business — Research and Development” regarding our belief that research and development expenditures will continue to represent a substantial percentage of sales, which statement is subject to certain risks and uncertainties, including, among others, that we may be unable to allocate substantial resources to research and development;

•  The statements under the heading “Item 1. Business — Manufacturing” regarding (1) our belief that our outsourcing strategy enables us to minimize our fixed costs and capital expenditures while also providing the flexibility to increase capacity as needed and allows us to focus on product differentiation through system design and quality control; (2) our efforts to reduce our dependence on limited suppliers for certain key parts, which statements are subject to various risks and uncertainties, including, without limitation, the possible occurrence of a disruption or termination of certain limited source suppliers; a prolonged inability to obtain certain components imperative to our operations; our failure to work efficiently with suppliers; and our inability to establish relationships with alternative suppliers of key parts;

•  The statement under the heading “Item 1. Business — Competition” regarding our belief as to our ability to compete favorably in our market segments, which statement is subject to various risks and uncertainties, including, among others, the greater financial, marketing, technical or other resources, broader product lines, greater customer service capabilities and larger and more established sales organizations and customer bases that some of our competitors possess; future competition from new market entrants from overseas and domestic sources; our competitors’ improvement of the design and performance of their products that may offer superior price or performance features as compared to our products; and our success in selecting, developing, manufacturing and marketing our new products or enhancing our existing products;

•  The statements under the heading “Item 1. Business — Patents and Proprietary Rights” regarding our intentions (1) to vigorously protect our intellectual property rights; and our beliefs (2) that the outcomes of current litigation will not have a material impact on our business, financial condition or results of operations; and (3) that in the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend us against claimed infringement of the rights of others and to determine the scope and validity of the intellectual property rights of others, which statements are subject to various risks and uncertainties, including, without limitation, the possibility that patents will not be issued from any of our pending applications or that claims allowed from existing or pending patents will not be sufficiently broad to protect our technology; the fact that litigation could result in substantial cost and diversion of our effort and the fact that adverse litigation determinations could result in a loss of our intellectual property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products;

•  The statement under the heading “Item 1. Business — Environmental Matters” that federal, state and local provisions regulating discharge of materials into the environment and remedial agreements or other environmental actions are not expected to have a material effect on our capital expenditures, financial condition, results of operations or competitive position, which statement is subject to certain risks and uncertainties, including, among others, that we have inaccurately assessed the environmental impact of our activities or the compliance requirements of environmental provisions and agreements;

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•  The statements under the headings “Item 3. Legal Proceedings” of our belief that the ultimate disposition of the Linear Technology Corporation, the derivative litigation actions and other litigation matters will not have a material adverse effect on the impact on our business, financial conditions or the overall trend in our results from operations, which statements are subject to various risks and uncertainties, including, without limitation, inherent uncertainty surrounding the litigation process and our inability to accurately predict the determination of complex issues of fact and law;

•  The statement in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview of Our Business and Industry” that our close relationships with our customers and substantial investments in research and development position us for future growth, which statement is subject to numerous risks and uncertainties, including, without limitation, our inability to maintain our customer accounts, realize marketable products from our investments or attain market acceptance for new product introductions;

•  The statements under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Net Sales and Research and Development (R&D)” of our strategies, beliefs, plans, expectations and anticipations including, without limitation, (1) expansion of our market presence in Asia; (2) continuation of our R&D commitment to improvement of new products and enhancement of our current product lines; (3) significant investment in R&D in order to remain competitive, which statements are subject to numerous risks and uncertainties, including, without limitation, risks and uncertainties associated with international operations, including economic downturns, trade balance issues, political instability, banking issues, fluctuations in interest and foreign currency exchange rates in Asia; technical and operational difficulties with our products that result in continued increases in warranty costs; and our inability to allocate substantial resources to R&D programs;

•  The statements under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Restructuring and Other Changes” regarding our expectation that we can decrease expenses in 2007 as a result of the restructuring plans and our belief that we can sell certain owned facilities in San Jose, California within one year, which statements are subject to certain risks and uncertainties including, our inability to decrease depreciation expenses related to assets written off in 2006, as well as our inability to sell the San Jose, California facilities due to fluctuations in the real-estate market and lack of demand for such facilities;

•  The statement under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Income Taxes” regarding our expectation to achieve a lower tax rate as a result of the global structure, which statement is subject to certain risks and uncertainties including our inability to achieve a tax benefit from foreign losses;

•  The statements under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Critical Accounting Policies” regarding the calculation of allowances, reserves, and other estimates that are based on historical experience, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, and the significant judgments of management that underlie the preparation of our consolidated financial statements including, without limitation, (1) realization of the majority of deferred tax assets due to anticipated future income; (2) the positive or negative impact on gross profit of possible revisions to estimated warranty liability; and (3) the lack of speculative risk in connection with our forward foreign exchange contracts, which statements are subject to certain risks and uncertainties, including, among others, the inaccuracy of our calculations, estimates, assumptions and judgments, regarding critical accounting policies; that actual and future product failure rates, material usage, installation costs, customer reserves or other estimates may differ from our historical experience, requiring revisions to our estimated doubtful account allowances, additional inventory write-downs, restructuring charges, litigation, warranty, and other reserves; the insufficiency of anticipated future income, whether due to a downturn in the semiconductor industry or increases in expenses; and the accuracy of our estimates and beliefs regarding warranty liability and foreign exchange contracts;

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•  The statement in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements” that it is not probable that we will be required to pay any amounts under standby letters of credit arrangements or guarantee arrangements on behalf of our consolidated subsidiaries, which statement is subject to certain risks and uncertainties, including, without limitation, the inaccuracy of our assessment of our obligations under credit and guarantee arrangements;

•  The statement in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Purchase Commitments” that we made adequate provision for potential exposure related to inventory on order which may go unused, which statement is subject to certain risks and uncertainties, including, without limitation, an unanticipated decline in demand that would increase our inventory-related exposure;

•  The statement under the heading “Item 7A. Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk” that we believe that an immediate change to interest rates to variable short-term borrowings will not have a material effect on our results, which statement is subject to certain risks and uncertainties, including, without limitation, that we have inaccurately assessed our future borrowing needs;

•  The statement in “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 2. Significant Accounting Policies — Concentration and Other Risks” regarding our expectation that sales of our products to a few customers will account for a high percent of our total system sales in the foreseeable future, which statement is subject to certain risks and uncertainties, including, without limitation, our inability to retain current customers due to unforeseeable market changes;

•  Our statement in “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 5. Goodwill and Other Intangible Assets” of our future estimated amortization expense for the identifiable intangible assets, which statement is subject to certain risks and uncertainties, including, without limitation, the accuracy of our accounting judgments and estimates underlying the amortization expense amount;

•  Our statements in “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 14. Stock-Based Compensation and Employee Benefit Plans” regarding estimates for evaluating the fair value of options granted on or after January 1, 2006, on a straight line basis, our calculations as to the expected term of options granted and the volatility of stock options at the date of grant using a combination of historical and implied volatilities related to SFAS 123R and SAB 107, and our expectation that the $49.3 million of total unrecognized compensation cost related to unvested stock options as of December 31, 2006 will be recognized over a weighted-average period of 2.7 years; which statements are subject to certain risk and uncertainties, including without limitation uncertainties related to historical data and market volatility, our inability to accurately estimate the fair market value of the options granted over time and our inability to calculate the period over which we can recognize the unrecognized compensation costs related to unvested stock options.

Introduction

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide readers with an understanding of Novellus. Our MD&A addresses the following topics:

•  Overview of Our Business and Industry;

•  Results of Operations;

•  Critical Accounting Policies;

•  Liquidity and Capital Resources;

•  Off-Balance Sheet Arrangements;

•  Contractual Obligations;

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•  Related Parties; and

•  Recent Accounting Pronouncements.

Overview of Our Business and Industry

Novellus Systems, Inc. is a California corporation organized in 1984. At Novellus, we develop, manufacture, sell and support equipment used in the fabrication of integrated circuits, which are commonly called chips or semiconductors. The customers for our products manufacture chips for sale or for incorporation in their own products, or provide chip-manufacturing services to third parties.

Beginning in 2001, Novellus has expanded beyond deposition technologies with a series of business acquisitions. In 2001, we acquired GaSonics International Corporation, a manufacturer of systems used to clean and prepare a semiconductor silicon wafer surface. In 2002, we acquired SpeedFam-IPEC, Inc., a manufacturer of chemical mechanical planarization (CMP) products. In 2004, we further diversified by acquiring Peter Wolters AG, a 200-year-old German company specializing in lapping and polishing equipment for a number of industries. With the acquisition of Peter Wolters AG, Novellus entered into market sectors beyond semiconductor manufacturing for the first time. In November 2005 we acquired Voumard, a privately-held manufacturer of high-precision machine manufacturing tools based in Neuchatel, Switzerland.

Our business depends on capital expenditures made by integrated circuit manufacturers, who in turn are dependent on corporate and consumer demand for integrated circuits and the electronic products which use them. Since the industry in which we operate is driven by spending for electronic products, our business is directly affected by growth or contraction in the global economy as well as by the adoption of new technologies. Demand for personal computers, the expansion of the Internet and telecommunications industries, and the emergence of new applications in consumer electronics have a direct impact on our business. In addition, the industry is characterized by intense competition and rapidly changing technology. We continue to work closely with our customers and make substantial investments in research and development in order to continue delivering innovative products which enhance productivity for our customers and utilize the latest technology. We believe these investments have positioned us for future growth.

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We focus on certain key quarterly financial data to manage our business. Net sales, gross profit, net income (loss) and net income (loss) per share are the primary measures we use to monitor performance, although we also use certain non-GAAP measures such as net orders to assess business trends and performance. Net orders are also used to forecast and plan future operations. Net orders consist of current period orders less current period cancellations. The following table sets forth certain quarterly and annual financial information for the periods indicated (in thousands, except per share data):

	Quarterly Financial Data
	First		Second		Third		Fourth		Year Ended
	Quarter		Quarter		Quarter		Quarter		December 31,
2006:
Net sales	$	365,906	$	410,073	$	444,032	$	438,505	$	1,658,516
Gross profit	$	167,540	$	204,764	$	226,525	$	225,520	$	824,349
Income before cumulative effect of a change in accounting principle	$	23,769	$	52,705	$	70,020	$	42,574	$	189,068
Net income	$	24,717	$	52,705	$	70,020	$	42,574	$	190,016
Diluted net income per share before cumulative effect of a change in accounting principle	$	0.18	$	0.42	$	0.57	$	0.34	$	1.49
Diluted net income per share	$	0.19	$	0.42	$	0.57	$	0.34	$	1.50
Net orders	$	416,770	$	457,545	$	470,322	$	441,620	$	1,786,257
2005:
Net sales	$	339,740	$	329,585	$	338,878	$	332,268	$	1,340,471
Gross profit	$	153,869	$	157,562	$	147,194	$	140,501	$	599,126
Net income	$	30,471	$	33,231	$	23,415	$	22,990	$	110,107
Diluted net income per share	$	0.22	$	0.24	$	0.17	$	0.17	$	0.80
Net orders	$	301,594	$	309,214	$	286,929	$	351,018	$	1,248,755
2004:
Net sales	$	262,862	$	338,219	$	415,935	$	340,272	$	1,357,288
Gross profit	$	124,605	$	169,680	$	201,111	$	169,734	$	665,130
Net income	$	16,681	$	37,811	$	64,662	$	37,536	$	156,690
Diluted net income per share	$	0.11	$	0.25	$	0.45	$	0.27	$	1.06
Net orders	$	346,793	$	397,598	$	422,692	$	331,347	$	1,498,430

The semiconductor equipment industry is subject to cyclical conditions, which play a major role in demand, as defined by net orders. These fluctuations, in turn, affected our net sales over the past three years. In 2006, we experienced a significant increase in demand for our products. Net orders increased by $537.5 million or 43% from 2005 to 2006. The increase began in the fourth quarter of 2005 and continued through the first three quarters of 2006 with a 19% increase in the first quarter, a 10% increase in the second quarter, and a 3% increase in the third quarter. Net orders decreased by 6% in the fourth quarter. Increased 2006 orders reflect a recovery in the semiconductor and semiconductor related industries and the global economy as end-user demand for electronic products drove increased customer requirements for advanced silicon products.

In 2005, we experienced a moderate decrease in demand for our products. Net orders decreased by $249.7 million or 17% from 2004 to 2005. The decrease in demand began in the fourth quarter of 2004, when net orders decreased 22% sequentially, and continued into 2005. Net orders during the first three quarters of 2005 were mostly lower sequentially with a 9% decrease in the first quarter, a 3% increase in the second quarter, and a 7% decrease in the third quarter. The net order decline in 2005 was driven primarily by our customers’ assimilation of significant production capacity increases undertaken during 2004. In the fourth

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quarter of 2005, demand grew significantly in large part due to an increase in the utilization of our customer’s production capacity as evidenced by our 22% increase in net orders over the prior quarter.

In 2004, we experienced a significant increase in demand for our products. Net orders increased by $561.9 million or 60% from 2003 to 2004. The increase in demand began in the fourth quarter of 2003, when net orders increased 25% sequentially, and continued into 2004. In the first three quarters of 2004, we experienced sequential increases in net orders of 26%, 15%, and 6%, respectively. The net order growth in 2004 was driven primarily by strengthening demand for corporate and consumer electronic devices, which resulted in an increase in our customers’ production capacity utilization. We also experienced increased demand as a result of our customers’ transition to 300mm fabrication equipment. In the fourth quarter of 2004, demand began to slow and we experienced a 22% sequential decrease in net orders.

The receipt of net orders in a particular quarter affects revenue in subsequent quarters. Net orders result in revenue either at shipment and transfer of title or upon customer acceptance of the equipment. Our revenue recognition policy addresses the distinction between the revenue recognized upon shipment and transfer of title and the revenue recognized upon customer acceptance. Equipment generally ships within two to six months of receiving the related order and if applicable, customer acceptance is typically received one to six months after shipment. These time lines are general estimates and actual times may vary depending on specific customer circumstances. We do not report orders for systems with delivery dates greater than twelve months after receipt of the order.

Demand for our systems can vary significantly from period to period as a result of several factors, including, but not limited to, downturns in the economy and semiconductor industry, supply of and demand for semiconductor devices, and competition in the semiconductor industry among suppliers of similar products. For these and other reasons, our results of operations for fiscal years 2006, 2005 and 2004 may not necessarily be indicative of future operating results.

Results of Operations

Net Sales

	Years Ended December 31,									% Change			% Change
	2006			2005			2004			in 2006			in 2005
	(Dollars in thousands)
Net sales	$	1,658,516		$	1,340,471		$	1,357,288			24	%		(1	)%
International net sales %		72	%		73	%		77	%

Net sales related to our Semiconductor Group increased $311.0 million from 2005 to 2006, while sales related to our Industrial Applications Group remained relatively unchanged increasing by $7.0 million from 2005 to 2006. The increase in net sales of our Semiconductor Group is primarily due to increased sales volume and a change in the mix of products sold.

Net sales decreased from 2004 to 2005 primarily due to decreased volume and a decrease in average selling price. The decrease in 2005 net sales was partially offset by a full year of operations in 2005 for Peter Wolters AG, which we acquired in June 2004, compared to a partial year of operations in 2004. Net sales provided by Peter Wolters AG were $88.6 million in 2005, compared to $41.0 million in 2004. Geographical net sales as a percentage of total net sales were as follows (based on the location of the customers’ facilities):

	Years Ended December 31,
	2006		2005		2004
North America		28%		27%		23%
Europe		9%		11%		9%
Asia		63%		62%		68%

We continue to rely on international customers, particularly those in Asia, for a significant portion of our net sales. We consider the Asia region to consist principally of Korea, Japan, Singapore, China and Taiwan. A substantial portion of the world’s semiconductor manufacturing capacity is located there. We plan to continue

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to focus on expanding our market presence in Asia, as we believe that significant additional growth potential exists in this region over the long term.

Gross Profit

	Years Ended December 31,									% Change			% Change
	2006			2005			2004			in 2006			in 2005
	(Dollars in thousands)
Gross profit	$	824,349		$	599,126		$	665,130			38	%		(10	)%
% of net sales		50	%		45	%		49	%

The increase in gross profit as a percentage of net sales in 2006 compared to 2005 is due primarily to a reduction in installation and warranty costs, a change in the mix of products sold and efficiencies in operations. Gross margin also increased by $2.5 million from 2005 to 2006 due to the adoption of SFAS 151 and decreased by $0.7 million due to the adoption of SFAS 123R (see Recent Accounting Pronouncements within this Item 7).

The decrease in gross profit as a percentage of net sales in 2005 compared to 2004 is due primarily to increased warranty costs associated with 300mm tools, a $5.3 million write-down of obsolete inventory resulting from a restructuring, and a decline in average selling price. Additional warranty charges relating to pre-existing warranties were about $13.9 million in 2005. Sales of inventory previously written down resulted in a decrease in cost of sales of approximately $15.1 million for the year ended December 31, 2005.

Our gross profit from period to period is affected by the treatment of certain product sales in accordance with SEC Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition,” (SAB 104) which superseded the earlier related guidance in SAB No. 101, “Revenue Recognition in Financial Statements.” For these sales, we recognize all of a product’s cost upon shipment even though a portion of a product’s revenue may be deferred until final payment is due, typically upon customer acceptance.

Selling, General and Administrative (SG&A)

	Years Ended December 31,									% Change			% Change
	2006			2005			2004			in 2006			in 2005
	(Dollars in thousands)
SG&A expense	$	261,389		$	206,939		$	194,652			26	%		6	%
% of net sales		16	%		15	%		14	%

SG&A expense includes compensation and benefits for corporate, financial, marketing and administrative personnel as well as travel expenses and professional and legal fees. Also included are expenses for rents, utilities, and depreciation and amortization related to the assets utilized by these functions.

The increase in SG&A expense in 2006 over the prior year, in absolute dollars and as a percentage of sales, is primarily due to an increase in stock compensation expense of $20.2 million due primarily to the adoption of SFAS 123R, the acquisition of Voumard, an increase in headcount to support sales volume and increases in commissions and profit sharing due to increased sales and improved financial performance in 2006.

The increase in SG&A expense in 2005 over the prior year, in absolute dollars and as a percentage of sales, is primarily due to a reduction in SG&A of $8.1 million in 2004 from the reversal of previously accrued royalty payments in connection with our legal settlement with Applied Materials, Inc., as well as a full year of operations in 2005 for Peter Wolters AG, which we acquired in June 2004, compared to a partial year of operations in 2004. Partially offsetting these increases is a net reduction in SG&A of $7.3 million during 2005 due to a reduction in our allowance for doubtful accounts.

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Research and Development (R&D)

	Years Ended December 31,									% Change			% Change
	2006			2005			2004			in 2006			in 2005
	(Dollars in thousands)
R&D expense	$	244,201		$	247,315		$	252,083			(1	)%		(2	)%
% of net sales		15	%		18	%		19	%

R&D expense includes compensation and benefits for our research and development personnel, project materials, chemicals and other direct expenses incurred in product and technology development. Also included are expenses for equipment repairs and maintenance, rents, utilities and depreciation. Our significant investments in R&D over the past several years reflect our strong commitment to the continuous improvement of our current product lines and the development of new products and technologies. We continue to believe that significant investment in R&D is required to remain competitive, and we plan to continue to invest in new products and enhancement of our current product lines.

The decrease in R&D expense in 2006 and 2005 in absolute dollars results from lower R&D program spending and lower depreciation and related facility costs due to restructuring. The decrease in R&D expense in 2006 is partially offset by an increase of $9.9 million of stock-based compensation included in R&D primarily as a result of the adoption of SFAS 123R. As a percentage of sales R&D has decreased due to higher sales and relatively fixed R&D spending. The 2005 reduction from 2004 levels was partially offset by a full year of operations in 2005 for Peter Wolters AG, which we acquired in June 2004, compared to a partial year of operations in 2004.

Acquired In-Process Research and Development (IPR&D)

	Years Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
IPR&D expense	$	—		$	—		$	6,124
% of net sales		0	%		0	%		less than 1	%

During 2004, we incurred a $6.1 million charge for acquired in-process research and development (IPR&D) in connection with the acquisition of Angstron Systems, Inc. We incurred no such charges during 2006 and 2005.

Legal Settlement

	Years Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Legal settlement	$	3,250		$	—		$	5,400
% of net sales		less than 1	%		0	%		less than 1	%

In 2006, we incurred a charge of $3.3 million to settle a customer indemnity claim. During 2004, we incurred a charge of $2.9 million related to the Semitool litigation and a charge of $2.5 million related to the settlement of a class action lawsuit by field service engineers relating to overtime compensation. No such legal charges were incurred during the year ended December 31, 2005.

Restructuring and Other Charges

	Years Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Restructuring and other charges	$	10,735		$	9,175		$	1,484
% of net sales		1	%		1	%		less than 1	%

During 2006, we implemented a restructuring plan to dispose of certain owned facilities located in San Jose, California. We recorded an impairment charge of $8.9 million to write down certain of those facilities to their

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estimated fair value and reclassified certain of those assets to assets held for sale in our Consolidated Balance Sheet as of December 31, 2006 as we expect to sell them within one year. In 2006, we also recorded restructuring charges of $6.0 million related to future lease payments, $1.3 million related to accelerated depreciation of leasehold improvements and $0.2 million related to other charges, all in connection with a restructuring plan we implemented in 2005 to relocate certain operations from Chandler, Arizona to San Jose, California and Tualatin, Oregon.

During 2005, we incurred a severance charge of $0.8 million and asset impairments of $14.2 million. These charges were offset by the reversal of a previously recorded restructuring accrual of $5.8 million due to a change in future estimated sublease income.

During 2004, we incurred a severance charge of $1.2 million and asset impairments of $1.2 million. These charges were offset by the reversal of a previously recorded restructuring accrual of $0.9 million due to a change in future estimated sublease income related to vacated facilities.

The charges for vacated facilities relates to rent obligations after the abandonment of certain facilities currently under long-term operating lease agreements. When applicable, anticipated future sublease income related to the vacated buildings has been offset against the charge for the remaining lease payments. Additionally, certain property and equipment, including leasehold improvements, associated with the abandoned facilities that had no future economic benefit have been written off.

As a result of the 2006 restructuring plan we expect to decrease net expenses in 2007 by approximately $2.5 million, which considers decreased depreciation expense related to asset write offs and sublease income. In addition we experienced cash flow savings of $1.3 million in 2006 and expect savings of $1.8 million in 2007, due primarily to sublease income. See Note 7 to Consolidated Financial Statements for further disclosure of our restructuring activities.

Interest and Other Income, net

	Years Ended December 31,									% Change			% Change
	2006			2005			2004			in 2006			in 2005
	(Dollars in thousands)
Interest and other income, net	$	34,145		$	22,916		$	17,804			49	%		29	%
% of net sales		2	%		2	%		1	%

Interest and other income, net, includes interest income, interest expense and other non-operating items. The increase in interest and other income, net, in absolute dollars for 2006 compared to 2005 is primarily due to an increase in interest income of approximately $7.0 million, due to higher balances of interest-bearing cash and short-term investments along with higher interest rates during 2006 and a gain of $2.8 million related to our acquisition of Voumard.

The increase in interest and other income, net, in absolute dollars for 2005 compared to 2004 is primarily due to an increase in interest income of approximately $9.2 million, due to higher balances of interest-bearing cash and short-term investments along with an increase in foreign currency-related gains of $6.5 million. Higher cash and investment balances resulted mainly from positive cash flow from operations during the year ended December 31, 2005. In 2004, interest and other income, net, included the cash receipt of $8.0 million in connection with the settlement of the Applied Materials, Inc. litigation.

Income Taxes

Our effective tax rate was 44%, 31% and 30% in 2006, 2005 and 2004, respectively. Our effective tax rate in 2006 differs from 2005 primarily because of the implementation of a new global business structure, the conclusion of certain tax examinations, increased benefit from federal manufacturing and export sales incentives, reduced state taxes, and reduced incremental benefit from tax-exempt interest income. Our new global business structure is being implemented to align our operations with the business needs of our non-U.S. customers. We expect to achieve a lower tax rate in the future as well as business efficiencies, as a result of the global structure. In 2006, a tax expense of approximately $46.1 million due to foreign losses with

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no current tax benefit associated with the global structure was partially offset by an $8.0 million benefit from the adjustment of tax reserves as a result of the conclusion of tax examinations. Our effective tax rate in 2005 differs from 2004 because of decreased benefit from export sale incentives and less benefit from a valuation allowance reduction. The effective tax rate in 2006 also reflects research and development credits, and foreign income taxes on foreign source earnings taxed at less than the U.S. statutory rate.

Our future effective income tax rate depends on various factors, such as profits (losses) before taxes, tax legislation, the geographic composition of pre-tax income and non-deductible expenses incurred in connection with acquisitions.

We remain subject to examination by federal and state tax authorities. In addition, certain of our foreign subsidiaries are subject to examination by foreign taxing authorities. The timing of the settlement of these examinations is uncertain. We believe that adequate accruals have been provided for any potential adjustments that may result from these examinations.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our assumptions and estimates, including those related to revenue recognition, inventory valuation, goodwill and other intangible assets, deferred tax assets, warranty obligations, restructuring and impairment charges and stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Revenue Recognition

In accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB 104), we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectibility is reasonably assured.

Our equipment sales generally have two elements: 1) the equipment and 2) installation of that equipment. If we have met defined customer acceptance experience levels with both the customer and the specific type of equipment, we recognize revenue for the equipment element upon shipment and transfer of title. The installation element is recognized upon customer acceptance. Installation services are not essential to the functionality of the delivered equipment. As provided for in EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” we allocate revenue based on the residual method when fair value has been established for installation services. For many of our sales contracts, the final payment is not billable until customer acceptance and typically exceeds the fair value of the installation services. Under these arrangements, we defer revenue for the final payment until customer acceptance. In the short-term, this practice creates variability in our gross margin, as revenue related to customer acceptance is recognized with little or no associated costs, which may not be indicative of our future operating performance.

We also enter into revenue arrangements that involve the sale of multiple pieces of equipment under a single arrangement. Revenue under these arrangements is allocated among the separate elements based on their relative fair values, provided the elements have value on a stand alone basis and there is objective and reliable evidence of fair value. Our sales arrangements do not include a general right of return. In cases where there is objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), the residual method is used to allocate the arrangement consideration.

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Revenue related to sales of spare parts is recognized upon shipment. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Unearned maintenance and service contract revenue is included in other accrued liabilities.

Inventory Valuation

We periodically assess the recoverability of all inventories, including raw materials, work-in-process, finished goods, and spare parts, to determine whether adjustments for impairment are required. Inventory that is obsolete, or that is in excess of our forecasted usage is written down to its estimated realizable value based on assumptions about future demand and market conditions. If actual demand is lower than our forecast, additional inventory write-downs may be required.

Goodwill and Other Intangible Assets

We account for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 142 requires that goodwill and identifiable intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144).

We review our long-lived assets, including goodwill and other intangible assets, for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In accordance with our policy, we completed the goodwill impairment test in the fourth quarter of 2006. The first step of the test identifies when impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. The results of our impairment tests did not indicate impairment.

Deferred Tax Assets

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2006, we had approximately $130.0 million of deferred tax assets, net of a valuation allowance of approximately $3.8 million principally related to acquired net operating loss carryforwards that are not realizable until 2017 and beyond. Management believes the majority of deferred tax assets will be realized due to anticipated future income. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If in the future we determine that we would not be able to realize all or part of our net deferred tax assets, an increase to the valuation allowance for deferred tax assets would decrease income in the period in which such determination is made.

Warranty Obligations

Our warranty policy generally states that we will provide warranty coverage for a predetermined amount of time on systems and modules for material and labor to repair and service the equipment. We generally record the estimated cost of warranty coverage to cost of sales upon system shipment. The estimated cost of warranty is determined by the warranty term, as well as the average historical labor and material costs for a specific product. Should actual product failure rates or material usage differ from our estimates, revisions to the estimated warranty liability may be required. These revisions have had and could in the future have a positive or negative impact on gross profit. We review the actual product failure rates and material usage rates on a quarterly basis and adjust our warranty liability as necessary.

Restructuring and Impairment Charges

Restructuring activities after December 31, 2002 were recorded under the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (SFAS 146); SFAS No. 112, “Employers’

36

Accounting for Postemployment Benefits;” and SAB 100, “Restructuring and Impairment Charges.” SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred, rather than when the exit or disposal plan is approved.

We account for business combination restructurings under the provisions of EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” and SAB 100. Accordingly, restructuring accruals are recorded when management initiates an exit plan that will cause us to incur costs that have no future economic benefit. Certain restructuring charges related to long-lived asset impairments are recorded in accordance with SFAS No. 144. The restructuring accrual related to vacated facilities is calculated net of estimated sublease income. Sublease income is estimated based on current market quotes for similar properties and expected occupancy dates. If we are unable to sublet these vacated properties as forecasted, if we are forced to sublet them at rates below our current estimates due to changes in market conditions, or if we change our sublease income estimate, we will adjust the restructuring accruals accordingly.

Hedge Accounting for Derivatives

We utilize foreign currency forward exchange contracts to hedge certain anticipated foreign currency sales transactions. When specific criteria required by SFAS No. 133, “Accounting for Derivative and Hedging Activities,” (SFAS 133) have been met, changes in fair values of hedge contracts relating to anticipated transactions are recorded in other comprehensive income rather than net income until the underlying hedged transaction affects net income. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When we determine that the transactions are no longer probable within a certain time frame, we are required to reclassify the cumulative changes in the fair values of the related hedge contracts from other comprehensive income to net income.

Stock-Based Compensation Expense

We account for stock-based compensation in accordance with the provisions of SFAS 123R. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could materially impact our operating results. See Note 14 to Consolidated Financial Statements for discussion of the impact of SFAS 123R on our Consolidated Financial Statements and significant estimates used.

Litigation

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. SFAS No. 5, “Accounting for Contingencies,” requires that an estimated loss from a loss contingency such as a legal proceeding or claim should be accrued by a charge to income if it is probable that an asset has been impaired or is required if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.

Liquidity and Capital Resources

Our operating and capital resource requirements are primarily financed from cash flows from operations and borrowings. Our restricted cash and cash equivalents balance was $143.8 million as of December 31, 2006. Our primary source of funds as of December 31, 2006 consisted of approximately $853.3 million in unrestricted cash, cash equivalents and short-term investments. This amount represents an increase of $198.3 million from the December 31, 2005 balance of $655.0 million. The increase was due primarily to cash generated from operations of $447.2 million, offset by the repurchase of common stock for $249.9 million.

Net cash provided by operating activities for the year ended December 31, 2006 was $447.2 million. The primary sources of cash from operating activities were net income, as adjusted to exclude the effect of non-

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cash charges of depreciation and amortization, stock-based compensation and restructuring charges, and changes in working capital levels, including accounts receivable and inventories. During 2006 we began to utilize programs to factor or sell accounts receivable, which has resulted in increased cash and lower accounts receivable in 2006 compared to 2005.

Net cash used in investing activities in the year ended December 31, 2006 was $234.2 million, which consisted primarily of cash paid for capital expenditures of $39.4 million and net purchases, sales and maturities of short-term investments of $176.1 million. As of December 31, 2006, we did not have any significant commitments to purchase property and equipment.

Net cash used in financing activities for the year ended December 31, 2006 was $197.9 million, which was due primarily to the repurchase of common stock for $249.9 million and payments on long-term debt of $10.2 million, partially offset by proceeds from employee stock compensation plans of $42.4 million.

In December 2006, we entered into a credit agreement with certain lenders (the Agreement), which established a senior unsecured five year revolving credit line with an aggregate committed amount of $150.0 million with the option to increase the total line by up to an additional $100.0 million under certain circumstances. We expect to use the proceeds for working capital and other general corporate purposes, including the repurchase of shares. The Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties, and events of default, which are subject to various exceptions and qualifications. No amounts have been borrowed under the Agreement as of December 31, 2006.

During 2004, we entered into a credit arrangement denominated in Euros that allowed for borrowing of up to $153.1 million and borrowed the entire amount available to fund the acquisition of Peter Wolters AG and for general corporate purposes. Borrowings are secured by cash or short-term investments on deposit which are included within restricted cash and cash equivalents on our Consolidated Balance Sheet. All borrowings under the credit arrangement are due and payable on or before June 28, 2009.

We have available short-term credit facilities with various financial institutions totaling $80.2 million, of which $46.3 million was unutilized as of December 31, 2006. These credit facilities bear interest at various rates, expire on various dates through December 2007 and are used for general corporate purposes. As of December 31, 2006, our subsidiaries had $19.5 million of borrowings outstanding under the short-term lines of credit at a weighted-average interest rate of 2.3%.

We also have long-term credit facilities with various institutions totaling $318.5 million, of which $190.7 million was unutilized as of December 31, 2006. These credit facilities bear interest at a weighted-average rate of 3.8% and expire through December 2037. As of December 31, 2006, we had $127.9 million in long-term debt outstanding.

On February 23, 2004, our Board of Directors renewed a stock repurchase program originally approved in September 2001. Under the repurchase program as renewed, we were authorized to repurchase up to $500.0 million of our outstanding common shares. On September 20, 2004 we announced that our Board of Directors had authorized an additional $1.0 billion for repurchase of outstanding common stock through September 14, 2009. As of December 31, 2006, we had approximately $613.3 million of remaining unused authorization for such repurchases.

We believe that our current cash position, cash generated through operations and equity offerings, and available borrowings will be sufficient to meet our needs through at least the next twelve months.

Off-Balance Sheet Arrangements

Standby Letters of Credit

We provide standby letters of credit to certain parties as required for certain transactions we initiate during the ordinary course of business. As of December 31, 2006, the maximum potential amount of future payments that we could be required to make under these letters of credit was approximately $14.5 million. We have not recorded any liability in connection with these arrangements beyond that required to appropriately account for the underlying transaction being guaranteed. We do not believe, based on historical experience and

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information currently available, that it is probable that any amounts will be required to be paid under these arrangements.

Guarantee Arrangements

We have guarantee arrangements on behalf of certain of our consolidated subsidiaries for line-of-credit borrowings, overdrafts and operating leases. In the event of default on these arrangements by our subsidiaries, we would have a maximum exposure of $181.7 million as of December 31, 2006.

Contractual Obligations

We have non-cancelable operating leases for various facilities. Rent expense was approximately $12.2 million, $11.8 million and $11.0 million for the years ended December 31, 2006, 2005 and 2004, respectively, net of sublease income of $2.3 million, $2.8 million and $3.7 million, respectively. Certain of the operating leases contain provisions, which permit us to renew the leases at the end of their respective lease terms.

The following is a table summarizing future minimum lease payments under all non-cancelable operating leases, with initial or remaining terms in excess of one year.

	Years Ending December 31,												Sublease			Net
	2007		2008		2009		2010		2011		Thereafter		Income			Total
	(In thousands)
Non-cancelable operating leases	$	8,936	$	8,382	$	7,957	$	7,827	$	7,693	$	24,875	$	(24,185	)	$	41,485

The following is a table summarizing our contractual obligations under long-term borrowing arrangements. This table excludes amounts recorded on our balance sheet as current liabilities at December 31, 2006.

	Years Ending December 31,
	2008		2009		2010		2011		Thereafter
	(In thousands)
Long-term debt obligations	$	38	$	126,627	$	38	$	38	$	1,121

Liabilities related to our pension and post-retirement benefit plans, are reported in our Consolidated Balance Sheets but are not reflected in a contractual obligation table due to the absence of stated maturities. We have net obligations at December 31, 2006 related to our pension plans and post-retirement medical plan of $6.7 million. We funded $0.5 million to these plans in fiscal 2006. We expect to make payments of $1.5 million in fiscal 2007.

Purchase Commitments

We have firm purchase commitments with various suppliers to ensure the availability of components. Our minimum obligation at December 31, 2006 under these arrangements was $113.7 million. All amounts under these arrangements are due in 2007. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or cancelled. Certain agreements provide for potential cancellation penalties. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We have made adequate provision for potential exposure related to inventory on order which may go unused.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R. SFAS 123R requires measurement of all employee stock-based compensation awards using a fair-value method and the recording of such expense in the consolidated financial statements. In addition, the adoption of SFAS 123R requires additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from share-based payment arrangements. In January 2005, the SEC issued Staff Accounting

39

Bulletin No. 107, “Share-Based Payment” (SAB 107), which provides supplemental implementation guidance for SFAS 123R. We selected the Black-Scholes option-pricing model as the most appropriate fair-value method for our awards and will recognize compensation cost on a straight-line basis over our awards’ vesting periods. We adopted SFAS 123R in the first quarter of fiscal 2006 and recognized $34.9 million of expense related to stock-based compensation in 2006.

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (SFAS 151). The standard clarifies that certain abnormal amounts be expensed as incurred, rather than included as a cost of inventory. SFAS 151 also requires that the allocation of fixed overhead costs to inventory be based upon a normal production capacity. We adopted the standard effective January 1, 2006, which resulted in an increased carrying value of inventory and decreased cost of sales of approximately $2.5 million and an increase to net income of $1.5 million, net of tax, or $0.01 per diluted share for the year ended December 31, 2006.

In June 2006, the EITF issued EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43” (EITF 06-2), which clarifies the accounting for compensated absences known as a sabbatical leave whereby the employee is entitled to paid time off after working for an entity for a specified period of time. The provisions of EITF 06-2 are effective for us as of January 1, 2007. We are currently evaluating the impact of adopting EITF 06-2 on our Consolidated Financial Statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 creates a single model to address uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from SFAS No. 5, “Accounting for Contingencies” (SFAS 5). The provisions of FIN 48 are effective for us as of January 1, 2007. We are currently evaluating the impact of adopting FIN 48 on our Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value. Also, SFAS 157 establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of SFAS 157 on our Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their consolidated balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. SFAS 158 also requires additional disclosures in the notes to financial statements. SFAS 158 is effective as of the end of fiscal years ending after December 15, 2006. We adopted SFAS 158 as of December 31, 2006, which resulted in recording an increased pension liability and other comprehensive loss of $0.9 million, net of tax of $0.4 million.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our short-term and long-term debt obligations. We do not use derivative financial instruments in our investment portfolio. We place our investments with high-credit-quality issuers and, by policy, limit the amount of credit exposure with any one issuer.

We mitigate default risk by investing in only the safest and highest credit quality securities and by monitoring the credit rating of their issuers. The portfolio includes only short-term investments with active secondary or

40

resale markets to ensure portfolio liquidity. We have no material cash flow exposure due to rate changes for cash equivalents and short-term investments.

The interest rate of the majority of our short-term and long-term obligations is floating. Therefore, our results are only affected by the interest rate changes to variable-rate short-term borrowings. Due to the short-term nature of these borrowings, an immediate change to interest rates is not expected to have a material effect on our results.

The tables below present the amounts we recorded and related weighted average interest rates by year of maturity for our investment portfolio and debt obligations as of December 31, 2006 and 2005. The amounts presented in the tables below approximate fair value.

	Periods of Maturity
	Less than			1 to 3			3 to 5			5 to 10			Over 10			2006
	1 Year			Years			Years			Years			Years			Total
	(In thousands)
Assets:
Cash and cash equivalents	$	58,463		$	—		$	—		$	—		$	—		$	58,463
Average interest rate		5.30	%		—			—			—			—			5.30	%
Short-term investments	$	199,980		$	49,016		$	4,845		$	12,875		$	522,998		$	789,714
Average interest rate		4.89	%		5.06	%		5.82	%		5.71	%		5.76	%		5.51	%
Restricted cash and cash equivalents	$	143,769		$	—		$	—		$	—		$	—		$	143,769
Average interest rate		5.33	%		—			—			—			—			5.33	%
Liabilities:
Short-term borrowings	$	19,480		$	—		$	—		$	—		$	—		$	19,480
Average interest rate		2.34	%		—			—			—			—			2.34	%
Long-term borrowings	$	—		$	126,665		$	76		$	190		$	931		$	127,862
Average interest rate		—			3.83	%		4.00	%		4.00	%		4.00	%		3.83	%

	Periods of Maturity
	Less than			1 to 3			3 to 5			5 to 10			Over 10			2005
	1 Year			Years			Years			Years			Years			Total
	(In thousands)
Assets:
Cash and cash equivalents	$	40,403		$	—		$	—		$	—		$	—		$	40,403
Average interest rate		3.77	%		—			—			—			—			3.77	%
Short-term investments	$	173,708		$	140,448		$	10,940		$	10,685		$	273,056		$	608,837
Average interest rate		3.65	%		4.35	%		4.99	%		5.18	%		4.98	%		4.46	%
Restricted cash and cash equivalents	$	140,212		$	—		$	—		$	—		$	—		$	140,212
Average interest rate		4.28	%		—			—			—			—			4.28	%
Liabilities:
Short-term borrowings	$	15,744		$	—		$	—		$	—		$	—		$	15,744
Average interest rate		0.83	%		—			—			—			—			0.83	%
Long-term borrowings	$	—		$	115		$	123,750		$	229		$	764		$	124,858
Average interest rate		—			4.00	%		2.63	%		4.00	%		4.00	%		2.65	%

The “less than 1 year” category of short-term investments contains $14.8 million and $8.1 million of other investments that do not have contractual maturities at December 31, 2006 and 2005. Also included in short-term investments is interest receivable of $5.2 million and $5.7 million as of December 31, 2006 and 2005, respectively, that is not included in the tables above.

41

Foreign Currency Risk

We conduct business in various foreign countries located primarily in Europe and Asia. We are therefore primarily exposed to changes in exchange rates of currencies in those regions. To address these currency risks, we expanded our foreign currency exposure management policy in 2006. We utilize foreign currency forward contracts to mitigate our risk to changes in exchange rates by hedging intercompany balances denominated in currencies other than the U.S. dollar, hedging our U.S. dollar net investment in certain foreign subsidiaries and by designating certain forward contracts as cash flow hedges on transactions in which costs are denominated in U.S. dollars but the related revenues are generated in a foreign currency. The intent of our hedging program is to minimize the impact of foreign currency fluctuations on our results of operations. We do not use foreign currency forward exchange contracts for speculative or trading purposes. For further discussion of the accounting treatment of our derivative instruments see Note 2 of our Consolidated Financial Statements. The tables below present the notional amounts (at the contract exchange rates), the weighted-average contractual foreign currency exchange rates and the estimated fair value of our contracts outstanding at December 31, 2006 and 2005.

	December 31, 2006
	Notional			Average		Estimated Fair
	(Buy) Sell			Contract Rate		Value-Gain (Loss)
	(In thousands, except for average contract rate)
Foreign currency forward exchange contracts:
Japanese yen	$	142,963			106.23	$	3,047
Swiss franc		1,966			1.21		0
Singapore dollar		(6,443	)		1.53		1
Other		(7	)				(16	)
	$	138,479				$	3,032

	December 31, 2005
	Notional			Average		Estimated Fair
	(Buy) Sell			Contract Rate		Value-Gain (Loss)
	(In thousands, except for average contract rate)
Foreign currency forward exchange contracts:
Japanese yen	$	156,555			105.81	$	13,267
British pound		(5,026	)		0.60		1
Euro		(15,974	)		0.84		(184	)
Swiss franc		1,395			1.31		(3	)
Sinapore dollar		(13,753	)		1.66		(15	)
Taiwanese dollar		657			33.06		1
Chinese renminbi		(2,040	)		8.03		(11	)
Malaysian ringget		(2,341	)		3.77		(7	)
Korean won		(12,304	)		1,012.10		(7	)
	$	107,169				$	13,042

42

Item 8.   Financial Statements and Supplementary Data

NOVELLUS SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2006			2005			2004
	(In thousands, except per share data)
Net sales	$	1,658,516		$	1,340,471		$	1,357,288
Cost of sales		834,167			741,345			692,158
Gross profit		824,349			599,126			665,130
Operating expenses:
Selling, general and administrative		261,389			206,939			194,652
Research and development		244,201			247,315			252,083
Acquired in-process research and development		—			—			6,124
Legal settlement		3,250			—			5,400
Restructuring and other charges		10,735			9,175			1,484
Total operating expenses		519,575			463,429			459,743
Operating income		304,774			135,697			205,387
Interest income		27,782			20,738			11,578
Interest expense		(4,290	)		(3,510	)		(2,133	)
Other income, net		10,653			5,688			8,359
Interest and other income, net		34,145			22,916			17,804
Income before provision for income taxes and cumulative effect of a change in accounting principle		338,919			158,613			223,191
Provision for income taxes		149,851			48,506			66,501
Income before cumulative effect of a change in accounting principle		189,068			110,107			156,690
Cumulative effect of a change in accounting principle, net of tax of $594		948			—			—
Net income	$	190,016		$	110,107		$	156,690
Net income per share:
Basic:
Income before cumulative effect of a change in accounting principle	$	1.51		$	0.80		$	1.07
Cumulative effect of a change in accounting principle		0.01			—			—
Basic net income per share	$	1.52		$	0.80		$	1.07
Diluted:
Income before cumulative effect of a change in accounting principle	$	1.49		$	0.80		$	1.06
Cumulative effect of a change in accounting principle		0.01			—			—
Diluted net income per share	$	1.50		$	0.80		$	1.06
Shares used in basic per share calculations		125,286			137,447			145,956
Shares used in diluted per share calculations		126,483			138,423			147,937

See accompanying Notes to the Consolidated Financial Statements.

43

NOVELLUS SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2006		2005
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	58,463	$	40,403
Short-term investments		794,865		614,580
Accounts receivable, net of allowance for doubtful accounts of $1,753 in 2006 and $987 in 2005		310,888		391,791
Inventories		198,571		193,787
Deferred tax assets, net		102,266		88,563
Assets held for sale		21,966		—
Prepaid and other current assets		18,274		34,388
Total current assets		1,505,293		1,363,512
Property and equipment, net		364,599		423,749
Restricted cash and cash equivalents		143,769		140,212
Goodwill		225,431		255,584
Intangibles and other assets		123,400		107,192
Total assets	$	2,362,492	$	2,290,249
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	76,406	$	83,710
Accrued payroll and related expenses		81,836		57,450
Accrued warranty		55,349		54,553
Other accrued liabilities		48,068		58,271
Income taxes payable		38,879		5,898
Deferred profit		41,351		68,718
Current obligations under lines of credit		19,480		15,744
Total current liabilities		361,369		344,344
Long-term debt		127,862		124,858
Other non-current liabilities		38,556		41,764
Total liabilities		527,787		510,966
Commitments and contingencies (Notes 10 and 11)
Shareholders’ equity:
Preferred stock, no par value; authorized shares — 10,000; issued and outstanding shares — none		—		—
Common stock, no par value; authorized shares — 240,000; issued and outstanding shares — 125,452 in 2006 and 132,820 in 2005		1,393,914		1,418,747
Deferred stock compensation		—		(24,942	)
Retained earnings		438,196		388,015
Accumulated other comprehensive income (loss)		2,595		(2,537	)
Total shareholders’ equity		1,834,705		1,779,283
Total liabilities and shareholders’ equity	$	2,362,492	$	2,290,249

See accompanying Notes to the Consolidated Financial Statements.

44

NOVELLUS SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Cash flows from operating activities:
Net income	$	190,016		$	110,107		$	156,690
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of equity investments		—			—			(303	)
Loss on disposal of fixed assets		1,699			2,182			1,650
Non-cash portion of restructuring and other charges		10,199			14,337			(7,779	)
Depreciation and amortization		69,729			82,776			89,244
Deferred income taxes		20,790			22,858			39,025
Stock-based compensation		34,941			4,209			4,093
Acquired in-process research and development		—			—			6,124
Tax benefit from stock-based compensation		29,656			4,132			—
Excess tax benefit from stock-based compensation		(15,612	)		—			—
Cumulative effect of a change in accounting principle		(1,542	)		—			—
Changes in operating assets and liabilities:
Accounts receivable, net		82,539			(6,167	)		(146,073	)
Inventories		(12,174	)		52,884			(46,072	)
Prepaid and other assets		27,085			(10,421	)		(5,703	)
Accounts payable		(7,764	)		1,580			10,916
Accrued payroll and related expenses		27,306			(3,541	)		31,350
Accrued warranty		501			8,795			14,718
Other liabilities		(18,259	)		(2,011	)		3,415
Income taxes payable		35,595			(5,945	)		3,747
Deferred profit		(27,552	)		(2,219	)		24,160
Net cash provided by operating activities		447,153			273,556			179,202
Cash flows from investing activities:
Proceeds from sales of short-term investments		672,263			329,434			629,378
Proceeds from maturities of short-term investments		197,464			395,806			246,799
Purchases of short-term investments		(1,045,876	)		(853,334	)		(849,558	)
Capital expenditures		(39,384	)		(44,744	)		(31,732	)
Proceeds from sale of property and equipment		2,235			2,676			—
Decrease (increase) in other assets		(16,603	)		3,003			(11,226	)
Decrease (increase) in restricted cash and cash equivalents		(3,557	)		36,496			(173,847	)
Purchase of Voumard Machine, Co. SA, net of cash acquired		(765	)		(5,384	)		—
Purchase of Peter Wolters AG, net of cash acquired		—			—			(142,916	)
Net cash used in investing activities		(234,223	)		(136,047	)		(333,102	)
Cash flows from financing activities:
Proceeds from employee stock compensation plans		42,383			29,864			38,706
Proceeds (repayments) from lines of credit, net		4,193			12,726			(10,044	)
Proceeds from long-term debt		—			—			153,115
Payments on long-term debt		(10,194	)		(19,902	)		(10,362	)
Repurchases of common stock		(249,864	)		(226,652	)		(410,188	)
Excess tax benefit from stock-based compensation		15,612			—			—
Net cash used in financing activities		(197,870	)		(203,964	)		(238,773	)
Effects of exchange rate changes on cash and cash equivalents		3,000			741			1,612
Net change in cash and cash equivalents		18,060			(65,714	)		(391,061	)
Cash and cash equivalents at beginning of period		40,403			106,117			497,178
Cash and cash equivalents at end of period	$	58,463		$	40,403		$	106,117
Supplemental disclosures:
Cash paid during the year for:
Interest	$	3,850		$	4,136		$	1,425
Income taxes, net	$	65,238		$	14,263		$	23,908

See accompanying Notes to the Consolidated Financial Statements.

45

NOVELLUS SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

													Accumulated
													Other
													Comprehensive			Total
	Common Stock						Deferred			Retained			Income			Shareholders’
	Shares			Amount			Compensation			Earnings			(Loss)			Equity
	(In thousands)
Balance at December 31, 2003		152,899		$	1,574,239		$	(8,313	)	$	501,362		$	4,572		$	2,071,860
Components of comprehensive income:
Net income		—			—			—			156,690			—			156,690
Net change in unrealized loss on marketable securities		—			—			—			—			(571	)		(571	)
Less: reclassification adjustment for gain on sale of marketable securities		—			—			—			—			(303	)		(303	)
Foreign currency translation adjustments, net of tax of $4,194		—			—			—			—			1,547			1,547
Comprehensive income																	157,363
Issuance of common stock under employee compensation plans, net		1,731			38,847			—			(141	)		—			38,706
Issuance of restricted common stock, net		450			12,939			(12,939	)		—			—			—
Amortization of deferred compensation		—			—			4,093			—			—			4,093
Repurchases of common stock		(14,774	)		(152,196	)		—			(257,992	)		—			(410,188	)
Balance at December 31, 2004		140,306			1,473,829			(17,159	)		399,919			5,245			1,861,834
Components of comprehensive income:
Net income		—			—			—			110,107			—			110,107
Net change in unrealized loss on marketable securities		—			—			—			—			(903	)		(903	)
Foreign currency translation adjustments, net of tax of $(2,495)		—			—			—			—			(6,879	)		(6,879	)
Comprehensive income																	102,325
Issuance of common stock under employee compensation plans, net		1,901			33,658			—			(223	)		—			33,435
Income tax benefits realized from activity in employee stock plans		—			4,132			—			—			—			4,132
Issuance of restricted common stock, net		538			11,992			(11,992	)		—			—			—
Amortization of deferred compensation		—						4,209			—			—			4,209
Repurchases of common stock		(9,925	)		(104,864	)		—			(121,788	)		—			(226,652	)
Balance at December 31, 2005		132,820			1,418,747			(24,942	)		388,015			(2,537	)		1,779,283
Components of comprehensive income:
Net income		—			—			—			190,016			—			190,016
Net change in unrealized loss on marketable securities		—			—			—			—			2,114			2,114
Foreign currency translation adjustments, net of tax of $123		—			—			—			—			4,225			4,225
Net change in unrealized loss on derivative instruments		—			—			—			—			(329	)		(329	)
Net change in unrealized loss on pension, net of tax of $369		—			—			—			—			(878	)		(878	)
Comprehensive income																	195,148
Reclassification of deferred compensation balance to common stock		—			(24,942	)		24,942			—			—			—
Issuance of common stock under employee compensation plans, net		2,985			46,560			—			(238	)		—			46,322
Income tax benefits realized from activity in employee stock plans		—			29,656			—			—			—			29,656
Stock based compensation		—			34,160			—			—			—			34,160
Repurchases of common stock		(10,353	)		(110,267	)		—			(139,597	)		—			(249,864	)
Balance at December 31, 2006		125,452		$	1,393,914		$	—		$	438,196		$	2,595		$	1,834,705

See accompanying Notes to the Consolidated Financial Statements.

46

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Description of the Business

Novellus Systems, Inc., together with its subsidiaries, is primarily a supplier of semiconductor manufacturing equipment used in the fabrication of integrated circuits. We are focused on delivering innovative interconnect products and technologies that meet the increasingly complex and demanding needs of the world’s largest semiconductor manufacturers. The semiconductor manufacturing equipment that we build, market and service provides today’s semiconductor device manufacturers with high productivity and low total cost of ownership.

As part of our growth strategy, from time to time we make acquisitions. On June 28, 2004, we acquired Peter Wolters AG, a manufacturer of high-precision machine manufacturing tools. The acquisition was accounted for as a purchase business combination. Our consolidated financial statements for 2004 include the financial position, results of operations and cash flows of Peter Wolters from the date of acquisition. With the acquisition of Peter Wolters AG, Novellus entered into the Industrial Applications market segment for the first time.

On November 18, 2005, we acquired 90% of Voumard Machines Co. SA (Voumard), a manufacturer of high-precision machine manufacturing tools based in Neuchâtel, Switzerland and in November 2006 we acquired the remaining 10%. The acquisition was accounted for as a purchase business combination. Our consolidated financial statements for 2005 include the financial position, results of operations and cash flows of Voumard from the date of acquisition. With the acquisition of Voumard, Novellus further enhanced the product offerings in our Industrial Applications Group.

Note 2.  Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying Consolidated Financial Statements include our accounts and the accounts of our subsidiaries after elimination of all significant intercompany account balances and transactions. Certain prior year amounts in the Consolidated Financial Statements and the notes thereto have been reclassified to conform to the current year presentation.

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to revenue recognition, cash and investments, allowance for doubtful accounts, inventory valuation, deferred tax assets, property and equipment, goodwill and other intangible assets, warranty obligations, restructuring and impairment charges, contingencies and litigation and stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our intent is to accurately state our assets and liabilities given facts known at the time of valuation. Our assumptions may prove incorrect as facts change in the future. Actual results may differ materially from these estimates under different assumptions or conditions.

Earnings per Share

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. For purposes of computing basic net income per share, the weighted-average number of outstanding shares of common stock excludes unvested restricted stock awards.

Diluted earnings per share is computed by dividing net income for the period by the weighted-average number of common shares outstanding during the period, plus the dilutive effect of unvested restricted stock awards,

47

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

outstanding options and shares issuable under stock incentive and employee stock purchase plans using the treasury stock method.

The following table provides a reconciliation of the numerators and denominators of the basic and diluted per share computations:

	Years Ended December 31,
	2006		2005		2004
	(In thousands, except per share amounts)
Numerator:
Net income	$	190,016	$	110,107	$	156,690
Denominator:
Basic weighted-average shares outstanding		125,286		137,447		145,956
Employee stock options and other		1,197		976		1,981
Diluted weighted-average shares outstanding		126,483		138,423		147,937
Basic net income per share	$	1.52	$	0.80	$	1.07
Diluted net income per share	$	1.50	$	0.80	$	1.06

For the years ended December 31, 2006, 2005 and 2004, 9.2 million, 19.8 million and 15.2 million shares, respectively, were attributable to outstanding stock options and were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. Restricted stock awards representing 0.8 million and 0.2 million shares were excluded from the computation of diluted shares outstanding for the years ended December 31, 2006 and 2005, respectively, as the shares were subject to performance conditions that had not been met.

Revenue Recognition

In accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB 104), we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectibility is reasonably assured.

Our equipment sales generally have two elements: 1) the equipment and 2) installation of that equipment. If we have met defined customer acceptance experience levels with both the customer and the specific type of equipment, we recognize revenue for the equipment element upon shipment and transfer of title. The installation element is recognized upon customer acceptance. Installation services are not essential to the functionality of the delivered equipment. As provided for in EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” we allocate revenue based on the residual method when fair value has been established for installation services. For many of our sales contracts, the final payment is not billable until customer acceptance and typically exceeds the fair value of the installation services. Under these arrangements, we defer revenue for the final payment until customer acceptance. In the short-term, this practice creates variability in our gross margin, as revenue related to customer acceptance is recognized with little or no associated costs, which may not be indicative of our future operating performance.

We also enter into revenue arrangements that involve the sale of multiple pieces of equipment under a single arrangement. Revenue under these arrangements is allocated among the separate elements based on their relative fair values, provided the elements have value on a stand alone basis and there is objective and reliable evidence of fair value. Our sales arrangements do not include a general right of return. In cases where there is objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), the residual method is used to allocate the arrangement consideration.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue related to sales of spare parts is recognized upon shipment. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Unearned maintenance and service contract revenue is included in other accrued liabilities.

Cash, Cash Equivalents and Short-Term Investments

We consider all highly liquid debt instruments with insignificant interest rate risk and original maturities of ninety days or less to be cash equivalents. Investments with original maturities greater than three months which are available for use in current operations are considered to be short-term investments. Our short-term investments are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses, net of tax, recorded in shareholders’ equity. The fair value of short-term investments is based on quoted market prices. Gains and losses and declines in fair value that are determined to be other than temporary are recorded in earnings. The cost of securities sold is based on the specific identification method.

Restricted Cash and Cash Equivalents

We maintain certain amounts of cash and cash equivalents on deposit which are restricted from general use. These amounts are used primarily to secure our Euro-based credit facility (see Note 8).

Allowance for Doubtful Accounts

We evaluate our allowance for doubtful accounts based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, we provide a specific allowance for bad debt against the amount due to reduce the net recognized receivable to the amount we reasonably believe will be collected. We also provide allowances based on our write-off history. We charge accounts receivable balances against our allowance for doubtful accounts once we have concluded our collection efforts are unsuccessful. Accounts receivable is considered past due in accordance with the contractual terms of the arrangement.

Inventories and Inventory Valuation

Inventories are stated at the lower of cost (first-in, first-out) or market. We periodically assess the recoverability of all inventories, including raw materials, work-in-process, finished goods, and spare parts, to determine whether adjustments for impairment are required. Inventory that is obsolete, or that is in excess of our forecasted usage, is written down to its estimated realizable value based on assumptions about future demand and market conditions.

Deferred Tax Assets

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. The valuation allowance at December 31, 2006 relates primarily to acquired net operating loss carryforwards that are not realizable until 2017 and beyond. The valuation allowance at December 31, 2006 includes $2.3 million related to the acquired deferred tax assets of SpeedFam-IPEC, which will be credited to goodwill when realized, and $1.5 million related to capital loss carryforwards. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the following estimated useful lives:

Machinery and equipment	3 — 10 years
Furniture and fixtures	5 — 10 years
Buildings	30 — 40 years
Building improvements	Shorter of useful life or remaining lease term

Goodwill and Other Intangible Assets

We review our long-lived assets, including goodwill and other intangible assets, for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In accordance with our policy, we completed the goodwill impairment test in the fourth quarter of 2006. The first step of the test identifies if potential impairment may have occurred, while the second step of the test measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of the asset exceeds the fair value. The results of our impairment tests did not indicate potential impairment.

Warranty

Our warranty policy generally states that we will provide warranty coverage for a predetermined amount of time on systems and modules for material and labor to repair and service the equipment. We generally record the estimated cost of warranty coverage to cost of sales upon system shipment. The estimated cost of warranty is determined by the warranty term as well as the average historical labor and material costs for a specific product. We review the actual product failure rates and material usage rates on a quarterly basis and adjust our warranty liability as necessary.

Restructuring and Impairment Charges

Restructuring activities after December 31, 2002 have been recorded under the provisions of Statement of Financial Accounting Standard (SFAS) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146); SFAS No. 112, “Employers’ Accounting for Postemployment Benefits;” and SEC SAB No. 100, “Restructuring and Impairment Charges” (SAB 100). SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred, rather than when the exit or disposal plan is approved. Accordingly, restructuring accruals are recorded when management initiates an exit plan that will cause us to incur costs that have no future economic benefit. The restructuring accrual related to vacated facilities is calculated net of estimated sublease income. Sublease income is estimated based on current market quotes for similar properties. If we are unable to sublet the vacated properties on a timely basis or if we are forced to sublet them at lower rates due to changes in market conditions, we will adjust the accruals accordingly.

Certain items classified within restructuring charges related to asset impairments are recorded in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and SAB 100.

Contingencies and Litigation

We assess the probability of adverse judgments in connection with current and threatened litigation. We accrue the cost of an adverse judgment if, in our estimation, the adverse outcome is probable and we can reasonably estimate the ultimate cost. We have made no such accruals as of December 31, 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Currency Translation

We translate assets and liabilities of international non-U.S. functional currency subsidiaries into dollars at the rates of exchange in effect at the balance sheet date. Revenue and expenses are translated using rates that approximate those in effect during the period. Accordingly, translation gains or losses related to these foreign subsidiaries are included as a component of accumulated other comprehensive income (loss).

Derivatives

To address increasing international growth and related currency risks, we expanded our foreign currency exposure management policy in 2006. Our policy is to enter into foreign exchange forward contracts with maturities of less than 12 months to mitigate the impact of currency fluctuations on existing non-functional currency monetary asset and liability balances; probable anticipated system sales denominated in yen; and our net investment in certain foreign functional currency subsidiaries. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), all derivatives are recorded in either other current assets or other current liabilities at fair value. Cash flows from derivative instruments are reported in cash flows from operating activities.

Cash Flow Hedging

We designate and document foreign exchange forward contracts on transactions in which costs are U.S. dollar denominated and the related revenues are generated in Japanese yen as cash flow hedges. We evaluate and calculate each hedge’s effectiveness at least quarterly using the dollar offset method, comparing the change in the forward contract’s fair value on a spot to spot basis to the spot to spot change in the anticipated transaction. The effective change is recorded in other comprehensive income until the sale is recognized. We record any ineffectiveness, along with the excluded time value of the forward contracts in cost of sales on the Consolidated Statement of Operations, which was not significant for 2006. In the event it becomes probable that a hedged anticipated transaction will not occur the gains or losses on the related cash flow hedges will immediately be reclassified from Other Comprehensive Income (OCI) to other income and expense.

The following table summarizes the impact of cash flow hedges on OCI during 2006.

	OCI
	(In thousands)
Balance as of January 1, 2006	$	—
Net change on cash flow hedges		(2,135	)
Reclassification to cost of sales		1,806
Balance as of December 31, 2006	$	(329	)

We anticipate reclassifying the net loss from OCI to earnings within 12 months.

Net Investment Hedging

During 2006, we began to hedge our net investment in certain foreign subsidiaries to reduce economic currency risk. The foreign exchange forward contracts used to hedge this exposure are designated and documented as net investment hedges. Effectiveness is evaluated at least quarterly, excluding time value, and hedges are highly effective when currency pairs and notional amounts on the forwards are properly aligned with the net investment in subsidiaries. Changes in the spot to spot value of the derivative are recorded as foreign currency translation adjustments within OCI. Ineffectiveness, if any, along with the excluded time value of the forward contracts are recorded in other income and expense, and amounted to a $0.8 million gain for 2006. Derivative losses related to net investment hedges recorded in OCI were $2.8 million in 2006. We did not hedge this exposure prior to the current year.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Non-Designated Hedges

We enter into forward foreign exchange contracts to hedge intercompany balances denominated in currencies other than the U.S. dollar that are remeasured each period and recorded in income. The maturities of these instruments are generally less than 12 months. These contracts do not require special hedge accounting treatment under SFAS 133 as the gains or losses are recorded in other income or expense each period, where they are expected to substantially offset the remeasurement gain or loss on the intercompany balances denominated in a foreign currency. The gain (loss) recognized in other income, net related to these transactions was $2.7 million in 2006 and $(6.0) million during 2005.

Shipping and Handling Costs

Shipping and handling costs are included as a component of cost of sales.

Advertising Expenses

We expense advertising costs as incurred. Advertising expenses for 2006, 2005 and 2004 were $1.4 million, $3.6 million and $2.9 million, respectively.

Concentrations and Other Risks

We use financial instruments that potentially subject us to concentrations of credit risk. Such instruments include cash equivalents, short-term investments, accounts receivable and financial instruments used in hedging activities. We invest our cash in cash deposits, money market funds, commercial paper, certificates of deposit, readily marketable debt securities, or medium-term notes. We place our investments with high-credit quality financial institutions, which limits the credit exposure from any one financial institution or instrument. To date, we have not experienced significant losses on these investments.

We sell a significant portion of our systems to a limited number of customers. System sales to our ten largest customers in 2006, 2005 and 2004 accounted for 72%, 71% and 69% of our total system sales, respectively. One customer accounted for 11% of receivables at December 31, 2006. Two customers accounted for 18% and 13% of receivables at December 31, 2005. We expect sales of our products to relatively few customers will continue to account for a high percentage of our total system sales in the foreseeable future. None of our customers have entered into long-term purchase agreements that would require them to purchase our products.

We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral. We have an exposure to nonperformance by counterparties on the foreign exchange contracts used in hedging activities. These counterparties are large international financial institutions and to date, no such counterparty has failed to meet its financial obligations to us. We do not believe there is a significant risk of nonperformance by these counterparties because we continuously monitor our positions, the credit ratings of such counterparties, and the amount of contracts we enter into with any one party.

Certain of the raw materials we use in the manufacture of our products are available from a limited number of suppliers. Shortages could occur in these essential materials due to an interruption of supply or increased demand in the industry.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires measurement of all employee stock-based compensation awards using a fair-value method and the recording of such expense in the consolidated financial statements. In addition, the adoption of SFAS 123R requires additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from share-based payment

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

arrangements. In January 2005, the SEC issued SAB No. 107, “Share-Based Payment” (SAB 107), which provides supplemental implementation guidance for SFAS 123R. We selected the Black-Scholes option-pricing model as the most appropriate fair-value method for our awards and recognize compensation cost on a straight-line basis over our awards’ vesting periods. We adopted SFAS 123R in the first quarter of fiscal 2006 and recognized $34.9 million of expense related to stock-based compensation in 2006.

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (SFAS 151). The standard clarifies that certain abnormal amounts be expensed as incurred, rather than included as a cost of inventory. SFAS 151 also requires that the allocation of fixed overhead costs to inventory be based upon a normal production capacity. We adopted the standard effective January 1, 2006, which resulted in an increased carrying value of inventory and decreased cost of sales of approximately $2.5 million and an increase to net income of $1.5 million, net of tax, or $0.01 per diluted share for the year ended December 31, 2006.

In June 2006, the EITF issued EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43” (EITF 06-2), which clarifies the accounting for compensated absences known as a sabbatical leave whereby the employee is entitled to paid time off after working for an entity for a specified period of time. The provisions of EITF 06-2 are effective for us as of January 1, 2007. We are currently evaluating the impact of adopting EITF 06-2 on our Consolidated Financial Statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 creates a single model to address uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from SFAS No. 5, “Accounting for Contingencies” (SFAS 5). The provisions of FIN 48 are effective for us as of January 1, 2007. We are currently evaluating the impact of adopting FIN 48 on our Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value. Also, SFAS 157 establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of SFAS 157 on our Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their consolidated balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. SFAS 158 also requires additional disclosures in the notes to financial statements. SFAS 158 is effective as of the end of fiscal years ending after December 15, 2006. We adopted SFAS 158 as of December 31, 2006, which resulted in recording an increased pension liability and other comprehensive loss of $0.9 million, net of tax of $0.4 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3.  Financial Instruments

Short-term investments

The cost and estimated fair value of our short-term investments are as follows:

	December 31, 2006
			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In thousands)
Municipal securities	$	246,019	$	9	$	(676	)	$	245,352
Tax-exempt auction rate notes		529,521		—		—			529,521
Other		13,950		891		—			14,841
Total	$	789,490	$	900	$	(676	)	$	789,714

	December 31, 2005
			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In thousands)
U.S. Government agencies	$	5,000	$	—	$	(20	)	$	4,980
Municipal securities		344,932		2		(1,924	)		343,010
Tax-exempt auction rate notes		252,730		—		—			252,730
Other		8,065		52		—			8,117
Total	$	610,727	$	54	$	(1,944	)	$	608,837

For the years ended December 31, 2006 and 2005, gross realized gains and losses on short-term investments were not significant. Also included in our short-term investments balance is interest receivable of $5.2 million and $5.7 million as of December 31, 2006 and 2005, respectively, that are not included in the tables above.

The maturities of our restricted cash and cash equivalents and our short-term investments as of December 31, 2006 are as follows:

December 31, 2006	Amount
	(In thousands)
Due in less than one year	$	343,749
Due in 1 to 3 years		49,016
Due in 3 to 5 years		4,845
Due in 5 to 10 years		12,875
Due in greater than 10 years		522,998
Total	$	933,483

Securities with contractual maturities of over three years are either auction rate securities or variable rate demand notes. While the contractual maturities are long-term, we believe the securities are highly liquid and that we can take advantage of interest rate re-set periods of between one and thirty-five days to liquidate the securities. Management has the ability and intent, if necessary, to liquidate these investments to fund operations within the next twelve months and accordingly has classified all non-restricted investments as short-term investments in current assets in the Consolidated Balance Sheets. The “due in less than one year” category contains $14.8 million of other investments that do not have contractual maturities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The breakdown of the short-term investments with unrealized losses at December 31, 2006 is as follows:

	In Loss Position for Less					In Loss Position for
	Than 12 Months					12 Months or Greater					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
Municipal securities	$	42,958	$	(37	)	$	127,783	$	(639	)	$	170,741	$	(676	)

The gross unrealized losses related to investments are primarily due to changes in interest rates. We view these unrealized losses as temporary in nature. We review our investment portfolio for possible impairment. Impairment is based on an analysis of factors that may have adverse affects on the fair value of the investment. Factors considered in determining whether a loss is temporary include the stability of the credit quality, the structure of the security and the ability to hold the investment to maturity.

Fair Value of Other Financial Instruments

The carrying and estimated fair values of our other financial instruments are as follows:

	December 31,
	2006				2005
	Carrying		Estimated Fair		Carrying		Estimated Fair
	Value		Value		Value		Value
	(In thousands)
Restricted cash & cash equivalents — non- current	$	143,769	$	143,769	$	140,212	$	140,212
Current obligations under lines of credit	$	19,480	$	19,480	$	15,744	$	15,744
Long-term debt	$	127,862	$	127,862	$	124,858	$	124,858

For certain of our financial instruments, including restricted investments and current obligations under our lines of credit, the carrying amounts approximate fair value due to their short maturities. The investments included in non-current restricted investments are all cash and cash equivalents. The estimated fair values of our restricted investments are based on quoted prices. Our long-term debt is not publicly traded and is denominated in Euros. Judgment is required to estimate the fair value, using available market information and appropriate valuation methods. The estimated fair value of the long-term debt is based primarily on borrowing rates currently available to us for bank loans with similar terms and maturities.

Financial Instruments with Off-Balance Sheet Risk

As part of our asset and liability management, we enter into various types of transactions that involve financial instruments with off-balance sheet risk. We enter into forward foreign currency exchange contracts in order to manage foreign exchange risk. The notional amounts, carrying amounts and estimated fair values of our forward foreign currency exchange contracts are as follows:

	December 31,
	2006						2005
	Notional		Carrying		Estimated		Notional		Carrying		Estimated
	Amount		Amount		Fair Value		Amount		Amount		Fair Value
	(In thousands)
Sell (buy) foreign currencies	$	138,479	$	3,032	$	3,032	$	107,169	$	13,042	$	13,042

The fair value of our forward foreign currency exchange contracts is calculated based on quoted market prices or pricing models using current market rates as of December 31, 2006 and 2005.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4.   Balance Sheet Details

Inventories

	December 31,
	2006		2005
	(In thousands)
Purchased and spare parts	$	152,727	$	152,763
Work-in-process		30,524		27,110
Finished goods		15,320		13,914
Total inventories	$	198,571	$	193,787

Property and equipment, net

	December 31,
	2006			2005
	(In thousands)
Machinery and equipment	$	608,690		$	577,157
Buildings and land		192,568			243,055
Building improvements		79,133			75,681
Furniture and fixtures		22,517			22,634
		902,908			918,527
Less accumulated depreciation		(538,309	)		(494,778	)
Total property and equipment	$	364,599		$	423,749

Depreciation expense for the years ended December 31, 2006, 2005 and 2004 was $63.4 million, $76.8 million and $80.2 million, respectively.

Accrued warranty

Changes in our accrued warranty liability were as follows:

	December 31,
	2006			2005			2004
	(In thousands)
Balance, beginning of period	$	54,553		$	45,526		$	28,805
Warranties issued		84,860			79,146			77,267
Settlements		(82,799	)		(84,632	)		(66,698	)
Balance acquired at acquisition		—			610			2,367
Changes in liability for pre-existing warranties, including expirations		(1,265	)		13,903			3,785
Balance, end of period	$	55,349		$	54,553		$	45,526

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 5.  Goodwill and Other Intangible Assets

Goodwill

Changes in goodwill are as follows:

	Years Ended
	2006			2005
	(In thousands)
Balance, beginning of period	$	255,584		$	278,972
SpeedFam-IPEC adjustment		(41,606	)		(11,566	)
Peter Wolters AG adjustment		—			1,945
Foreign currency translation		11,453			(13,767	)
Balance, end of period	$	225,431		$	255,584

During 2006 and 2005, we determined that certain tax accruals recorded during the acquisition of SpeedFam-IPEC were no longer required, and we accordingly reversed $41.6 million and $11.6 million against goodwill, respectively.

As a result of our acquisition of Peter Wolters AG on June 28, 2004, we recorded goodwill in the amount of $104.2 million, which is subject to foreign currency translation effects. As a result of the finalization of the purchase price allocation, in 2005 and 2004 we recorded an increase to goodwill of $1.9 million related to the valuation of acquired inventory and of $0.4 million related to a property tax accrual associated with the acquisition of Peter Wolters AG, respectively. The goodwill associated with the Peter Wolters acquisition is attributable to the Industrial Applications Group operating segment, and all other goodwill, including any adjustments made to goodwill during 2006 and 2005, is attributable to the Semiconductor Group operating segment.

Intangible Assets

Our acquired intangible assets are as follows:

	Weighted
	Average
	Amortization				Accumulated
December 31, 2006	Period		Gross		Amortization			Net
	(Years)				(In thousands)
Patents and other intangibles		10.8	$	20,707	$	(2,164	)	$	18,543
Developed technology		6.0		28,995		(16,555	)		12,440
Trademark		10.0		6,663		(1,666	)		4,997
Total		8.2	$	56,365	$	(20,385	)	$	35,980

	Weighted
	Average
	Amortization				Accumulated
December 31, 2005	Period		Gross		Amortization			Net
	(Years)				(In thousands)
Patents and other intangibles		6.3	$	4,362	$	(1,324	)	$	3,038
Developed technology		6.0		28,042		(11,422	)		16,620
Trademark		10.0		6,065		(903	)		5,162
Total		6.7	$	38,469	$	(13,649	)	$	24,820

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The amortization expense for the identifiable intangible assets was approximately $6.3 million, $6.0 million and $7.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. Our estimated amortization expense for the identifiable intangible assets for each of the next five fiscal years will be approximately $7.6 million for 2007, $7.4 million for 2008, $4.7 million for 2009, $3.2 million for 2010 and $2.0 million for 2011. In 2006 we purchased a portfolio of intellectual properties for $16.3 million, which is being amortized over a weighted average period of 12 years. As of December 31, 2006, we have no identifiable intangible assets with indefinite lives.

Note 6.  Business Combinations

Voumard Machine Co. SA

In November 2005, we acquired 90% of the outstanding stock of Voumard, a privately-held manufacturer of high-precision machine manufacturing tools based in Neuchâtel, Switzerland, and in November 2006 we acquired the remaining 10%. The acquisition of Voumard further enhances the product offerings in our Industrial Applications Group. We funded the purchase price of the acquisition with existing cash resources.

The acquisition of Voumard was accounted for as a business combination in accordance with SFAS No. 141, “Business Combinations” (SFAS 141) which requires the purchase price to be allocated to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition. After this allocation and after reducing certain non-monetary assets to zero as required by SFAS 141, the fair value of net assets acquired exceeded the purchase price by $2.8 million, which was recorded as a gain in other income during 2006 upon completion of the purchase price allocation.

The purchase price was allocated to the fair value of assets acquired and liabilities assumed as follows.

	(In thousands)
Cash consideration	$	7,134
Transaction costs		486
Total purchase price	$	7,620
Assets acquired	$	18,548
Liabilities assumed		(8,131	)
Total net assets acquired	$	10,417
Gain	$	2,797

Peter Wolters AG

On June 28, 2004, we acquired all of the outstanding stock of Peter Wolters AG, a privately-held manufacturer of high-precision machine manufacturing tools based in Rendsburg, Germany. The acquisition of Peter Wolters AG enables us to diversify our product offerings. We funded the purchase price of the acquisition, excluding transaction costs, with approximately $149.5 million of borrowings under a credit facility. For further discussion regarding the credit facility, see Note 8.

The acquisition of Peter Wolters AG was accounted for as a business combination in accordance with SFAS 141. Tangible and intangible assets and liabilities were recorded at their estimated fair value.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The purchase price was allocated to the fair value of assets acquired and liabilities assumed as follows:

	(In thousands)
Cash consideration	$	149,512
Transaction costs		2,100
Total purchase price	$	151,612
Cash and cash equivalents	$	8,696
Current assets		37,377
Property, plant and equipment		19,492
Acquired intangibles		122,321
Other assets		23
Current liabilities		(28,928	)
Long-term debt		(967	)
Other long-term liabilities		(6,402	)
Total net assets acquired	$	151,612

As of the closing of our acquisition of Peter Wolters AG, $18.1 million of the total purchase price was allocated to intangible assets subject to amortization. Included in these intangible assets are developed and core technologies, customer backlog and trademark/trade name rights with weighted average lives of 6.0, 0.5, and 10.0 years, respectively. The weighted average life for all intangibles acquired in the acquisition was 6.6 years.

The potential value of the combined companies’ products and technologies contributed to a purchase price that resulted in goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill is not deductible for tax purposes and is not subject to amortization, however, it is to be tested for impairment at least annually in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Approximately $104.2 million of the total purchase price was allocated to goodwill upon the closing of our acquisition of Peter Wolters.

Note 7.  Restructuring and Other Charges

In an effort to consolidate our operations, streamline product offerings and align our manufacturing operations with current business conditions we have implemented various restructuring plans since 2001. All restructuring and other charges, except for $1.0 million of asset impairment in 2005, are related to the Semiconductor Group. As of December 31, 2006, substantially all actions under our restructuring plans had been completed, except for payments of future rent obligations of $17.5 million, which we estimate will be paid in cash through 2017.

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The following table summarizes restructuring activity:

	Facility			Asset						Restructuring			Inventory
	Exit Costs			Impairments			Severance			Total			Write-Down
	(In thousands)
Balance at December 31, 2003	$	50,513		$	—		$	592		$	51,105		$	—
Restructuring charges		—			1,220			1,187			2,407			—
Non-cash adjustment		—			(1,057	)		—			(1,057	)		—
Cash payments		(7,909	)		—			(1,619	)		(9,528	)		—
Adjustment of prior restructuring cost		(923	)		—			—			(923	)		—
Balance at December 31, 2004		41,681			163			160			42,004			—
Restructuring charges		—			14,172			838			15,010			5,250
Non-cash adjustment		—			(14,265	)		—			(14,265	)		(5,250	)
Cash payments		(8,607	)		(70	)		(135	)		(8,812	)		—
Adjustment of prior restructuring cost		(5,835	)		—			—			(5,835	)		—
Balance at December 31, 2005		27,239			—			863			28,102			—
Restructuring charges		6,235			10,199			51			16,485			—
Non-cash adjustment		1,161			(10,199	)		—			(9,038	)		—
Cash payments		(11,607	)		—			(544	)		(12,151	)		—
Adjustment of prior restructuring cost		(5,525	)		—			(225	)		(5,750	)		—
Balance at December 31, 2006	$	17,503		$	—		$	145		$	17,648		$	—

Facilities Exit Costs and Asset Impairment

During 2006, we implemented a restructuring plan to dispose of certain owned facilities located in San Jose, California. We recorded an impairment charge of $8.9 million to write down certain of those facilities to their estimated fair value and reclassified certain of those assets to assets held for sale in our Consolidated Balance Sheet as of December 31, 2006, as we expect to sell them within one year. In 2006, we also recorded restructuring charges of $6.0 million related to future lease payments, $1.3 million related to accelerated depreciation of leasehold improvements and $0.2 million related to other charges, all in connection with a restructuring plan we implemented in 2005 to relocate certain operations from Chandler, Arizona to San Jose, California and Tualatin, Oregon.

Restructuring charges related to facility exit costs were reduced by $5.5 million, $5.8 million and $0.9 million in 2006, 2005 and 2004, respectively, due to changes in estimated sublease income over the remaining lease term related to facilities previously included in our restructuring liability.

During 2005, we abandoned R&D assets in the U.S. and Europe and reassessed the useful lives of leasehold improvements in certain R&D related facilities. As a result, we recorded charges related to asset impairments and accelerated depreciation of $13.2 million and $1.0 million in the U.S. and Europe, respectively, as we do not expect to recover the carrying value of these assets through future cash flows. In 2004, we abandoned R&D related assets in the U.S. and recorded a charge of $1.2 million.

Inventory Write-downs

During 2005 our consolidation of operations and streamlining of certain product offerings resulted in a portion of our inventory becoming excess or obsolete and led to a $5.3 million write-down of inventory, which was recorded in cost of sales.

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Note 8.   Borrowing Arrangements

Current Obligations Under Lines of Credit

We have available short-term credit facilities with various financial institutions of $80.2 million, of which $46.3 million was unutilized as of December 31, 2006. These credit facilities bear interest at various rates, expire on various dates through December 2007 and are used for general corporate purposes. As of December 31, 2006, our subsidiaries had $19.5 million of borrowings outstanding under the short-term lines of credit at a weighted-average interest rate of 2.3%.

Long-Term Debt

In December 2006, we entered into a credit agreement with certain lenders (the Agreement), which established a senior unsecured five year revolving credit line with an aggregate committed amount of $150.0 million with the option to increase the total line by up to an additional $100.0 million under certain circumstances. The proceeds are expected to be used for working capital and other general corporate purposes, including the repurchase of shares. The Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties, and events of default, which are subject to various exceptions and qualifications. No amounts have been borrowed under the Agreement as of December 31, 2006.

In June 2004, we borrowed $153.1 million to fund the acquisition of Peter Wolters AG and for general corporate purposes. The credit arrangement allows for periodic borrowings in Euros, with an interest rate equal to the Eurocurrency Rate plus 0.2% (3.8% at December 31, 2006), and requires us to maintain certain financial covenants. We were in compliance with these covenants as of December 31, 2006. Outstanding balances of $126.6 million and $123.0 million were recorded as long-term debt at December 31, 2006 and 2005, respectively. This credit facility is secured by cash or short-term investments on deposit and is due and payable on or before June 28, 2009. Amounts to secure this borrowing are included within restricted cash and cash equivalents in the Consolidated Balance Sheets at December 31, 2006 and 2005.

One of our subsidiaries also maintained borrowings of $0.6 million at December 31, 2005. There were no borrowings as of December 31, 2006. This facility is for general corporate purposes and bears interest of 4.8% at December 31, 2006. Amounts under this credit arrangement are due and payable in installments through June 30, 2009.

Another subsidiary maintained borrowings of $1.3 million and $1.2 million at December 31, 2006 and 2005, respectively. This facility is for general corporate purposes and bears interest of 4.0% at December 31, 2006. Amounts under this credit arrangement are due and payable in installments through December 31, 2037.

We have long-term credit facilities with various institutions totaling $318.5 million, of which $190.7 million was unutilized as of December 31, 2006. These credit facilities bear interest at a weighted-average rate of 3.8% and expire through December 2037. As of December 31, 2006, we had $127.9 million in long-term debt outstanding.

The following is a table summarizing our contractual obligations under long-term borrowing arrangements, which excludes amounts recorded on our balance sheet as current liabilities at December 31, 2006.

	Years Ending December 31,
	2008		2009		2010		2011		Thereafter
	(In thousands)
Long-term debt obligations	$	38	$	126,627	$	38	$	38	$	1,121

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Note 9.  Other Income, net

The components of other income, net within the Consolidated Statements of Operations are as follows:

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Litigation proceeds	$	—		$	—		$	8,000
Other income		4,820			810			2,160
Other expense		(1,772	)		(578	)		(761	)
Foreign currency gain (loss), net		4,808			5,456			(1,040	)
Gain on acquisition of Voumard		2,797			—			—
Total other income, net	$	10,653		$	5,688		$	8,359

Note 10.   Commitments and Guarantees

Standby Letters of Credit

We provide standby letters of credit to certain parties as required for certain transactions we initiate during the ordinary course of business. As of December 31, 2006, the maximum potential amount of future payments that we could be required to make under these letters of credit was approximately $14.5 million. We have not recorded any liability in connection with these arrangements beyond that required to appropriately account for the underlying transaction being guaranteed. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these arrangements.

Guarantee Arrangements

We have guarantee arrangements on behalf of certain of our consolidated subsidiaries for line-of-credit borrowings, overdrafts and operating leases. In the event of default on these arrangements by our subsidiaries, we would have a maximum exposure of $181.7 million as of December 31, 2006.

Lease Commitments

We have non-cancelable operating leases for various facilities. Rent expense was approximately $12.2 million, $11.8 million and $11.0 million for the years ended December 31, 2006, 2005 and 2004, respectively, net of sublease income of $2.3 million, $2.8 million and $3.7 million, respectively. Certain of the operating leases contain provisions which permit us to renew the leases at the end of their respective lease terms.

The following is a table summarizing future minimum lease payments under all non-cancelable operating leases, with initial or remaining terms in excess of one year.

	Years Ending December 31,												Sublease			Net
	2007		2008		2009		2010		2011		Thereafter		Income			Total
	(In thousands)
Non-cancelable operating leases	$	8,936	$	8,382	$	7,957	$	7,827	$	7,693	$	24,875	$	(24,185	)	$	41,485

Purchase Commitments

We have firm purchase commitments with various suppliers to ensure the availability of components. Our minimum obligation at December 31, 2006 under these arrangements was $113.7 million. All amounts under

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these arrangements are due in 2007. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or cancelled. Certain agreements provide for cancellation penalties. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We have made adequate provision for potential exposure related to inventory on order that may go unused.

Note 11.   Litigation

Linear Technology Corporation

In March 2002, Linear Technology Corporation (Linear) filed a complaint against Novellus, among other parties, in the Superior Court of the State of California for the County of Santa Clara. The complaint seeks damages (including punitive damages) and injunctions for causes of actions involving alleged breach of contract, fraud, unfair competition, breach of warranty and declaratory relief. On September 3, 2004, Novellus filed a demurrer to all causes of action in the complaint, which the Court granted without leave to amend on October 5, 2004. On January 11, 2005, Linear filed a notice of appeal of the court’s order and the appeal is now fully briefed. The Court of Appeal has not yet set a date for oral argument. Although we prevailed on these claims in the Superior Court, it is possible that the Court of Appeal will reverse the ruling of the Superior Court, in which case Novellus could face potential liability on these claims. We cannot predict how the Court of Appeal will rule on this issue or, if it does rule against Novellus, estimate a range of potential loss, if any. However, we currently believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Derivative Litigation

On May 31, 2006, a complaint titled “Joshua Teitelbaum, in the right of and for the benefit of Novellus Systems, Inc., v. Richard S. Hill, Jeffrey C. Benzing, D. James Guzy, Tom Long, Robert H. Smith, Neil R. Bonke, Youssef A. El-Mansy, J. David Litster, Yoshio Nishi, Glen G. Possley, Ann D. Rhoads, William R. Spivey and Delbert A. Whitaker, as defendants, and the Company as a Nominal Defendant” was filed in the United States District Court for the Northern District of California. The complaint alleges that our practices in connection with certain stock option grants to executives caused a diversion of assets from Novellus to the executives and caused us to make false and misleading statements to the SEC. The complaint also alleges, among other things, violations of sections 10(b) and 14(a) of the Exchange Act, a breach of fiduciary duty, abuse of control, gross mismanagement, corporate waste, and unjust enrichment. The complaint seeks unspecified monetary damages and other relief against the defendants. On June 21, 2006, a separate complaint titled “Alaska Electrical Pension Fund, on behalf of Novellus Systems, Inc., v. Richard S. Hill, Jeffrey C. Benzing, William H. Kurtz, Neil R. Bonke, Youssef A. El-Mansy, J. David Litster, Yoshio Nishi, Glen G. Possley, Ann D. Rhoads, William R. Spivey and Delbert Whitaker, as defendants, and the Company as a Nominal Defendant” was filed in the United States District Court for the Northern District of California with similar allegations. The complaints seek unspecified monetary damages and other relief against the defendants. We have, through outside counsel, conducted an inquiry into each of the option grants referenced in the complaints. As a result of this inquiry, Novellus and its Board of Directors believe the claims of both complaints to be without merit. However, we cannot predict the outcome of this case or if the outcome is unfavorable, estimate a range of potential loss, if any. However, we currently believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

The two complaints were consolidated on September 8, 2006. The plaintiffs filed an amended, consolidated complaint on December 8, 2006. Novellus and the individual defendants filed motions to dismiss on

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January 19, 2007. Briefing on these motions will be complete by March 9, 2007. The Court will hear argument on the motions on March 23, 2007.

Other Litigation

During the year ended December 31, 2006, we reached an agreement to settle a customer indemnity claim, and the $3.3 million cost of this settlement was included in our results of operations.

We are a defendant or plaintiff in various actions that have arisen in the normal course of business. We believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or results of operations. However, due to the uncertainty surrounding the litigation process, we are unable to estimate a range of loss, if any, at this time.

Note 12.   Income Taxes

Significant components of the provision for income taxes are as follows:

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Federal
Current	$	48,101		$	6		$	13,611
Deferred		45,090			21,851			29,067
		93,191			21,857			42,678
State
Current		8,446			442			1,036
Deferred		4,431			8,737			7,438
		12,877			9,179			8,474
Foreign
Current		19,662			17,211			15,349
Deferred		(5,215	)		(3,873	)		—
		14,447			13,338			15,349
Employee stock plan activity allocated to shareholders’ equity		29,336			4,132			—
Total provision for income taxes	$	149,851		$	48,506		$	66,501

Income (loss) before income taxes and cumulative effect of a change in accounting principle consisted of the following:

	Years Ended December 31,
	2006			2005		2004
	(In thousands)
Domestic	$	433,658		$	126,099	$	188,938
Foreign		(94,739	)		32,514		34,253
Total	$	338,919		$	158,613	$	223,191

In 2006, we implemented our new global business structure. A key element of the structure involves the sharing of certain expenses, and our 2006 geographic breakout of income (loss) before income taxes reflects additional intercompany expenses incurred by our foreign subsidiaries.

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:

	December 31,
	2006			2005
	(In thousands)
Deferred tax assets:
Reserves and accruals	$	86,933		$	79,986
Capitalized in-process research and development		31,344			36,893
Deferred profit		25,369			33,632
Net operating loss carryforwards		41,216			43,923
Credits		14,570			50,662
Other		11,493			14,494
Total deferred tax assets		210,925			259,590
Valuation allowance		(3,770	)		(67,999	)
Deferred tax assets, net of valuation allowance		207,155			191,591
Deferred tax liabilities:
Depreciation		(69,148	)		(72,031	)
Acquisition related items		(8,023	)		(8,091	)
Total net deferred tax assets	$	129,984		$	111,469

The net change in the valuation allowance was $(64.2) million, $(12.3) million and $3.8 million during the years ended December 31, 2006, 2005 and 2004, respectively. The valuation allowance at December 31, 2006 includes $2.3 million related to the acquired deferred tax assets of SpeedFam-IPEC, which will be credited to goodwill when realized, and $1.5 million related to capital loss carryforwards.

As of December 31, 2006, we had federal and state tax credit carryforwards of approximately $3.7 million and $14.0 million, respectively. The federal tax credit carryforwards expire if not utilized beginning in 2014. A portion of the state tax credit carryforwards expire if not utilized at various dates beginning in 2007.

As of December 31, 2006, our federal and state net operating losses for tax return purposes were $111.9 million and $11.2 million, respectively. A valuation allowance has been provided to the extent that we believe that the losses may not be utilized in future periods due to the limitations of Internal Revenue Code Section 382 and expiration of capital loss carryforwards. If not utilized, these carryforwards will start to expire in 2010.

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The provision for income taxes differs from the provision calculated by applying the federal statutory tax rate to income before income taxes and cumulative effect of a change in accounting principle because of the following:

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Expected provision at 35%	$	118,622		$	55,515		$	78,117
State tax, net of federal benefit		8,374			5,966			5,508
Tax-exempt interest		(6,988	)		(5,885	)		(2,459	)
Research and development credits		(1,886	)		(1,913	)		(1,309	)
Domestic manufacturing/export sales incentive		(9,723	)		(2,971	)		(9,781	)
Foreign income/losses taxed at different rates		46,106			—			—
Adjustments of tax accounts		(8,529	)		—			—
Valuation allowance decrease		—			—			(8,827	)
Write-off of acquired IPR&D		—			—			2,143
Other		3,875			(2,206	)		3,109
Total provision for income taxes	$	149,851		$	48,506		$	66,501

We remain subject to examination by federal and state tax authorities. In addition, certain of our foreign subsidiaries are subject to examination by foreign taxing authorities. The timing of the settlement of these examinations is uncertain. We believe that adequate accruals have been provided for any potential adjustments that may result from these examinations. The adjustments of tax accounts item in the table above results primarily from the conclusion of tax examinations.

Note 13.   Shareholders’ Equity

Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of related taxes are as follows:

	December 31,
	2006			2005
	(In thousands)
Foreign currency translation adjustments, net of tax of $(1,575) and $(1,698) in 2006 and 2005, respectively	$	3,578		$	(647	)
Unrealized gain (loss) on short-term investments		224			(1,890	)
Unrealized loss on derivative instruments		(329	)		—
Unrealized loss on minimum pension liability adjustment, net of tax of $369		(878	)		—
Accumulated other comprehensive income (loss)	$	2,595		$	(2,537	)

Common Stock Repurchase Program

On February 23, 2004, our Board of Directors renewed a stock repurchase program originally approved in September 2001. Under the repurchase program as renewed, we were authorized to repurchase up to $500.0 million of our outstanding common shares. On September 20, 2004 we announced that our Board of Directors had authorized an additional $1.0 billion for repurchase of outstanding common stock through September 14, 2009. For the years ended December 31, 2006 and 2005, 10.4 million and 9.9 million shares were repurchased, respectively, under this plan at a weighted average purchase price of $24.13 and $22.84,

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respectively. As of December 31, 2006, we had approximately $613.3 million of remaining unused authorization for such repurchases.

Note 14.   Stock-Based Compensation and Employee Benefit Plans

Stock-Based Compensation

We have adopted several stock plans that provide equity instruments to its employees and non-employee directors. These plans include incentive and non-statutory stock options and restricted stock awards. Stock options generally vest ratably over a four-year period on the anniversary date of the grant, and expire ten years after the grant date. Restricted stock awards generally vest over a three, four, or five-year period, excluding certain awards that vest upon the achievement of specific revenue or shipment performance targets. The Employee Stock Purchase Plan (ESPP) allows qualified employees to purchase Novellus shares at 85% of the fair market value on specified dates.

Prior to January 1, 2006, we accounted for stock-based employee compensation plans under the measurement and recognition provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). With the exception of certain options assumed in acquisitions and grants of restricted stock awards, we generally recorded no stock-based compensation expenses during periods prior to January 1, 2006 as all stock-based grants had exercise prices equal to the fair market value of our common stock on the date of grant. We also recorded no compensation expense in connection with our employee stock purchase plans as they qualified as non-compensatory plans following the guidance provided by APB 25. In accordance with SFAS 123 and SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” we disclosed our net income or loss and net income or loss per share as if we had applied the fair value based method in measuring compensation expense for our stock-based compensation programs. Under SFAS 123, we elected to calculate our compensation expense by applying the Black-Scholes valuation model, applying the graded vesting expense attribution method and recognizing forfeited awards in the period that they occurred.

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R using the modified prospective transition method. Under that transition method, compensation expense that we recognized for the year ended December 31, 2006 included: (a) compensation expense for all share-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all share-based payments granted or modified on or after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Compensation expense is recognized only for those awards that are expected to vest, whereas prior to the adoption of SFAS 123R, we recognized forfeitures as they occurred. In addition, we elected the straight-line attribution method as our accounting policy for recognizing stock-based compensation expense for all awards that are granted on or after January 1, 2006. For awards subject to graded vesting that were granted prior to the adoption of SFAS 123R, we use an accelerated expense attribution method. Results in prior periods have not been restated.

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The following table summarizes the stock-based compensation expense for stock options, restricted stock awards and ESPP in our results from continuing operations:

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
	(1)			(2)			(3)
Cost of sales	$	1,425		$	736		$	724
Selling, general and administrative		22,337			2,168			2,132
Research and development		11,179			1,305			1,283
Stock-based compensation expense before income taxes		34,941			4,209			4,139
Income tax benefit		(11,531	)		(1,620	)		(1,233	)
Total stock-based compensation expense after income taxes	$	23,410		$	2,589		$	2,906

(1)	Amounts include amortization expense related to stock options of $25.1 million, employee stock purchase plan of $2.4 million, and restricted stock awards of $7.5 million for the year ended December 31, 2006.
(2)	Amounts include amortization expense related to restricted stock awards of $4.2 million for the year ended December 31, 2005.
(3)	Amounts include amortization expense related to restricted stock awards of $4.1 million for the year ended December 31, 2004.

As of December 31, 2006, we capitalized stock-based compensation costs of $0.7 million, which were included as components of inventory, deferred profit and property and equipment.

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The following table presents the impact of adoption of SFAS 123R on selected consolidated financial statement line items:

	Year Ended December 31, 2006
	SFAS 123(R)			As
	Adjustments			Reported
	(In thousands, except per share amounts)
Consolidated Statement of Operations:
Operating income	$	(26,765	)	$	304,774
Income before provision for income taxes and cumulative effect of a change in accounting principle		(26,765	)		338,919
Income before cumulative effect of a change in accounting principle		(17,933	)		189,068
Net income		(16,985	)		190,016
Net income per share:
Basic:
Income before cumulative effect of a change in accounting principle	$	(0.15	)	$	1.51
Cumulative effect of a change in accounting principle		0.01			0.01
Basic net income per share	$	(0.14	)	$	1.52
Diluted:
Income before cumulative effect of a change in accounting principle	$	(0.14	)	$	1.49
Cumulative effect of a change in accounting principle		0.01			0.01
Diluted net income per share	$	(0.13	)	$	1.50
Consolidated Statement of Cash Flows:
Net cash provided by operating activities	$	(15,612	)	$	447,153
Net cash used in financing activities	$	15,612		$	(197,870	)

Prior to the adoption of SFAS 123R, we presented deferred compensation as a separate component of shareholders’ equity. In accordance with the provisions of SFAS 123R, on January 1, 2006, we reclassified the balance in deferred compensation to common stock on the balance sheet.

The adoption of SFAS 123R resulted in a benefit from a cumulative effect of a change in accounting principle of $0.9 million, net of tax. The benefit consists of a reduction of the cumulative expense recorded for restricted stock awards through December 31, 2005 in order to reflect estimated future forfeitures. Prior to the adoption of SFAS 123R, we recorded forfeitures as they occurred as previously permitted under SFAS 123 and APB 25.

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The following table illustrates the effect on net income and net income per share for the years ended December 31, 2005 and 2004 if we had applied the fair value recognition provisions of SFAS 123 to stock-based compensation using the Black-Scholes valuation model:

	Years Ended December 31,
	2005			2004
	(In thousands, except per share amounts)
Net income as reported	$	110,107		$	156,690
Add:
Intrinsic value method expense included in reported net income, net of related tax effects		2,589			2,906
Less:
Fair value method expense, net of related tax effects		(49,145	)		(49,086	)
Pro-forma net income	$	63,551		$	110,510
Pro-forma basic net income per share	$	0.46		$	0.76
Pro-forma diluted net income per share	$	0.46		$	0.75
Basic net income per share as reported	$	0.80		$	1.07
Diluted net income per share as reported	$	0.80		$	1.06

Valuation and Other Assumptions for Stock Options

Valuation and Amortization Method.  We estimated the fair value of stock options granted before and after the adoption of SFAS 123R using the Black-Scholes option valuation model. For options granted before January 1, 2006, we estimated the fair value using the multiple option approach and are amortizing the fair value of options expected to vest on a graded vesting (or accelerated) basis. For options granted on or after January 1, 2006, we estimate the fair value using a single option approach and amortize the fair value on a straight-line basis for options expected to vest. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods.

Expected Term.  The expected term of options granted represents the period of time that they are expected to be outstanding. We estimate the expected term of options granted based on our historical experience of grants, exercises and post-vesting cancellations. Contractual term expirations have not been significant.

Expected Volatility.  We estimate the volatility of our stock options at the date of grant using a combination of historical and implied volatilities, consistent with SFAS 123R and SAB 107. Historical volatilities are calculated based on the historical prices of our common stock over a period at least equal to the expected term of our option grants, while implied volatilities are derived from publicly traded options of common stock. Prior to the adoption of SFAS 123R, we relied exclusively on the historical prices of our common stock in the calculation of expected volatility.

Risk-Free Interest Rate.  We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with remaining terms equivalent to the expected term of our option grants.

Dividends.  We have never paid any cash dividends on common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

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Forfeitures.  We use historical data to estimate pre-vesting option forfeitures. As required by SFAS 123R, we record stock-based compensation expense only for those awards that are expected to vest. For the year ended December 31, 2006, the estimated annual forfeiture rate was 8.9%.

We used the following weighted-average valuation assumptions to estimate the fair value of options granted for the years ended December 31, 2006, 2005 and 2004, respectively:

	2006			2005			2004
Risk-free interest rate		4.7	%		4.1	%		2.7	%
Expected volatility		49	%		54	%		74	%
Expected term		4.4 years			3.9 years			3.6 years
Expected dividends		None			None			None

The weighted-average grant-date fair value of options granted was $14.30, $11.25 and $15.45 per option for the years ended December 31, 2006, 2005 and 2004, respectively.

Stock Options

A summary of stock option activity follows:

						Weighted-Average
						Remaining
	Number of			Weighted-Average		Contractual		Aggregate
	Shares			Exercise Price		Term (in Years)		Intrinsic Value
	(In thousands)							(In thousands)
Outstanding at December 31, 2003		25,298		$	32.80		7.47	$	255,444
Grants		5,339			29.02
Exercises		(1,292	)		20.13
Forfeitures or expirations		(2,640	)		36.06
Outstanding at December 31, 2004		26,705		$	32.40		7.11	$	40,601
Grants		2,911			24.99
Exercises		(1,327	)		16.21
Forfeitures or expirations		(4,152	)		35.96
Outstanding at December 31, 2005		24,137		$	31.79		6.67	$	13,383
Grants		2,855			31.39
Exercises		(1,603	)		22.41
Forfeitures or expirations		(2,490	)		34.00
Outstanding at December 31, 2006		22,899		$	32.16		6.23	$	102,527
Vested and expected to vest at December 31, 2006		21,937		$	32.29		6.10	$	97,403
Exercisable at December 31, 2006		16,995		$	33.39		5.24	$	68,343

The aggregate intrinsic value of options outstanding at December 31, 2006, is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the

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16.1 million shares that had exercise prices that were lower than the market price of our common stock on December 31, 2006. The total intrinsic value of the options exercised during the years ended December 31, 2006, 2005, and 2004 was $14.0 million, $14.0 million and $13.5 million, respectively, determined as of the date of exercise. The total cash received in 2006 from employees as a result of stock option exercises during the year ended December 31, 2006 was $34.2 million. In connection with these exercises and the disqualification of incentive stock options, we realized a tax benefit of $4.3 million for the year ended December 31, 2006. We settle employee stock option exercises with newly issued common shares.

As of December 31, 2006, there was $49.3 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.7 years.

In November 2005, we accelerated the vesting on approximately 3.8 million under-water options that were priced at $30.00 per share or above. By doing this, we reduced future compensation expense by approximately $24.3 million on a pre-tax basis through 2008. Each of our executive officers at the time the acceleration became effective and whose options were accelerated entered into a Resale Restriction Agreement, which imposes restrictions on the sale of any shares received through the exercise of accelerated options until the earlier of (i) the original vesting dates set forth in the option or (ii) the executive officer’s termination of employment.

Restricted Stock Awards

The following table summarizes our restricted stock award activity:

				Weighted-Average
	Number of			Grant Date
	Shares			Fair Value
	(In thousands)
Unvested restricted stock at December 31, 2003		249		$	35.22
Granted		511			30.69
Vested		(10	)		36.50
Forfeited		(62	)		36.39
Unvested restricted stock at December 31, 2004		688		$	31.73
Granted		655			24.21
Vested		(29	)		24.90
Forfeited		(117	)		32.04
Unvested restricted stock at December 31, 2005		1,197		$	27.57
Granted		832			32.14
Vested		(77	)		30.39
Forfeited		(108	)		27.12
Unvested restricted stock at December 31, 2006		1,844		$	29.56

As of December 31, 2006, there was $33.7 million of total unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted-average period of 2.1 years. The total fair value of restricted stock awards vested during the years ended December 31, 2006, 2005 and 2004 was $2.0 million, $0.7 million and $0.3 million, respectively. As of December 31, 2006, there were a total of 0.8 million restricted shares subject to performance conditions that will result in forfeiture if the conditions are not realized. In connection with the issuance of restricted stock awards, we realized a tax benefit of $0.7 million for the year ended December 31, 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ESPP

ESPP awards were valued using the Black-Scholes model with expected volatility calculated using a six-month historical volatility. During the years ended December 31, 2006, 2005 and 2004, ESPP awards were valued using the following weighted-average assumptions:

	2006			2005			2004
Risk-free interest rate		5.0	%		3.3	%		1.6	%
Expected volatility		33	%		32	%		43	%
Expected term		6 months			6 months			6 months
Expected dividends		None			None			None

The weighted-average fair value of ESPP shares was $6.47, $5.56 and $8.04 for the years ended December 31, 2006, 2005 and 2004, respectively. As of December 31, 2006, there was $0.9 million of total unrecognized compensation costs related to the ESPP, which is expected to be fully recognized during the next fiscal quarter. In connection with the issuance of shares under our ESPP, we realized a tax benefit of $0.6 million attributed to disqualifying dispositions.

Employee Savings and Retirement Plan

We maintain a 401(k) retirement savings plan for our full-time employees. Participants in the 401(k) plan may contribute up to 100% of their eligible pre-tax compensation, limited by the maximum dollar amount allowed by the Internal Revenue Code. Annually, we contribute a percentage of each participating employee’s salary deferral contributions up to a maximum of 3% of an employee’s covered compensation. Our matching contributions are invested in Novellus common stock and become fully vested at the end of the employee’s third year of credited service. We recorded $3.9 million, $3.6 million and $4.0 million of expense in connection with matching contributions under the 401(k) plan for the years ended December 31, 2006, 2005 and 2004, respectively.

Deferred Compensation Plan

Under the Deferred Compensation Plan, certain employees may elect to defer a portion of their earnings. Amounts payable under the Deferred Compensation Plan totaled $9.3 million and $7.7 million at December 31, 2006 and 2005, respectively.

Profit Sharing Plans

Profit sharing is awarded to employees based upon Novellus’ performance against certain financial and operating goals. Distributions to employees are made annually based upon a percentage of base salary, provided that a threshold level of financial and performance goals are met. Charges to expense under the profit sharing plans were $34.3 million, $18.7 million and $33.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Defined Benefit Pension Plans

We provide certain defined benefit pension plans to employees primarily located in countries outside of the U.S. We deposit funds for certain of these plans, consistent with the requirements of local law, with insurance companies or third-party trustees, and accrue for the unfunded portion of the obligation. The assumptions used in calculating the obligation for these plans depend on the local economic environment. The projected benefit obligation was $22.2 million and $20.2 million as of December 31, 2006 and 2005, respectively. The related fair value of plan assets was $17.5 million and $16.9 million as of December 31, 2006 and 2005, respectively. Our practice is to fund the pension plans in amounts at least sufficient to meet the minimum requirements of

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local laws and regulations. The assets of the plans are primarily invested in high quality fixed income investments. Our contributions were approximately $0.5 million in each of the years 2006 and 2005. The net liability recognized related to the funded status of the plans was approximately $4.7 million and $3.2 million as of December 31, 2006 and 2005, respectively. Our estimated benefit payments for each of the next ten years will be approximately $1.7 million per year in 2007 through 2011, and an aggregate of $10.3 million for years 2012 through 2016.

Postretirement Healthcare Plan

We maintain a postretirement healthcare plan for certain retirees. Coverage continues through the duration of the lifetime of the retiree or the retiree’s spouse, whichever is longer. The benefit obligation was $2.0 million and $2.5 million as of December 31, 2006 and 2005, respectively.

Note 15.   Operating Segments

We operate primarily in one segment, the manufacturing, marketing and servicing of semiconductor equipment for thin film deposition, surface preparation and chemical mechanical planarization. This operating segment is referred to as the Semiconductor Group. In accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (SFAS 131), our chief operating decision-maker is the Chairman and Chief Executive Officer. All semiconductor-related operating units qualify for aggregation under SFAS 131, due to their customer base and similarities in economic characteristics, nature of products and services, and process for procurement, manufacturing and distribution processes. In the third quarter of 2004, we acquired Peter Wolters AG. Due to the diversity of Peter Wolters AG’s existing product lines and customer base from the Semiconductor Group, we have determined that the qualitative thresholds required for aggregation under SFAS 131 have not been met. As a result, we included a new segment in our disclosures beginning in the year ended December 31, 2004. This segment is referred to as the Industrial Applications Group. This segment had no reportable activity prior to the acquisition of Peter Wolters AG.

Our Semiconductor Group develops, manufactures, sells and supports equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. Our Industrial Applications Group is a supplier of lapping, grinding, polishing and deburring products for fine-surface optimization. The accounting policies of these segments are the same as those described in Note 2.

			Industrial
	Semiconductor		Applications
	Group		Group		Total
			(In thousands)
2006
Sales to unaffiliated customers	$	1,547,540	$	110,976	$	1,658,516
Total net sales	$	1,547,540	$	110,976	$	1,658,516
Operating income	$	296,281	$	8,493	$	304,774
Long-lived assets	$	345,403	$	19,196	$	364,599
All other identifiable assets		1,807,248		190,645		1,997,893
Total assets	$	2,152,651	$	209,841	$	2,362,492

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

			Industrial
	Semiconductor		Applications
	Group		Group		Total
			(In thousands)
2005
Sales to unaffiliated customers	$	1,236,515	$	103,956	$	1,340,471
Total net sales	$	1,236,515	$	103,956	$	1,340,471
Operating income	$	122,231	$	13,466	$	135,697
Long-lived assets	$	406,786	$	16,963	$	423,749
All other identifiable assets		1,689,160		177,340		1,866,500
Total assets	$	2,095,946	$	194,303	$	2,290,249

			Industrial
	Semiconductor		Applications
	Group		Group		Total
			(In thousands)
2004
Sales to unaffiliated customers	$	1,299,918	$	57,370	$	1,357,288
Total net sales	$	1,299,918	$	57,370	$	1,357,288
Operating income	$	204,569	$	818	$	205,387
Long-lived assets	$	456,023	$	20,469	$	476,492
All other identifiable assets		1,721,646		203,694		1,925,340
Total assets	$	2,177,669	$	224,163	$	2,401,832

For the year ended December 31, 2006, three customers accounted for 16%, 11% and 10% of our net system sales. For the year ended December 31, 2005, two customers accounted for 20% and 13% of our net system sales. For the year ended December 31, 2004, three customers each accounted for 12%, 12% and 11% of our net system sales. All such customer concentration is contained exclusively within the Semiconductor Group.

For geographical reporting, revenues are attributed to the geographic area in which our subsidiaries are located. Long-lived property, plant and equipment, goodwill and other intangible assets are attributed to the geographic area in which the assets are located.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a summary of operations by geographic area:

	North America		Europe		Asia			Elimination			Consolidated
	(In thousands)
2006
Sales to unaffiliated customers	$	1,245,003	$	97,834	$	315,679		$	—		$	1,658,516
Transfers between geographic locations		312,230		27,902		53,753			(393,885	)	$	—
Total net sales	$	1,557,233	$	125,736	$	369,432		$	(393,885	)	$	1,658,516
Operating income (loss)	$	394,414	$	11,461	$	(101,101	)	$	—		$	304,774
Long-lived assets	$	344,868	$	16,951	$	2,780		$	—		$	364,599
All other identifiable assets		1,711,893		188,202		97,798			—			1,997,893
Total assets	$	2,056,761	$	205,153	$	100,578		$	—		$	2,362,492

	North America		Europe		Asia		Elimination			Consolidated
	(In thousands)
2005
Sales to unaffiliated customers	$	986,409	$	92,307	$	261,755	$	—		$	1,340,471
Transfers between geographic locations		157,659		27,035		42,814		(227,508	)	$	—
Total net sales	$	1,144,068	$	119,342	$	304,569	$	(227,508	)	$	1,340,471
Operating income	$	99,961	$	16,148	$	19,588	$	—		$	135,697
Long-lived assets	$	406,570	$	14,542	$	2,637	$	—		$	423,749
All other identifiable assets		1,481,647		170,640		214,213		—			1,866,500
Total assets	$	1,888,217	$	185,182	$	216,850	$	—		$	2,290,249

	North America		Europe		Asia		Elimination			Consolidated
	(In thousands)
2004
Sales to unaffiliated customers	$	1,051,553	$	47,661	$	258,074	$	—		$	1,357,288
Transfers between geographic locations		134,013		24,369		36,966		(195,348	)		—
Total net sales	$	1,185,566	$	72,030	$	295,040	$	(195,348	)	$	1,357,288
Operating income	$	164,106	$	4,060	$	37,221	$	—		$	205,387
Long-lived assets	$	455,218	$	18,794	$	2,480	$	—		$	476,492
All other identifiable assets		1,561,672		195,957		167,711		—			1,925,340
Total assets	$	2,016,890	$	214,751	$	170,191	$	—		$	2,401,832

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue for each geographic area is recognized from the locations within a designated geographic region in accordance with SAB 104. Transfers and commission arrangements between geographic areas are at prices sufficient to recover a reasonable profit.

Note 16.   Related Party Transactions

We lease an aircraft from NVLS I, LLC, a third-party entity wholly owned by Richard S. Hill, our Chairman and Chief Executive Officer. Under the aircraft lease agreement, we incurred lease expense of $0.8 million, $0.6 million and $0.9 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Mr. Hill is a member of the Board of Directors of the University of Illinois Foundation. Novellus regularly provides research funding to certain groups, including the University of Illinois. Novellus provided research grants to the University of Illinois and certain of its professors in the amount of $0.1 million for each of the years ended December 31, 2005 and 2004. No grants were provided during the year ended December 31, 2006.

During the years ended December 31, 2005 and 2004, Mr. Hill served as a member of the Board of Directors of LTX Corporation. We recorded sublease income from LTX Corporation of approximately $1.4 million for each of the years ended December 31, 2005 and 2004. In November 2005, Mr. Hill did not stand for reelection as a member of the Board of Directors of LTX Corporation.

During each of the years ended December 31, 2006, 2005 and 2004, Novellus employed, in non-executive positions, certain immediate family members of our executive officers. The aggregate compensation amounts recognized for these immediate family members during the years ended December 31, 2006, 2005 and 2004 were $0.3 million, $0.3 million and $0.5 million, respectively.

From time to time we have made secured and unsecured relocation loans to our executive officers, vice presidents and other key personnel. As of December 31, 2006, we had no outstanding loans to our “executive officers,” as defined by the SEC. However, we have outstanding loans to certain non-executive vice presidents and other key personnel. The total outstanding balance of loans to non-executive vice presidents and other key personnel was approximately $1.5 million at both December 31, 2006 and 2005. Of the amount outstanding at December 31, 2006, $1.5 million was secured by collateral. Excluding relocation loans, all other loans bear interest. We have not realized material bad debts related to the loans to our personnel.

Note 17.   Quarterly Financial Data (Unaudited)

	Quarter Ended
	April 1,		July 1,		September 30,		December 31,
	2006		2006		2006		2006(1)
	(In thousands, except per share amounts)
Net sales	$	365,906	$	410,073	$	444,032	$	438,505
Gross profit	$	167,540	$	204,764	$	226,525	$	225,520
Net income	$	24,717	$	52,705	$	70,020	$	42,574
Basic net income per share	$	0.19	$	0.42	$	0.57	$	0.35
Diluted net income per share	$	0.19	$	0.42	$	0.57	$	0.34
Shares used in basic per share calculations		131,102		125,124		122,150		122,766
Shares used in diluted per share calculations		132,264		125,910		123,357		124,447

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Quarter Ended
	April 2,		July 2,		October 1,		December 31,
	2005		2005		2005		2005
	(In thousands, except per share amounts)
Net sales	$	339,740	$	329,585	$	338,878	$	332,268
Gross profit	$	153,869	$	157,562	$	147,194	$	140,501
Net income	$	30,471	$	33,231	$	23,415	$	22,990
Basic and diluted net income per share	$	0.22	$	0.24	$	0.17	$	0.17
Shares used in basic per share calculations		139,890		138,068		137,848		133,980
Shares used in diluted per share calculations		141,099		138,944		138,895		134,752

(1) A tax charge of $46.1 million related to the implementation of our new global business structure was recorded in the fourth quarter of 2006.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Novellus Systems, Inc.

We have audited the accompanying consolidated balance sheets of Novellus Systems, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Novellus Systems, Inc. at December 31, 2006 and 2005 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, in 2006 Novellus changed its method of accounting for share-based payments in accordance with Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” and also changed its method for accounting for inventory costs in accordance with Financial Accounting Standards No. 151, “Inventory Costs.”

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Novellus Systems, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2007 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

San Jose, California

February 27, 2007

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Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.   Controls and Procedures

Attached as exhibits to this Annual Report on Form 10-K are certifications of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which are required pursuant to Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section of this Annual Report on Form 10-K includes information concerning the controls and controls evaluation referenced in the certifications. The report of Ernst & Young LLP, our independent registered public accounting firm, is also included below. This report addresses Ernst & Young LLP’s audit of our internal control over financial reporting and of management’s assessment of internal control over financial reporting set forth below. This section of the Annual Report on Form 10-K should be read in conjunction with the certifications and the report of Ernst & Young LLP for a more complete understanding of the matters presented.

Evaluation of Disclosure Controls and Procedures

We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. This controls evaluation was performed under the supervision and with the participation of management, including our CEO and CFO. Disclosure controls are procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified by the SEC. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of disclosure controls includes an evaluation of some components of our internal control over financial reporting. We also perform a separate annual evaluation of internal control over financial reporting for the purpose of providing the management report below.

The evaluation of our disclosure controls included a review of their objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Annual Report on Form 10-K. In the course of the controls evaluation, we reviewed identified data errors or control problems and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the disclosure controls can be reported in our periodic reports on Form 10-Q and Form 10-K. Many of the components of our disclosure controls are also evaluated on an ongoing basis by both our internal audit and finance organizations. The overall goals of these various evaluation activities are to monitor our disclosure controls and to modify them as necessary. We intend to maintain the disclosure controls as dynamic systems that we adjust as circumstances merit.

Based on the controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted in this Part II, Item 9A, as of the end of the period covered by this Form 10-K, our disclosure controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports was recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to Novellus was made known to management, including the CEO and the CFO, particularly during the time when our periodic reports were being prepared.

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006 based on the guidelines established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our management concluded that

80

our internal control over financial reporting was effective as of December 31, 2006 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with Generally Accepted Accounting Principles applied in the United States.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report included below.

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Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting

The Board of Directors and Shareholders of Novellus Systems, Inc.

We have audited management’s assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that Novellus Systems, Inc. (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Novellus Systems, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Novellus Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Novellus Systems, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 of Novellus Systems, Inc. and our report dated February 27, 2007 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

San Jose, California

February 27, 2007

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Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, do not expect that our disclosure controls or our internal controls for financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Novellus have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Item 9B.   Other Information

Not applicable.

PART III

Item 10.   Directors, Executive Officers and Corporate Governance

The information required by this item is included under (i) “Proposal No. 1: Election of Directors” as it relates to members of our Board of Directors, including our Audit Committee and our Audit Committee financial experts, our code of ethics, any changes to procedures by which security holders may recommend nominees to our Board of Directors, (ii) “Other Information — Executive Officers” as it relates to our executive officers, and (iii) “Other Matters — Section 16(a) Beneficial Ownership Reporting Compliance” as it relates to information concerning Section 16(a) beneficial ownership reporting compliance, in our Proxy Statement, to be filed in connection with our 2007 Annual Meeting of Shareholders, and is incorporated herein by reference.

Item 11.   Executive Compensation

The information required by this item is included under (i) “Other Information — Compensation Discussion and Analysis” as it relates to compensation of our executive, (ii) “Proposal No. 1: Election of Directors” as it relates to our Compensation Committee disclosure pursuant to Item 407(e)(4), and (iii) “Compensation Committee Report” as it relates to disclosure pursuant to Item 407(e)(5) in our Proxy Statement, to be filed in connection with our 2007 Annual Meeting of Shareholders, and is incorporated herein by reference.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information required by this item is included under (i) “Other Information — Security Ownership of Certain Beneficial Owners and Management” as it relates to security ownership of certain beneficial owners and management, and (ii) “Other Information — Equity Compensation Plan Information” as it relates to our equity compensation plans, in our Proxy Statement, to be filed in connection with our 2007 Annual Meeting of Shareholders, and is incorporated herein by reference.

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Item 13.   Certain Relationships and Related Transactions, and Director Independence

The information required by this item is included under “Proposal No. 1: Election of Directors” and “Other Information — Certain Relationships and Related Transactions” in our Proxy Statement, to be filed in connection with our 2007 Annual Meeting of Shareholders, and is incorporated herein by reference.

Item 14.   Principal Accountant Fees and Services

The information required by this item is included under “Proposal No. 2: Ratification and Approval of Appointment of Independent Registered Public Accounting Firm — Audit and Non-Audit Fees” in our Proxy Statement, to be filed in connection with our 2007 Annual Meeting of Shareholders, and is incorporated herein by reference.

PART IV

Item 15.   Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this report:

(1) Financial Statements and Reports of Independent Registered Public Accounting Firm

Consolidated Statements of Operations — Years Ended December 31, 2006, 2005, and 2004. Consolidated Balance Sheets at December 31, 2006 and 2005. Consolidated Statements of Cash Flows — Years Ended December 31, 2006, 2005, and 2004. Consolidated Statement of Shareholders’ Equity — Years Ended December 31, 2006, 2005, and 2004. Notes to Consolidated Financial Statements. Reports of Independent Registered Public Accounting Firm.

(2) Financial Statement Schedules

The following financial statement schedule is filed as part of this Report on Form 10-K and should be read in conjunction with the financial statements:

Schedule II — Valuation and Qualifying Accounts.

All other schedules are omitted because they are not required or the required information is included in the financial statements or notes thereto.

(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)

3	.1(1)	Amended and Restated Articles of Incorporation of Novellus.
3	.2(2)	Amended and Restated Bylaws of Novellus.
10	.1(3)	Assignment and Assumption of Lessee’s Interest in Lease (Units 8 and 9, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold Interests (Units 1-12, Palo Alto) by and between Varian Associates, Inc. and Novellus dated May 7, 1997.
10	.2(4)	Environmental Agreement by and between Varian Associates, Inc. and Novellus dated May 7, 1997.
*10	.3(5)	Novellus’ 1992 Stock Option Plan, together with forms of agreements thereunder.
*10	.4(6)	Amended and Restated 1992 Employee Stock Purchase Plan, as amended.
*10	.5(7)	Form of Directors and Officers Indemnification Agreement.
*10	.6(8)	GaSonics International Corporation 1994 Stock Option/Stock Issuance plan, together with forms of agreements thereunder, as assumed by Novellus.
*10	.7(9)	Gamma Precision Technology, Inc. 1998 Stock Option Plan, together with forms of agreements thereunder, as assumed by Novellus.
*10	.8(10)	GaSonics International Corporation Supplemental Stock Option Plan, as assumed by Novellus.
10	.9(11)	Light Industrial Lease between Teachers Insurance and Annuity Association of America and GaSonics, Inc. for office space at 2730 Junction Avenue, San Jose, California.
*10	.10(12)	Novellus 2001 Stock Incentive Plan, as amended, together with forms of agreement thereunder.

84

*10	.11(13)	SpeedFam-IPEC, Inc. Amended and Restated 1995 Stock Plan, as assumed by Novellus.
*10	.12(14)	SpeedFam-IPEC, Inc. 2001 Nonstatutory Stock Option Plan, together with forms of agreements thereunder, as assumed by Novellus.
*10	.13(15)	Integrated Process Equipment Corporation 1992 Stock Option Plan, as assumed by Novellus.
10	.14(16)	Lease Agreement between Seldin Properties and Integrated Process Equipment Corp. dated December 26, 1996.
10	.15(17)	Lease Guaranty between Novellus and Phoenix Industrial Investment Partners, L.P. dated January 21, 2003.
*10	.16(18)	Restricted Stock Purchase Agreement between Novellus and Richard S. Hill dated December 13, 2002.
10	.17(19)	Credit Agreement between Johanna 34 Vermogensverwaltungs GmbH, Novellus Systems BV, Novellus Systems, Inc. and JPMorgan Chase Bank, as Administrative Agent dated June 25, 2004.
10	.18(20)	Guarantee and Collateral Agreement made by Novellus Systems, Inc. in favor of JPMorgan Chase Bank, as Administrative Agent dated June 25, 2004.
10	.19(21)	Binding Memorandum of Understanding between Novellus, and Applied Materials, Inc., effective as of September 3, 2004. Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
*10	.20(22)	Amended and Restated Employment Agreement between Novellus and Richard S. Hill effective as of March 11, 2005.
10	.21(23)	Form of Non-Employee Director Restricted Stock Bonus Agreement, as amended.
10	.22(24)	Form of Resale Restriction Agreement.
10	.23	Credit Agreement among Novellus Systems, Inc., as Borrower, Bank of America, N.A., as Administrative Agent and Swing Line Lender, Deutche Bank AG New York Branch, as Syndication Agent, ABN Amro Bank, N.V. and Mizuho Corporate Bank Ltd, as Co-Documentation Agents, and the other lenders thereto, Banc of America Securities, LLC and Deutche Bank Securities, Inc, as Joint Lead Arrangers and Joint Book Managers, dated as of December 26, 2006.
*10	.24	Offer Letter of Employment to William H. Kurtz dated August 24, 2005.
*10	.25	Executive Employment Agreement between Novellus Systems, Inc. and Dr. Thomas Caulfield dated October 12, 2005.
*10	.26	Offer Letter of Employment to Ginetto Addiego dated February 2, 2005.
21	.1	Subsidiaries of Novellus.
23	.1	Consent of Independent Registered Public Accounting Firm.
24	.1	Power of Attorney (see page 87).
31	.1	Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated February 26, 2007 in accordance with Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2	Certification of William H. Kurtz, Executive Vice President and Chief Financial Officer of Novellus Systems, Inc. dated February 26, 2007 in accordance with Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1	Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated February 26, 2007 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32	.2	Certification of William H. Kurtz, Executive Vice President and Chief Financial Officer of Novellus Systems, Inc. dated February 26, 2007 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the exhibit with the corresponding exhibit number in Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2000.

85

(2)	Incorporated by reference to Exhibit 3.2 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2004.
(3)	Incorporated by reference to Exhibit 2.3 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(4)	Incorporated by reference to Exhibit 2.6 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(5)	Incorporated by reference to Exhibit 10.30 filed with Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 1993.
(6)	Incorporated by reference to Exhibit 10.2 filed with Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2005.
(7)	Incorporated by reference to Exhibit 10.1 filed with Novellus’ Report on Form 10-Q filed with the Securities and Exchange Commission on August 13, 2002.
(8)	Incorporated by reference to Exhibit 10.31 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2001.
(9)	Incorporated by reference to Exhibit 10.32 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2001.
(10)	Incorporated by reference to Exhibit 10.33 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2001.
(11)	Incorporated by reference to Exhibit 10.34 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2001.
(12)	Incorporated by reference to Exhibit 10.1 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2005.
(13)	Incorporated by reference to Exhibit 10.30 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(14)	Incorporated by reference to Exhibit 10.31 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(15)	Incorporated by reference to Exhibit 10.32 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(16)	Incorporated by reference to Exhibit 10.35 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(17)	Incorporated by reference to Exhibit 10.39 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(18)	Incorporated by reference to Exhibit 10.41 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2004.
(19)	Incorporated by reference to Exhibit 10.1 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2004.
(20)	Incorporated by reference to Exhibit 10.2 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2004.
(21)	Incorporated by reference to Exhibit 99.1 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2004.
(22)	Incorporated by reference to Exhibit 10.30 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2005.
(23)	Incorporated by reference to Exhibit 10.3 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2005.
(24)	Incorporated by reference to Exhibit 10.34 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on November 15, 2005.
*	Management contracts or compensatory plans or arrangements.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on this 26th day of February, 2007.

NOVELLUS SYSTEMS, INC.

By:  /s/  Richard S. Hill

Richard S. Hill

Chairman of the Board of Directors and

Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard S. Hill and William H. Kurtz, and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the date indicated.

Signature	Title	Date
/s/  Richard S. Hill Richard S. Hill	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	February 26, 2007
/s/  William H. Kurtz William H. Kurtz	Executive Vice President and Chief Financial Officer and Interim Corporate Controller (Principal Financial Officer and Principal Accounting Officer)	February 26, 2007
/s/  Neil R. Bonke Neil R. Bonke	Director	February 26, 2007
/s/  Youssef A. El-Mansy Youssef A. El-Mansy	Director	February 26, 2007
/s/  J. David Litster J. David Litster	Director	February 26, 2007
/s/  Yoshio Nishi Yoshio Nishi	Director	February 26, 2007
/s/  Glen G. Possley Glen G. Possley	Director	February 26, 2007

87

Signature	Title	Date
/s/  Ann D. Rhoads Ann D. Rhoads	Director	February 26, 2007
/s/  William R. Spivey William R. Spivey	Director	February 26, 2007
/s/  Delbert A. Whitaker Delbert A. Whitaker	Director	February 26, 2007

88

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

December 31, 2006, 2005 and 2004

	Balance at
	Beginning of							Balance at
	Year		Additions		Deductions			End of Year
	(In thousands)
Allowance for doubtful accounts(1)
2006	$	987	$	1,119	$	(353	)	$	1,753
2005	$	8,247	$	243	$	(7,503	)	$	987
2004	$	7,655	$	546	$	46		$	8,247
Valuation allowance for deferred tax assets(2)
2006	$	67,999	$	—	$	(64,229	)	$	3,770
2005	$	80,281	$	2,267	$	(14,549	)	$	67,999
2004	$	76,510	$	14,193	$	(10,422	)	$	80,281

(1)

Deductions represent uncollectible accounts written off, net of recoveries and other adjustments. For 2005, deductions include a decrease in estimated allowance of $6.1 million during the second quarter.

(2)

In 2006, the valuation allowance for deferred taxes decreased by approximately $64.2 million. The primary components of this decrease were the utilization of approximately $22.0 million of tax credits, which was credited to equity, and the reassessment of the realizability of approximately $39.2 million of acquired deferred tax assets of SpeedFam-IPEC, which was credited to goodwill. Additions include $0.5 million and $14.2 million of adjustments to goodwill, equity or other balance sheet accounts in the years ended December 31, 2005 and 2004, respectively. There were no additions in the year ended December 31, 2006.

89

EXHIBIT INDEX

3	.1(1)	Amended and Restated Articles of Incorporation of Novellus.
3	.2(2)	Amended and Restated Bylaws of Novellus.
10	.1(3)	Assignment and Assumption of Lessee’s Interest in Lease (Units 8 and 9, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold Interests (Units 1-12, Palo Alto) by and between Varian Associates, Inc. and Novellus dated May 7, 1997.
10	.2(4)	Environmental Agreement by and between Varian Associates, Inc. and Novellus dated May 7, 1997.
*10	.3(5)	Novellus’ 1992 Stock Option Plan, together with forms of agreements thereunder.
*10	.4(6)	Amended and Restated 1992 Employee Stock Purchase Plan, as amended.
*10	.5(7)	Form of Directors and Officers Indemnification Agreement.
*10	.6(8)	GaSonics International Corporation 1994 Stock Option/Stock Issuance plan, together with forms of agreements thereunder, as assumed by Novellus.
*10	.7(9)	Gamma Precision Technology, Inc. 1998 Stock Option Plan, together with forms of agreements thereunder, as assumed by Novellus.
*10	.8(10)	GaSonics International Corporation Supplemental Stock Option Plan, as assumed by Novellus.
10	.9(11)	Light Industrial Lease between Teachers Insurance and Annuity Association of America and GaSonics, Inc. for office space at 2730 Junction Avenue, San Jose, California.
*10	.10(12)	Novellus 2001 Stock Incentive Plan, as amended, together with forms of agreement thereunder.
*10	.11(13)	SpeedFam-IPEC, Inc. Amended and Restated 1995 Stock Plan, as assumed by Novellus.
*10	.12(14)	SpeedFam-IPEC, Inc. 2001 Nonstatutory Stock Option Plan, together with forms of agreements thereunder, as assumed by Novellus.
*10	.13(15)	Integrated Process Equipment Corporation 1992 Stock Option Plan, as assumed by Novellus.
10	.14(16)	Lease Agreement between Seldin Properties and Integrated Process Equipment Corp. dated December 26, 1996.
10	.15(17)	Lease Guaranty between Novellus and Phoenix Industrial Investment Partners, L.P. dated January 21, 2003.
*10	.16(18)	Restricted Stock Purchase Agreement between Novellus and Richard S. Hill dated December 13, 2002.
10	.17(19)	Credit Agreement between Johanna 34 Vermogensverwaltungs GmbH, Novellus Systems BV, Novellus Systems, Inc. and JPMorgan Chase Bank, as Administrative Agent dated June 25, 2004.
10	.18(20)	Guarantee and Collateral Agreement made by Novellus Systems, Inc. in favor of JPMorgan Chase Bank, as Administrative Agent dated June 25, 2004.
10	.19(21)	Binding Memorandum of Understanding between Novellus, and Applied Materials, Inc., effective as of September 3, 2004. Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
*10	.20(22)	Amended and Restated Employment Agreement between Novellus and Richard S. Hill effective as of March 11, 2005.
10	.21(23)	Form of Non-Employee Director Restricted Stock Bonus Agreement, as amended.
10	.22(24)	Form of Resale Restriction Agreement.
10	.23	Credit Agreement among Novellus Systems, Inc., as Borrower, Bank of America, N.A., as Administrative Agent and Swing Line Lender, Deutche Bank AG New York Branch, as Syndication Agent, ABN Amro Bank, N.V. and Mizuho Corporate Bank Ltd, as Co-Documentation Agents, and the other lenders thereto, Banc of America Securities, LLC and Deutche Bank Securities, Inc, as Joint Lead Arrangers and Joint Book Managers, dated as of December 26, 2006.
*10	.24	Offer Letter of Employment to William H. Kurtz dated August 24, 2005.
*10	.25	Executive Employment Agreement between Novellus Systems, Inc. and Dr. Thomas Caulfield dated October 12, 2005.
*10	.26	Offer Letter of Employment to Ginetto Addiego dated February 2, 2005.
21	.1	Subsidiaries of Novellus.
23	.1	Consent of Independent Registered Public Accounting Firm.
24	.1	Power of Attorney (see page 87).

31	.1	Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated February 26, 2007 in accordance with Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2	Certification of William H. Kurtz, Executive Vice President and Chief Financial Officer of Novellus Systems, Inc. dated February 26, 2007 in accordance with Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1	Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated February 26, 2007 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32	.2	Certification of William H. Kurtz, Executive Vice President and Chief Financial Officer of Novellus Systems, Inc. dated February 26, 2007 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference to the exhibit with the corresponding exhibit number in Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2000.
(2)	Incorporated by reference to Exhibit 3.2 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2004.
(3)	Incorporated by reference to Exhibit 2.3 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(4)	Incorporated by reference to Exhibit 2.6 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(5)	Incorporated by reference to Exhibit 10.30 filed with Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 1993.
(6)	Incorporated by reference to Exhibit 10.2 filed with Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2005.
(7)	Incorporated by reference to Exhibit 10.1 filed with Novellus’ Report on Form 10-Q filed with the Securities and Exchange Commission on August 13, 2002.
(8)	Incorporated by reference to Exhibit 10.31 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2001.
(9)	Incorporated by reference to Exhibit 10.32 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2001.
(10)	Incorporated by reference to Exhibit 10.33 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2001.
(11)	Incorporated by reference to Exhibit 10.34 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2001.
(12)	Incorporated by reference to Exhibit 10.1 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2005.
(13)	Incorporated by reference to Exhibit 10.30 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(14)	Incorporated by reference to Exhibit 10.31 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(15)	Incorporated by reference to Exhibit 10.32 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(16)	Incorporated by reference to Exhibit 10.35 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(17)	Incorporated by reference to Exhibit 10.39 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(18)	Incorporated by reference to Exhibit 10.41 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2004.

(19)	Incorporated by reference to Exhibit 10.1 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2004.
(20)	Incorporated by reference to Exhibit 10.2 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2004.
(21)	Incorporated by reference to Exhibit 99.1 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2004.
(22)	Incorporated by reference to Exhibit 10.30 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2005.
(23)	Incorporated by reference to Exhibit 10.3 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2005.
(24)	Incorporated by reference to Exhibit 10.34 to Novellus’ Report on Form 8-K filed with the Securities and Exchange Commission on November 15, 2005.
*	Management contracts or compensatory plans or arrangements.

EX-10.23

Exhibit 10.23

CREDIT AGREEMENT

Dated as of December 26, 2006

among

NOVELLUS SYSTEMS, INC,

as Borrower,

BANK OF AMERICA, N.A.,

as Administrative Agent and Swing Line Lender,

DEUTSCHE BANK AG NEW YORK BRANCH,
as Syndication Agent,

ABN AMRO BANK N.V. and
MIZUHO CORPORATE BANK, LTD.,
as Co-Documentation Agents

and

THE OTHER LENDERS PARTY HERETO

BANC OF AMERICA SECURITIES LLC and
DEUTSCHE BANK SECURITIES INC.,
as Joint Lead Arrangers and Joint Book Managers

TABLE OF CONTENTS

		Page
SECTION1. DEFINITIONS		1
1.1	Defined Terms	1
1.2	Other Definitional Provisions	21
SECTION 2. AMOUNT AND TERMS OF REVOLVING COMMITMENTS		21
2.1	Revolving Commitments	21
2.2	Procedure for Revolving Loan Borrowing	23
2.3	Commitment Fees, etc.	23
2.4	Termination or Reduction of Revolving Commitments	24
2.5	Optional Prepayments	24
2.6	Conversion and Continuation Options	25
2.7	Limitations on Eurodollar Tranches	25
2.8	Interest Rates and Payment Dates	26
2.9	Computation of Interest and Fees	26
2.10	Inability to Determine Interest Rate	27
2.11	Pro Rata Treatment and Payments	27
2.12	Requirements of Law	29
2.13	Taxes	30
2.14	Indemnity	32
2.15	Change of Lending Office	33
2.16	Replacement of Lenders	33
2.17	Swine Line Loans	33
2.18	Sharing of Payments by Lenders	36
2.19	Cash Collateral	37
SECTION 3. REPRESENTATIONS AND WARRANTIES		37
3.1	Financial Condition	37
3.2	No Change	38
3.3	Existence; Compliance with Law	38
3.4	Power; Authorization; Enforceable Obligations	38
3.5	No Legal Bar	39
3.6	Litigation	39
3.7	No Default	39
3.8	Ownership of Property	39
3.9	Intellectual Property	39
3.10	Taxes	39
3.11	Federal Regulations	40
3.12	ERISA	40
3.13	Investment Company Act; Other Regulations	40
3.14	Subsidiaries	40
3.15	Use of Proceeds	40
3.16	Environmental Matters	40
3.17	Accuracy of Information, etc	41

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3.18	Solvency	42
SECTION 4. CONDITIONS PRECEDENT		42
4.1	Conditions to Initial Extension of Credit	42
4.2	Conditions to Each Extension of Credit	43
SECTION 5. AFFIRMATIVE COVENANTS		43
5.1	Financial Statements	43
5.2	Certificates; Other Information	44
5.3	Intentionally Omitted	46
5.4	Maintenance of Existence; Compliance	46
5.5	Maintenance of Property; Insurance	46
5.6	Inspection of Property; Books and Records; Discussions	46
5.7	Notices	46
5.8	Additional Subsidiaries	47
SECTION 6. NEGATIVE COVENANTS		47
6.1	Financial Covenants	47
6.2	Fundamental Changes	47
6.3	Lines of Business	48
6.4	Liens	48
6.5	Investments	49
6.6	Indebtedness	51
6.7	Dispositions	51
6.8	Restricted Payments	51
6.9	Transactions with Affiliates and Insiders	52
SECTION 7. EVENTS OF DEFAULT		52
SECTION 8. THE ADMINISTRATIVE AGENT		55
8.1	Appointment and Authority	55
8.2	Rights as a Lender	55
8.3	Exculpatory Provisions	55
8.4	Reliance by Administrative Agent	56
8.5	Delegation of Duties	56
8.6	Resignation of Administrative Agent	57
8.7	Non-Reliance on Administrative Agent and Other Lenders	57
8.8	No Other Duties; Etc	58
8.9	Administrative Agent May File Proofs of Claim	58
8.10	Guaranty Matters	58
SECTION 9. MISCELLANEOUS		59
9.1	Amendments and Waivers	59
9.2	Notices	60
9.3	No Waiver; Cumulative Remedies	62
9.4	Survival of Representations and Warranties	62
9.5	Payment of Expenses; Payments Set Aside	62
9.6	Successors and Assigns; Participations and Assignments	64
9.7	Set-off	68
9.8	Counterparts	68

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9.9	Severability	69
9.10	Integration	69
9.11	GOVERNING LAW; JURISDICTION; ETC.	69
9.12	Treatment of Certain Information; Confidentiality	70
9.13	WAIVERS OF JURY TRIAL	71
9.14	USA Patriot Act	71
9.15	California Judicial Reference	71
9.16	No Advisory or Fiduciary Relationship	72
SECTION 10. GUARANTY		72
10.1	The Guaranty	72
10.2	Obligations Unconditional	73
10.3	Reinstatement	74
10.4	Certain Additional Waivers	74
10.5	Remedies	74
10.6	Rights of Contribution	74
10.7	Additional Guarantor Waivers and Agreements	74
10.8	Guarantee of Payment; Continuing Guarantee	75

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     CREDIT AGREEMENT (this “Agreement”), dated as of December 26, 2006, among Novellus Systems, Inc., a California corporation (“Novellus” or the “Borrower”), the Guarantors (defined herein), the several banks and other financial institutions or entities from time to time parties to this Agreement (the “Lenders”) and Bank of America, N.A., as Administrative Agent and Swing Line Lender.

     The parties hereto hereby agree as follows:

     SECTION 1. DEFINITIONS

     1.1 Defined Terms. As used in this Agreement, the terms listed in this Section 1.1 shall have the respective meanings set forth in this Section 1.1.

“Acquisition”: by any Person, the acquisition by such Person, in a single transaction or in a series of related transactions, of all or any substantial portion of the property of another Person or at least a majority of the Voting Stock of another Person, in each case whether or not involving a merger or consolidation with such other Person and whether for cash, property, services, assumption of Indebtedness, securities or otherwise.

     “Administrative Agent”: Bank of America, N.A., together with its affiliates, as the administrative agent for the Lenders under this Agreement and the other Loan Documents, together with any of its successors.

     “Administrative Agent’s Office”: means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 9.2 or such other address or account as the Administrative Agent may from time to time notify to the Borrower and the Lenders.

     “Administrative Questionnaire”: an Administrative Questionnaire in a form supplied by the Administrative Agent.

     “Affiliate”: as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

     “Agreement”: as defined in the preamble hereto.

     “Applicable Margin”: with respect to Revolving Loans, Swing Line Loans and the Commitment Fee, the following percentages per annum, based upon the Consolidated Leverage Ratio as set forth in the most recent Compliance Certificate received by the Administrative Agent pursuant to Section 5.2(b):

	Consolidated		Commitment			Eurodollar			Base Rate
Pricing Tier	Leverage Ratio		Fee			Loans			Loans
1		>2.5:1.0		0.20	%		1.00	%		0.00	%
2	>1.5:1.0 but<			0.15	%		0.75	%		0.00	%
		2.5:1.0
3		<1.5:1.0		0.10	%		0.50	%		0.00	%

Any increase or decrease in the Applicable Margin resulting from a change in the Consolidated Leverage Ratio shall become effective as of the first Business Day immediately following the date a Compliance Certificate is required to be delivered pursuant to Section 5.2(b) provided, however, that if a Compliance Certificate is not delivered when due in accordance with such Section, then Pricing Tier 1 shall apply as of the first Business Day after the date on which such Compliance Certificate was required to have been delivered and shall continue to apply until the first Business Day immediately following the date a Compliance Certificate is delivered in accordance with Section 5.2(b), whereupon the Applicable Margin shall be adjusted based upon the calculation of the Consolidated Leverage Ratio contained in such Compliance Certificate. Notwithstanding the foregoing, the Applicable Margin in effect from the Closing Date through the first Business Day immediately following the date a Compliance Certificate is required to be delivered pursuant to Section 5.2(b) for the fiscal quarter ending December 31, 2006 shall be determined based upon Pricing Tier 3.

     “Approved Fund”: any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

     “Assignee Group”: two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.

     “Assignment and Assumption”: an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 9.6(b), and accepted by the Administrative Agent, in substantially the form of Exhibit B or any other form approved by the Administrative Agent.

     “Attributable Indebtedness” means, on any date, (a) in respect of any Capital Lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP and (b) in respect of any Securitization Transaction of any Person, the outstanding principal amount of such financing, after taking into account reserve accounts and making appropriate adjustments, determined by the Administrative Agent in its reasonable judgment.

     “Bank of America”: Bank of America, N.A. and it successors.

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     “BAS”: Banc of America Securities LLC, in its capacity as sole lead arranger and book manager.

     “Base Rate”: for any day a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate.” The “prime rate” is a rate set by Bank of America based upon various factors including Bank of America’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change.

     “Base Rate Loans”: Revolving Loans the rate of interest applicable to which is based upon the Base Rate.

     “Board”: the Board of Governors of the Federal Reserve System of the United States (or any successor).

     “Borrower”: as defined in the preamble hereto.

     “Borrower Materials”: as defined in Section 5.2.

     “Borrowing Date”: any Business Day specified by the Borrower as a date on which the Borrower requests the Lenders to make Revolving Loans hereunder.

     “Business”: as defined in Section 3.16(b).

     “Business Day”: a day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the laws of, or are in fact closed in, the state where the Administrative Agent’s Office is located; provided, that with respect to notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, such day is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market.

     “Capital Stock”: any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing.

     “Cash Collateral”: as defined in Section 2.19.

     “Cash Equivalents”: as at any date, (a) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) Dollar denominated time deposits and certificates of deposit of (i) any Lender, (ii) any domestic commercial bank of recognized

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standing having capital and surplus in excess of $500,000,000 or (iii) any bank whose short-term commercial paper rating from S&P is at least A-l or the equivalent thereof or from Moody’s is at least P-l or the equivalent thereof (any such bank being an “Approved Bank”), in each case with maturities of not more than 270 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated A-l (or the equivalent thereof) or better by S&P or P-l (or the equivalent thereof) or better by Moody’s and maturing within six months of the date of acquisition, (d) repurchase agreements entered into by any Person with a bank or trust company (including any of the Lenders) or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States in which such Person shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations and (e) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940 which are administered by reputable financial institutions having capital of at least $500,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing subdivisions (a) through (d).

“Change of Control” means the occurrence of any of the following events:

     (a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all Capital Stock that such person or group has the right to acquire (such right, an “option right”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of thirty-five percent (35%) of the Capital Stock of the Borrower entitled to vote for members of the board of directors or equivalent governing body of the Borrower on a fully diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); or

     (b) during any period of 24 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by

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     any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors).

     “Closing Date”: the date hereof.

     “Code”: the Internal Revenue Code of 1986, as amended from time to time.

     “Commitment Fee: as defined in Section 2.3(a).

     “Commonly Controlled Entity”: an entity, whether or not incorporated, that is under common control with Novellus within the meaning of Section 4001 of ERISA or is part of a group that includes Novellus and that is treated as a single employer under Section 414 of the Code.

     “Compliance Certificate”: a certificate substantially in the form of Exhibit D.

     “Consolidated Current Liabilities”: at any date, all amounts that would, in conformity with GAAP, be set forth opposite the caption “total current liabilities” (or any like caption) on a consolidated balance sheet of Novellus and its Subsidiaries at such date.

     “Consolidated EBITDA”: for any period, Consolidated Net Income for such period plus, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Revolving Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs and (e) any extraordinary non-cash expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, non-cash losses on sales of assets outside of the ordinary course of business), and minus, (a) without duplication and to the extent included in the statement of such Consolidated Net Income for such period, the sum of (i) interest income, (ii) any extraordinary, unusual or non-recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business), (iii) income tax credits (to the extent not netted from income tax expense) and (iv) any other non-cash income and (b) any cash payments made during such period in respect of items described in clause (e) above subsequent to the fiscal quarter in which the relevant non-cash expenses or losses were reflected as a charge in the statement of Consolidated Net Income, all as determined on a consolidated basis.

     “Consolidated Funded Debt”: at any date, the aggregate principal amount of all Funded Debt (other than Funded Debt (other than the Obligations) that is collateralized by cash) of the Borrower and its Subsidiaries at such date, determined on a consolidated basis in accordance with GAAP.

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     “Consolidated Leverage Ratio”: as at the last day of any period, the ratio of (a) Consolidated Funded Debt on such day to (b) Consolidated EBITDA for the period of the four consecutive fiscal quarters ended on such day.

     “Consolidated Net Income”: for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its Subsidiaries, (b) the income (or deficit) of any Person (other than a Subsidiary of the Borrower) in which the Borrower or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by the Borrower or such Subsidiary in the form of dividends or similar distributions and (c) the undistributed earnings of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation (other than under any Loan Document) or Requirement of Law applicable to such Subsidiary.

     “Consolidated Total Assets”: at any time, the total assets of the Borrower and its Subsidiaries which would appear as assets on a consolidated balance sheet of the Borrower and the Subsidiaries prepared as of such time in accordance with GAAP.

     “Contractual Obligation”: as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.

     “Default”: any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied.

     “Defaulting Lender”: any Lender that (a) has failed to fund any portion of the Loans or participations in Swing Line Loans required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding.

     “Disposition” or “Dispose”: the sale, transfer, license, lease or other disposition of any property by any Loan Party or any Subsidiary (including the Capital Stock of any Subsidiary), including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith, but excluding (a) the sale, lease, license, transfer or other disposition of inventory, in each case in the ordinary course of business; (b) the sale, lease, license, transfer or other disposition in the ordinary course of business of surplus, obsolete or worn out property no longer used or useful in the conduct of business of any Loan Party and its Subsidiaries; (c) any sale, lease, license, transfer or other disposition of property to any Loan Party or any Subsidiary; provided, that if the transferor of such property is a Loan Party (i) the transferee thereof must be a Loan Party or (ii) to the extent such transaction constitutes an Investment, such transaction is permitted under Section 6.4; (d)

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any Involuntary Disposition; (e) any sale, transfer, license, lease or other disposition of Receivables Program Assets in connection with any Qualified Receivables Transaction; (f) any sale, transfer, license, lease or other disposition of property by the Borrower or any Subsidiary in connection with any License and Manufacturing Transaction; (g) the creation of any Lien otherwise permitted hereunder; (h) grants of nonexclusive licenses of intellectual property in the ordinary course of business and (i) the good faith surrender or waiver of contract rights, tort claims or statutory rights in the ordinary course of business.

     “Dollars” and “$”: dollars in lawful currency of the United States.

     “Domestic Subsidiary”: any Subsidiary that is organized under the laws of any state of the United States or the District of Columbia.

     “Eligible Assignee”: any Person that meets the requirements to be an assignee under Section 9.6(b)(iv) and (v) (subject to such consents, if any, as may be required under Section 9.6(b)(ii)).

     “Environmental Laws”: any and all foreign, Federal, state, local or municipal laws, rules, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law regulating, relating to or imposing liability or standards of conduct concerning protection of the indoor or outdoor environment, as now or may at any time hereafter be in effect.

     “ERISA”: the Employee Retirement Income Security Act of 1974, as amended from time to time.

     “Eurocurrency Reserve Requirements”: for any day during any Interest Period, the reserve percentage (expressed as a decimal, carried out to five decimal places) in effect on such day, whether or not applicable to any Lender, under regulations issued from time to time by the Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). The Eurodollar Rate for each outstanding Eurodollar Loan shall be adjusted automatically as of the effective date of any change in the Eurocurrency Reserve Requirements.

     “Eurodollar Base Rate”: for any Interest Period, the rate per annum equal to the British Bankers Association LIBOR Rate (“BBA LIBOR, X”) as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) at approximately ll:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period. If such rate is not available at such time for any reason, then the “Eurodollar Base Rate” for such Interest Period shall be the rate per annum determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted by Bank of America and with a term equivalent to such Interest Period would be

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offered by Bank of America’s London Branch to major banks in the London interbank eurodollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period.

     “Eurodollar Loans”: Revolving Loans the rate of interest applicable to which is based upon the Eurodollar Rate.

     “Eurodollar Rate”: for any Interest Period with respect to a Eurodollar Loan, a rate per annum determined by the Administrative Agent pursuant to the following formula:

Eurodollar Rate	=	Eurodollar Base Rate
		1.00 — Eurocurrency Reserve Requirements

     “Eurodollar Tranche”: the collective reference to Eurodollar Loans the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Eurodollar Loans shall originally have been made on the same day).

     “Event of Default”: any of the events specified in Section 7, provided that any requirement for the giving of notice, the lapse of time, or both, has been satisfied.

     “Existing Credit Agreement”: that certain Credit Agreement dated as of May 24, 2006 among the Borrower, the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent, as amended from time to time.

     “Federal Funds Rate”: for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent.

     “Fee Letter”: the letter agreement, dated November 9, 2006, among the Borrower, Bank of America and BAS.

     “Fee Payment Date”: (a) the third Business Day following the last day of each March, June, September and December and (b) the last day of the Revolving Commitment Period.

     “Foreign Subsidiary”: any Subsidiary that is not a Domestic Subsidiary.

     “Fund”: any Person (other than a natural person) that is engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

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     “Funded Debt”: as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:

     (a) all obligations for borrowed money, whether current or long-term (including the Obligations) and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments;

     (b) all purchase money Indebtedness;

     (c) the principal portion of all obligations under conditional sale or other title retention agreements relating to properly purchased by the Borrower or any Subsidiary (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business);

     (d) all obligations arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments;

     (e) all obligations in respect of the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business and, in each case, not past due for more than 60 days after the date on which such trade account payable was created);

     (f) the Attributable Indebtedness of Capital Leases and Securitization Transactions;

     (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interests in such Person or any other Person, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends;

     (h) all Funded Debt of others secured by (or for which the holder of such Funded Debt has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed;

     (i) all Guarantee Obligations with respect to Funded Debt of the types specified in clauses (a) through (h) above of another Person; and

     (j) all Funded Debt of the types referred to in clauses (a) through (i) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or joint venturer, except to the extent that Funded Debt is expressly made non-recourse to such Person.

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For purposes hereof, the amount of any direct obligation arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments shall be the maximum amount available to be drawn thereunder.

     “Funding Office”: the office of the Administrative Agent specified in Section 9.2 or such other office as may be specified from time to time by the Administrative Agent as its funding office by written notice to the Borrower and the Lenders.

     “GAAP”: generally accepted accounting principles in the United States as in effect from time to time, except that for purposes of Section 6.1, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the most recent audited financial statements referred to in Section 3.1. In the event that any “Accounting Change” (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this Agreement, then the Borrower and the Administrative Agent agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the Borrower shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Borrower, the Administrative Agent and the Required Lenders, all financial covenants, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. “Accounting Changes” refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.

     “Governmental Authority”: any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization (including the National Association of Insurance Commissioners).

     “Group Members”: the collective reference to Novellus and its Subsidiaries.

     “Guarantee Obligation”: as to any Person (the “guaranteeing person”), any obligation, including a reimbursement, counterindemnity or similar obligation, of the guaranteeing person that guarantees or in effect guarantees, or which is given to induce the creation of a separate obligation by another Person (including any bank under any letter of credit) that guarantees or in effect guarantees, any Indebtedness, leases, dividends or other obligations (the “primary obligations”) of any other third Person (the “primary obligor”) in any manner, whether directly or indirectly, including any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the

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ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person’s maximum reasonably anticipated liability in respect thereof as determined by Novellus in good faith.

     “Guarantors”: each Domestic Subsidiary of the Borrower identified as a “Guarantor” on the signature pages hereto and each other Person that joins as a Guarantor pursuant to Section 5.8 together with their successors and permitted assigns.

     “Guaranty”: the Guaranty made by the Guarantors in favor of the Administrative Agent and the Lenders pursuant to Section 10.

     “Indebtedness”: of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than current trade payables incurred in the ordinary course of such Person’s business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all capital lease obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an account party or applicant under or in respect of acceptances, letters of credit, surety bonds or similar arrangements, (g) the redemption value of all redeemable preferred Capital Stock of such Person, (h) all Guarantee Obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (g) above, (i) all obligations of the kind referred to in clauses (a) through (h) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on property (including accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such obligation, and (j) for the purposes of Section 7(e) only, all obligations of such Person in respect of Swap Agreements (calculated on a mark-to-market basis). The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness expressly provide that such Person is not liable therefor.

     “Information”: as defined in Section 9.12.

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     “Insolvency”: with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA.

     “Insolvent”: pertaining to a condition of Insolvency.

     “Intellectual Property”: the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.

     “Interest Payment Date”: (a) as to any Base Rate Loan (including a Swing Line Loan), the last day of each March, June, September and December to occur while such Base Rate Loan is outstanding, the date of any repayment or prepayment made in respect thereof and the Revolving Termination Date, as applicable, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day that is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period and (d) as to any Eurodollar Loan, the date of any repayment or prepayment made in respect thereof and the Revolving Termination Date, as applicable.

     “Interest Period”: as to any Eurodollar Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six (or, if available to all Lenders) nine months thereafter, as selected by the Borrower in its Loan Notice given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six (or, if available to all Lenders) nine months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not later than 11:00 A.M., on the date that is three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following:

     (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day;

     (ii) the Borrower may not select an Interest Period that would extend beyond the Revolving Termination Date;

     (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and

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     (iv) the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Revolving Loan.

     “Investment”: as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of Capital Stock of another Person, (b) a loan, advance or capital contribution to, Guarantee Obligation or assumption of debt of, or purchase or other acquisition of any other debt or equity participation or interest in, another Person, including any partnership or joint venture interest in such other Person and any arrangement pursuant to which the investor guarantees Indebtedness of such other Person, or (c) an Acquisition. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment (other than by virtue of repayment thereof).

     “Involuntary Disposition”: any loss or destruction of, or any condemnation or other taking for public use of, any property of any Loan Party or any of its Subsidiaries.

     “Joinder Agreement”: a joinder agreement substantially in the form of Exhibit G executed and delivered by a Domestic Subsidiary in accordance with the provisions of Section 5.8.

     “Lenders”: as defined in the preamble hereto and “Lender” means any one of them; provided, that unless the context otherwise requires, each reference herein to the Lenders shall be deemed to include any Swing Line Lender.

     “License and Manufacturing Transactions”: those transactions entered into pursuant to agreements in place on or prior to the Closing Date (and any amendments or modifications thereto) among the Borrower and/or its Subsidiaries, entered into on an arm’s length basis, related to the licensing of intellectual property, manufacturing of products or provision of administration services.

     “Lien”: any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing).

     “Loan”: an extension of credit by a Lender to the Borrower under Section 2 in the form of a Revolving Loan or a Swing Line Loan.

     “Loan Documents”: this Agreement, the Notes, the Fee Letter, any security agreement and/or control agreement delivered to the Administrative Agent pursuant to Section 2.19 and any amendment, waiver, supplement or other modification to any of the foregoing.

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     “Loan Notice”: a notice of (a) a borrowing of Loans, (b) a conversion of Loans from one Type to the other, or (c) a continuation of Eurodollar Loans which, if in writing, shall be substantially in the form of Exhibit E.

     “Loan Parties”: collectively, the Borrower and each Guarantor, and “Loan Party” means any one of them.

     “Marketable Securities”: at any date, all amounts that would, in conformity with GAAP, be categorized as “Marketable Securities” on a consolidated balance sheet of Novellus and its Subsidiaries at such date.

     “Material Adverse Effect”: a material adverse effect on (a) the business, assets, liabilities (actual or contingent), operations or financial condition of Novellus and its Subsidiaries taken as a whole or (b) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder.

     “Materials of Environmental Concern”: any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including friable asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.

     “Material Subsidiary” means, as of any date of determination, any Subsidiary of the Borrower that (a) has on such date total assets constituting ten percent or more of Consolidated Total Assets or (ii) for the four fiscal quarter period most recently ended has revenues constituting ten percent or more of the consolidated revenues of the Borrower and its Subsidiaries for such period, as determined in accordance with GAAP.

     “Moody’s ”: Moody’s Investors Service, Inc. and any successor thereto.

     “Multiemployer Plan”: a Plan that is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

     “Non-Excluded Taxes”: as defined in Section 2.13(a).

     “Non-Guarantor Subsidiary”: any Subsidiary that has not guaranteed, and is not required hereunder to guarantee, the Obligations pursuant to the Guaranty.

     “Non-U.S. Lender”: as defined in Section 2.13(d).

     “Note” or “Notes”: the Revolving Notes and/or the Swing Line Note, individually or collectively, as appropriate.

     “Novellus”: as defined in the preamble hereto.

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     “Novellus China”: any and all of (i) Novellus Systems International Trading (Shanghai) Co., Ltd., (ii) Novellus Systems (H.K.) Ltd. and (iii) Novellus Systems Semiconductor Equipment (Shanghai) Co., Ltd.

     “Novellus Japan”: any and all of (i) Novellus Systems Japan G.K. and (ii) Novellus Systems Japan.

     “Novellus Singapore”: any and all of (i) Novellus Systems International BV and (ii) Novellus Singapore Holdings PTE. LTD.

     “Obligations”: the unpaid principal of and interest on (including interest accruing after the maturity of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of any Loan Party to the Administrative Agent or to any Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Administrative Agent or to any Lender that are required to be paid by any Loan Party pursuant hereto) or otherwise.

     “Other Taxes”: any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.

     “Participant”: as defined in Section 9.6(d).

     “PBGC”: the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor).

     “Permitted Acquisitions”: Investments consisting of an Acquisition by any Loan Party, provided that (i) no Default shall have occurred and be continuing or would result from such Acquisition, (ii) the property acquired (or the property of the Person acquired) in such Acquisition is used or useful in the same or a similar line of business as the Borrower and its Subsidiaries were engaged in on the Closing Date (or any reasonable extensions or expansions thereof), (iii) in the case of an Acquisition of the Capital Stock of another Person, the board of directors (or other comparable governing body) of such other Person shall have duly approved such Acquisition, (iv) the Borrower shall have delivered to the Administrative Agent a Compliance Certificate demonstrating that, upon giving effect to such Acquisition on a pro forma basis, the Loan Parties would be in compliance with the financial covenants set forth in Section 6.1 as of the most recent fiscal quarter for which the Borrower was required to deliver financial statements pursuant to Section 5.1, (v) the representations and warranties made by the Loan Parties in Section 3 shall be true and correct in all material respects at and as if made as of

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the date of such Acquisition (after giving effect thereto) except to the extent such representations and warranties expressly relate to an earlier date, (v) if such transaction involves the purchase of an interest in a partnership between the Borrower (or a Subsidiary) as a general partner and entities Unaffiliated with the Borrower or such Subsidiary as the other partners, such transaction shall be effected by having such equity interest acquired by a corporate holding company directly or indirectly wholly-owned by the Borrower newly formed for the sole purpose of effecting such transaction, and (vi) if the Consolidated Leverage Ratio (calculated on a pro forma basis after giving effect to such Acquisition) is greater than 2.5 to 1.0, the aggregate cash consideration paid by the Loan Parties for all such Acquisitions occurring during the term of this Agreement shall not exceed $1,000,000,000, it being understood and agreed that (a) if the Consolidated Leverage Ratio (calculated on a pro forma basis after giving effect to such Acquisition) is less than or equal to 2.5 to 1.0 or (b) if the Borrower provides Cash Collateral to secure the Obligations in accordance with Section 2.19, there shall be no limit on the amount of cash consideration paid for such Acquisition.

     “Person”: an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.

     “Plan”: at a particular time, any employee benefit plan that is covered by ERISA and in respect of which Novellus or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

     “Platform”: as defined in Section 5.2.

     “Priority Debt Amount”: as at any date of determination, the sum (without duplication) of (a) the aggregate principal amount outstanding of Indebtedness of the Borrower and its Subsidiaries secured by a Lien on any asset or property of the Borrower or any Subsidiary plus (b) the aggregate principal amount outstanding of all unsecured Indebtedness of Non-Guarantor Subsidiaries (other than any unsecured Indebtedness owing by any Non-Guarantor Subsidiary to any Loan Party) plus (c) the aggregate principal amount outstanding of purchase money Indebtedness of the Borrower or any of its Subsidiaries to finance the purchase of fixed assets, and renewals, refinancings and extensions thereof; provided that the aggregate principal amount of all Indebtedness that is cash collateralized shall be excluded from the calculation of Priority Debt Amount.

     “Properties”: as defined in Section 3.16(a).

     “Public Lender”: as defined in Section 5.2.

     “Qualified Receivables Transaction”: means any transaction or series of transactions that may be entered into by Novellus Japan, Novellus China or Novellus Singapore pursuant to which Novellus Japan, Novellus China or Novellus Singapore may sell, convey or otherwise transfer to any Person, or may grant a security interest in, any Receivables Program Assets (whether now existing or arising in the future).

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     “Quick Assets”: at any date, the sum of (a) unrestricted cash plus (b) unrestricted Marketable Securities plus (c) unrestricted accounts receivable of Novellus and its Subsidiaries at such date.

     “Quick Ratio”: at any date, the ratio of (a) Quick Assets at such date to (b) Consolidated Current Liabilities at such date less the aggregate amount of such Consolidated Current Liabilities that are collateralized by cash as of such date.

     “Receivables”: all rights of Novellus Japan, Novellus China or Novellus Singapore to payments (whether constituting accounts, chattel paper, instruments, general intangibles or otherwise, and including the right to payment of any interest or finance charges), which rights are identified in the accounting records of Novellus Japan, Novellus China or Novellus Singapore as accounts receivable.

     “Receivables Documents”: (a) a receivables purchase agreement, pooling and servicing agreement, credit agreement, agreements to acquire undivided interests or other agreement to transfer, or create a security interest in, Receivables Program Assets, in each case as amended, modified, supplemented or restated and in effect from time to time entered into by Novellus Japan, Novellus China or Novellus Singapore and (b) each other instrument, agreement and other document entered into by Novellus Japan, Novellus China or Novellus Singapore relating to the transactions contemplated by the items referred to in clause (b) above, in each case as amended, modified, supplemented or restated and in effect from time to time.

     “Receivables Program Assets”: means (a) all Receivables which are described as being transferred by Novellus Japan, Novellus China or Novellus Singapore pursuant to the Receivables Documents, (b) all Receivables Related Assets, and (c) all collections (including recoveries) and other proceeds of the assets described in the foregoing clauses.

     “Receivables Related Assets”: any rights arising under the documentation governing or relating to Receivables (including rights in respect of liens securing such Receivables and other credit support in respect of such Receivables), (ii) any proceeds of such Receivables and any lockboxes or accounts in which such proceeds are deposited, (iii) spread accounts and other similar accounts (and any amounts on deposit therein) established in connection with a Qualified Receivables Transaction, (iv) any warranty, indemnity, dilution and other intercompany claim arising out of Receivables Documents and (v) other assets which are customarily transferred or in respect of which security interests are customarily granted in connection with sale of receivables transactions involving accounts receivable.

     “Register”: as defined in Section 9.6(c).

     “Regulation U”: Regulation U of the Board as in effect from time to time.

     “Related Parties”: with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents and advisors of such Person and of such Person’s Affiliates.

     “Reorganization”: with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA.

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     “Reportable Event”: any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the PBGC by regulation has waived the thirty day notice requirement under Section 4043(a) of ERISA.

     “Required Lenders”: at any time, the holders of more than 50% of the Total Revolving Commitments then in effect or, if the Revolving Commitments have been terminated, the Total Revolving Extensions of Credit then outstanding. The unfunded Revolving Commitments of, and the outstanding Loans held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders.

     “Requirement of Law”: as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

     “Responsible Officer”: the chief executive officer, president or chief financial officer of Novellus, but in any event, with respect to financial matters, the chief financial officer of Novellus.

     “Restricted Payment”: any dividend or other distribution (whether in cash, securities or other property) with respect to any Capital Stock of any Loan Party or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such Capital Stock or on account of any return of capital to the Borrower’s stockholders, partners or members (or the equivalent Person thereof), or any setting apart of funds or property for any of the foregoing.

     “Revolving Commitment”: as to any Lender, the obligation of such Lender to (a) make Revolving Loans and (b) purchase participations in Swing Line Loans in an aggregate principal amount not to exceed the amount set forth under the heading “Revolving Commitment” opposite such Lender’s name on Schedule 1.1(a) or in the Assignment and Assumption pursuant to which such Lender became a party hereto, as the same may be changed from time to time pursuant to the terms hereof. The original amount of the Total Revolving Commitments is $150,000,000.

     “Revolving Commitment Period”: the period from and including the Closing Date to the Revolving Termination Date.

     “Revolving Extensions of Credit”: as to any Lender at any time, an amount equal to the aggregate principal amount of all Revolving Loans held by such Lender then outstanding.

     “Revolving Loans”: as defined in Section 2.1(a).

     “Revolving Note”: as defined in Section 2.1l(g).

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     “Revolving Percentage”: as to any Lender at any time, the percentage which such Lender’s Revolving Commitment then constitutes of the Total Revolving Commitments or, at any time after the Revolving Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender’s Revolving Loans then outstanding constitutes of the aggregate principal amount of the Revolving Loans then outstanding.

     “Revolving Termination Date”: December 26, 2011.

     “S&P”: Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. and any successor thereto.

     “Sarbanes-Oxley”: the Sarbanes-Oxley Act of 2002.

     “SEC”: the Securities and Exchange Commission, any successor thereto and any analogous Governmental Authority.

     “Securitization Transaction” means, with respect to any Person, any financing transaction or series of financing transactions pursuant to which such Person or any Subsidiary of such Person may sell, convey or otherwise transfer, or grant a security interest in, accounts, payments, receivables, rights to future lease payments or residuals or similar rights to payment to a special purpose subsidiary or affiliate of such Person.

     “Single Employer Plan”: any Plan that is covered by Title IV of ERISA, but that is not a Multiemployer Plan.

     “Solvent”: when used with respect to any Person, means that, as of any date of determination, (a) the amount of the “present fair saleable value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise”, as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) “debt” means liability on a “claim”, and (ii) “claim” means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured.

     ”Subsidiary”: as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of

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such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of Novellus.

     “Swap Agreement”: any agreement with respect to any swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions; provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of Novellus or any of its Subsidiaries shall be a “Swap Agreement”.

     “Swing Line”: the revolving credit facility made available by the Swing Line Lender pursuant to Section 2.17.

     “Swing Line Borrowing”: a borrowing of a Swing Line Loan pursuant to Section 2.17.

     “Swing Line Lender”: Bank of America in its capacity as provider of Swing Line Loans, or any successor swing line lender hereunder.

     “Swing Line Loan”: as defined in Section 2.17(a).

     “Swing Line Note”: as defined in Section 2.11(g).

     “Swing Line Loan Notice”: a notice of a Swing Line Borrowing pursuant to Section 2.17(b), which, if in writing, shall be substantially in the form of Exhibit F.

     “Swing Line Sublimit”: an amount equal to the lesser of (a) $25,000,000 and (b) the Total Revolving Commitments. The Swing Line Sublimit is part of, and not in addition to, the Total Revolving Commitments.

     “Total Revolving Commitments”: at any time, the aggregate amount of the Revolving Commitments then in effect.

     “Total Revolving Extensions of Credit”: at any time, the aggregate amount of the Revolving Extensions of Credit outstanding at such time.

     “Transferee”: any Eligible Assignee or Participant.

     “Type”: as to any Revolving Loan, its nature as an Base Rate Loan or a Eurodollar Loan.

     “United States”: the United States of America.

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     “Voting Stock”: with respect to any Person, Capital Stock issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency.

     1.2 Other Definitional Provisions.

     (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto.

     (b) As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, (i) accounting terms relating to any Group Member not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP, (ii) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”, (iii) the word “incur” shall be construed to mean incur, create, issue, assume, become liable in respect of or suffer to exist (and the words “incurred” and “incurrence” shall have correlative meanings), (iv) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, Capital Stock, securities, revenues, accounts, leasehold interests and contract rights, and (v) references to agreements or other Contractual Obligations shall, unless otherwise specified, be deemed to refer to such agreements or Contractual Obligations as amended, supplemented, restated or otherwise modified from time to time.

     (c) The words “hereof” “herein” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified.

     (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

     (e) Unless otherwise specified, all references herein to times of day shall be references to Pacific time (daylight or standard, as applicable).

     SECTION 2. AMOUNT AND TERMS OF REVOLVING COMMITMENTS

     2.1 Revolving Commitments.

     (a) Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans (“Revolving Loans”) in Dollars to the Borrower from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding that does not exceed the amount of such Lender’s Revolving Commitment; provided, however, that after giving effect to any borrowing of Revolving Loans, (i) the aggregate principal amount of Revolving Loans and Swing Line Loans outstanding shall not exceed the Total Revolving

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Commitments and (ii) the aggregate principal amount of Revolving Loans outstanding of any Lender, plus such Lender’s Revolving Percentage of the outstanding amount of all Swing Line Loans shall not exceed such Lender’s Revolving Commitment. During the Revolving Commitment Period, the Borrower may use the Revolving Commitments by borrowing, prepaying the Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. The Revolving Loans may from time to time be Eurodollar Loans or Base Rate Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.6. All borrowings of Revolving Loans made on the Closing Date shall be made as Base Rate Loans.

     (b) The Borrower shall repay all outstanding Revolving Loans on the Revolving Termination Date.

     (c) The Borrower may at any time and from time to time, upon 15 days prior written notice by the Borrower to the Administrative Agent, increase the Total Revolving Commitments by up to ONE HUNDRED MILLION DOLLARS ($100,000,000) with additional Revolving Commitments from any existing Lender or new Revolving Commitments from any other Person selected by the Borrower and approved by the Administrative Agent; provided that:

     (i) any such increase shall be in a minimum principal amount of $5,000,000 and in integral multiples of $1,000,000 in excess thereof and the Borrower may make a maximum of three requests;

     (ii) no Default or Event of Default shall exist and be continuing at the time of any such increase;

     (iii) no existing Lender shall be under any obligation to increase its Revolving Commitment and any such decision whether to increase its Revolving Commitment shall be in such Lender’s sole and absolute discretion;

     (iv) (A) any new Lender shall join this Agreement by executing such joinder documents reasonably required by the Administrative Agent and/or (B) any existing Lender electing to increase its Revolving Commitment shall have executed a commitment agreement satisfactory to the Administrative Agent; and

     (v) as a condition precedent to such increase, the Borrower shall deliver to the Administrative Agent a certificate dated as of the date of such increase signed by a Responsible Officer of each Loan Party (A) certifying and attaching the resolutions adopted by such Loan Party approving or consenting to such increase or the resultant increased amount, and (B) certifying that, before and after giving effect to such increase, (1) the representations and warranties contained in Section 3 and the other Loan Documents are true and correct in all material respects on and as of the date of such increase, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct in all material respects as of such earlier date, and except that for purposes of this Section 2.1(c), the representations and

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warranties contained in Section 3.1 shall be deemed to refer to the most recent statements furnished pursuant to Section 5.1, and (2) no Default or Event of Default exists.

     The Borrower shall prepay any Loans owing by it and outstanding on the date of any such increase to the extent necessary to keep the outstanding Revolving Loans ratable with any revised Revolving Commitments arising from any nonratable increase in the Revolving Commitments under this Section. In connection with any such increase in the Total Revolving Commitments, Schedule 1.1 (a) shall be revised by the Administrative Agent to reflect the new Revolving Commitments.

     2.2 Procedure for Revolving Loan Borrowing.

     (a) The Borrower may borrow under the Revolving Commitments during the Revolving Commitment Period on any Business Day, provided that the Borrower shall give the Administrative Agent irrevocable notice (which notice may be given by telephone and must be received by the Administrative Agent prior to 11:00 A.M., (a) three Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or (b) one Business Day prior to the requested Borrowing Date, in the case of Base Rate Loans) specifying (i) the amount and Type of Revolving Loans to be borrowed, (ii) the requested Borrowing Date and (iii) in the case of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Period therefor. Each telephonic notice by the Borrower pursuant to this Section 2.2 must be confirmed promptly by delivery to the Administrative Agent of a written Loan Notice, appropriately completed and signed by a Responsible Officer of the Borrower. Each borrowing under the Revolving Commitments shall be in an amount equal to $500,000 or a whole multiple of $100,000 in excess thereof. If the Borrower fails to specify a Type of a Loan in a Loan Notice or if the Borrower fails to give a timely notice requesting a conversion or continuation, then the applicable Loans shall be made as, or converted to, Base Rate Loans. Any such automatic conversion to Base Rate Loans shall be effective as of the last day of the Interest Period then in effect with respect to the applicable Eurodollar Loans. If a Borrower requests a borrowing of, conversion to, or continuation of Eurodollar Loans in any Loan Notice, but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month.

     (b) Upon receipt of a Loan Notice, the Administrative Agent shall promptly notify each Lender thereof. Each Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the Funding Office prior to 12:00 Noon, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent either by (i) crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) the Administrative Agent by the Borrower.

     2.3 Commitment Fees, etc.

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     (a) The Borrower agrees to pay to the Administrative Agent for the account of each relevant Lender a commitment fee (the “Commitment Fee”), computed at the Applicable Margin times the actual daily amount by which the Total Revolving Commitments exceed the sum of the Revolving Loans outstanding. The Commitment Fee shall accrue at all times until the last day of the Revolving Commitment Period and shall be payable quarterly in arrears on each Fee Payment Date, commencing on the first such date to occur after the date hereof. For purposes of clarification, Swing Line Loans shall not be considered outstanding for purposes of determining the unused portion of the Total Revolving Commitments.

     (b) The Borrower agrees to pay to the Administrative Agent the fees in the amounts and on the dates as set forth in the Fee Letter and to perform any other obligations contained therein.

     2.4 Termination or Reduction of Revolving Commitments. The Borrower shall have the right, upon notice to the Administrative Agent, to terminate the Revolving Commitments or, from time to time, to reduce the amount of the Revolving Commitments; provided that (a) any such notice shall be received by the Administrative Agent not later than 11:00 A.M. three Business Days prior to the date of termination or reduction and (b) no such termination or reduction of Revolving Commitments shall be permitted if, after giving effect thereto and to any concurrent prepayments hereunder, the aggregate principal amount of Revolving Loans and Swing Line Loans outstanding shall exceed the Total Revolving Commitments and (c) the Borrower shall not terminate or reduce the Swing Line Sublimit if, after giving effect thereto and to any concurrent prepayments hereunder the outstanding amount of Swing Line Loans would exceed the Swing Line Sublimit. Any such reduction shall be in an amount equal to $5,000,000, or any whole multiple of $1,000,000 in excess thereof, and shall reduce permanently the Revolving Commitments then in effect.

     2.5 Optional Prepayments.

     (a) The Borrower may at any time and from time to time prepay the Revolving Loans made to it, in whole or in part, without premium or penalty, upon irrevocable notice delivered to the Administrative Agent no later than 11:00 A,M., three Business Days prior thereto, in the case of Eurodollar Loans, and no later than 11:00 A.M., one Business Day prior thereto, in the case of Base Rate Loans, which notice shall specify the date and amount of prepayment and whether the prepayment is of Eurodollar Loans or Base Rate Loans; provided, that if a Eurodollar Loan is prepaid on any day other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to Section 2.14. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments of Revolving Loans shall be in an aggregate principal amount of $500,000 or a whole multiple of $100,000 in excess thereof.

     (b) The Borrower may, upon notice to the Swing Line Lender (with a copy to the Administrative Agent), at any time or from time to time, voluntarily prepay Swing Line Loans in whole or in part without premium or penalty; provided that (A) such notice must be received by

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the Swing Line Lender and the Administrative Agent not later than 1:00 p.m. on the date of the prepayment, and (B) any such prepayment shall be in a minimum principal amount of $100,000. Each such notice shall specify the date and amount of such prepayment. If such notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein.

     2.6 Conversion and Continuation Options.

     (a) The Borrower may elect from time to time to convert Eurodollar Loans to Base Rate Loans by giving the Administrative Agent prior irrevocable notice of such election no later than 11:00 A.M., on the Business Day preceding the proposed conversion date (which notice may be given by telephone); provided that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Base Rate Loans to Eurodollar Loans by giving the Administrative Agent prior irrevocable notice of such election no later than 11:00 A.M., on the third Business Day preceding the proposed conversion date (which notice may be given by telephone and shall specify the length of the Interest Period therefor), provided that no Base Rate Loan may be converted into a Eurodollar Loan when any Event of Default has occurred and is continuing and the Required Lenders have determined in their sole discretion not to permit such conversions. Each telephonic notice by the Borrower pursuant to this Section 2.6(a) must be confirmed promptly by delivery to the Administrative Agent of a written Loan Notice, appropriately completed and signed by a Responsible Officer of the Borrower. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof.

     (b) Any Eurodollar Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving irrevocable notice to the Administrative Agent (which notice may be given by telephone), in accordance with the applicable provisions of the term “Interest Period” set forth in Section 1.1, of the length of the next Interest Period to be applicable to such Revolving Loans, provided that no Eurodollar Loan may be continued as such when any Event of Default has occurred and is continuing and the Required Lenders have determined in their sole discretion not to permit such continuations, and provided, further, that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso such Revolving Loans shall be automatically converted to Base Rate Loans on the last day of such then expiring Interest Period. Each telephonic notice by the Borrower pursuant to this Section 2.6(b) must be confirmed promptly by delivery to the Administrative Agent of a written Loan Notice, appropriately completed and signed by a Responsible Officer of the Borrower. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof.

     2.7 Limitations on Eurodollar Tranches. Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions and continuations of Eurodollar Loans and all selections of Interest Periods shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the Eurodollar Loans comprising each Eurodollar Tranche shall be equal to $500,000 or a whole multiple of $100,000 in excess thereof and (b) no more than ten Eurodollar Tranches shall be outstanding at any one time.

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     2.8 Interest Rates and Payment Dates.

     (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin. Each Base Rate Loan shall bear interest at a rate per annum equal to the Base Rate. Each Swing Line Loan shall bear interest on the outstanding principal thereof from the applicable borrowing date at a rate per annum equal to the Base Rate.

     (b) If (i) all or a portion of the principal amount of any Revolving Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section plus 2% or, and (ii) all or a portion of any interest payable on any Revolving Loan or any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the rate then applicable to Base Rate Loans plus 2%, in each case, with respect to clauses (i) and (ii) above, from the date of such non-payment until such amount is paid in full (as well after as before judgment).

     (c) Upon the request of the Required Lenders, while any Event of Default exists, the Borrower shall pay interest on the principal amount of all outstanding Obligations (other than those Obligations that are then accruing default interest pursuant to Section 2.8(b) above) hereunder at a fluctuating interest rate per annum at all times equal to the rate that would otherwise be applicable thereto plus 2% to the fullest extent permitted by applicable law.

     (d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraphs (b) and (c) of this Section shall be payable from time to time on demand.

     2.9 Computation of Interest and Fees.

     (a) Interest and fees payable pursuant hereto shall be calculated on the basis of a 360-day year for the actual days elapsed, except that, with respect to Base Rate Loans the rate of interest on which is calculated on the basis of Bank of America’s “prime rate”, the interest thereon shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Revolving Loan resulting from a change in the Base Rate or Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate.

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     (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error.

     2.10 Inability to Determine Interest Rate. If prior to the first day of any Interest Period:

     (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or

     (b) the Administrative Agent shall have received notice from the Required Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Revolving Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans, (y) any Revolving Loans that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as Base Rate Loans and (z) any outstanding Eurodollar Loans shall be converted, on the last day of the then-current Interest Period, to Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Revolving Loans to Eurodollar Loans.

     2.11 Pro Rata Treatment and Payments.

     (a) Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any commitment fee and any reduction of the Revolving Commitments of the Lenders shall be made pro rata according to the Revolving Percentages of the Lenders.

     (b) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Revolving Loans made to it shall be made pro rata according to the respective outstanding principal amounts of the Revolving Loans then held by the Lenders.

     (c) All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 Noon, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Funding Office, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a

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Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at the then applicable rate during such extension.

     (d) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon, at a rate equal to the greater of (i) the Federal Funds Rate and (ii) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation, for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this paragraph shall be conclusive in the absence of manifest error. If such Lender’s share of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days after such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to Base Rate Loans, on demand, from the Borrower.

     (e) Unless the Administrative Agent shall have been notified in writing by the Borrower prior to the date of any payment due to be made by the Borrower hereunder that the Borrower will not make such payment to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such payment, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lenders their respective pro rata shares of a corresponding amount. If such payment is not made to the Administrative Agent by the Borrower within three Business Days after such due date, the Administrative Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the daily average rate of the Federal Funds Rate. Nothing herein shall be deemed to limit the rights of the Administrative Agent or any Lender against the Borrower.

     (f) The obligations of the Lenders hereunder to make Loans, to fund participations in Swing Line Loans and to make payments pursuant to Section 9.5 are several and not joint. The failure of any Lender to make any Loan, to fund any such participation or to make any payment under Section 9.5 on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Loan, to purchase its participation or to make its payment under Section 9.5(c).

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     (g) The Loans made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Loans made by the Lenders to the Borrower and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. Upon the request of any Lender made through the Administrative Agent, the Borrower shall execute and deliver to such Lender (through the Administrative Agent) a promissory note, which shall evidence such Lender’s Loans in addition to such accounts or records. Each such promissory note shall (i) in the case of Revolving Loans, be in the form of Exhibit H (a “Revolving Note”) and (ii) in the case of Swing Line Loans, be in the form of Exhibit I (a “Swing Line Note”). Each Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity of its Loans and payments with respect thereto.

     2.12 Requirements of Law.

     (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:

     (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 2.13 and changes in the rate of tax on the overall net income of such Lender);

     (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender that is not otherwise included in the determination of the Eurodollar Rate; or

     (iii) shall impose on such Lender any other condition;

and the result of any of the foregoing is to increase the cost to such Lender, by an amount that such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this paragraph, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled.

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     (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Administrative Agent) of a written request therefor, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction.

     (c) A certificate as to any additional amounts payable pursuant to this Section submitted by any Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. Notwithstanding anything to the contrary in this Section, no Borrower shall be required to compensate a Lender pursuant to this Section for any amounts incurred more than nine months prior to the date that such Lender notifies the Borrower of such Lender’s intention to claim compensation therefor; provided that, if the circumstances giving rise to such claim have a retroactive effect, then such nine-month period shall be extended to include the period of such retroactive effect. The obligations of the Borrower pursuant to this Section 2.12 shall survive until the date that is one year after the termination of this Agreement and the payment of the Revolving Loans and all other amounts payable hereunder.

     2.13 Taxes.

     (a) All payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings (“Non-Excluded Taxes”) or Other Taxes are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrower shall not be required to increase any such amounts payable to any Lender with

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respect to any Non-Excluded Taxes (i) that are attributable to such Lender’s failure to comply with the requirements of paragraph (d) or (e) of this Section or (ii) that are United States withholding taxes imposed on amounts payable to such Lender at the time such Lender becomes a party to this Agreement, except to the extent that such Lender’s assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such Non-Excluded Taxes pursuant to this paragraph.

     (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

     (c) Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of the relevant Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure.

     (d) Each Lender (or Transferee) that is not a “U.S. Person” as defined in Section 7701(a)(30) of the Code (a “Non-U.S. Lender”) shall deliver to the Borrower and the Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two copies of either U.S. Internal Revenue Service Form W-8BEN or Form W-8ECI, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio interest”, a statement substantially in the form of Exhibit C and a Form W-8BEN, or any subsequent versions thereof or successors thereto, properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this paragraph, a Non-U.S. Lender shall not be required to deliver any form pursuant to this paragraph that such Non-U.S. Lender is not legally able to deliver.

     (e) A Lender that is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed

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documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate, provided that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lender’s judgment such completion, execution or submission would not materially prejudice the legal position of such Lender.

     (f) If the Administrative Agent or any Lender determines, in its sole discretion, that it has received a refund or credit of any Non-Excluded Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.13, it shall pay over such refund or credit to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.13 with respect to the Non-Excluded Taxes or Other Taxes giving rise to such refund or credit), net of all out-of-pocket expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund or credit); provided, that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund or credit to such Governmental Authority. This paragraph shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other Person.

     (g) The agreements in this Section 2.13 shall survive until the date that is one year after the termination of this Agreement and the payment of the Revolving Loans and all other amounts payable hereunder.

     2.14 Indemnity. The Borrower agrees to indemnify each Lender for, and to hold each Lender harmless from, any loss or expense that such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment of or conversion from Eurodollar Loans after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day that is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest that would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Revolving Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender after consultation with Novellus) that would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurocurrency market. A certificate as to any amounts payable pursuant to this Section submitted to the Borrower by any Lender shall be conclusive in the absence of manifest error. The Borrower shall also pay any customary administrative fees charged by such

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Lender in connection with the foregoing. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder until such time as any applicable statute of limitations has expired.

     2.15 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.12 or 2.13(a) with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Revolving Loans affected by such event with the object of avoiding the consequences of such event; provided, that such designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage, and provided, further, that nothing in this Section shall affect or postpone any of the obligations of the Borrower or the rights of any Lender pursuant to Section 2.12 or 2.13(a).

     2.16 Replacement of Lenders. The Borrower shall be permitted to replace any Lender that (a) requests reimbursement for amounts owing pursuant to Section 2.12 or 2.13(a) or (b) defaults in its obligation to make Loans hereunder, with a replacement financial institution; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Lender shall have taken no action under Section 2.15 so as to eliminate the continued need for payment of amounts owing pursuant to Section 2.12 or 2.13(a), (iv) the replacement financial institution shall purchase, at par, all Revolving Loans and other amounts owing to such replaced Lender on or prior to the date of replacement, (v) the Borrower shall be liable to such replaced Lender under Section 2.14 if any Eurodollar Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (vi) the replacement financial institution, if not already a Lender, shall be reasonably satisfactory to the Administrative Agent, (vii) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 9.6 (provided that the Borrower shall be obligated to pay the registration and processing fee referred to therein), (viii) until such time as such replacement shall be consummated, the Borrower shall pay all additional amounts (if any) required pursuant to Section 2.12 or 2.13(a), as the case may be, and (ix) any such replacement shall not be deemed to be a waiver of any rights that the Borrower, the Administrative Agent or any other Lender shall have against the replaced Lender.

     2.17 Swing Line Loans.

     (a) The Swing Line. Subject to the terms and conditions set forth herein, the Swing Line Lender agrees, in reliance upon the agreements of the other Lenders set forth in this Section 2.17 to make loans (each such loan, a “Swing Line Loan”) to the Borrower from time to time on any Business Day during the Revolving Commitment Period in an aggregate amount not to exceed at any time outstanding the amount of the Swing Line Sublimait; provided, however, that after giving effect to any Swing Line Loan, (i) the aggregate principal amount of Revolving Loans and Swing Loans outstanding shall not exceed the Total Revolving Commitments at such time, and (ii) the aggregate principal amount of Revolving Loans outstanding of any Lender at such time, plus such Lender’s Revolving Percentage of the outstanding amount of all Swing Line Loans at such time shall not exceed such Lender’s Revolving Commitment, and provided further

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that the Borrower shall not use the proceeds of any Swing Line Loan to refinance any outstanding Swing Line Loan. Within the foregoing limits, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.17, prepay under Section 2.5, and reborrow under this Section 2.17. Each Swing Line Loan shall be a Base Rate Loan. Immediately upon the making of a Swing Line Loan, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Swing Line Lender a risk participation in such Swing Line Loan in an amount equal to the product of such Lender’s Revolving Percentage times the amount of such Swing Line Loan.

     (b) Borrowing Procedures. Each Swing Line Borrowing shall be made upon the Borrower’s irrevocable notice to the Swing Line Lender and the Administrative Agent, which may be given by telephone. Each such notice must be received by the Swing Line Lender and the Administrative Agent not later than 1:00 p.m. on the requested borrowing date, and shall specify (i) the amount to be borrowed, which shall be a minimum of $500,000, and (ii) the requested borrowing date, which shall be a Business Day. Each such telephonic notice must be confirmed promptly by delivery to the Swing Line Lender and the Administrative Agent of a written Swing Line Loan Notice, appropriately completed and signed by a Responsible Officer of the Borrower. Promptly after receipt by the Swing Line Lender of any telephonic Swing Line Loan Notice, the Swing Line Lender will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has also received such Swing Line Loan Notice and, if not, the Swing Line Lender will notify the Administrative Agent (by telephone or in writing) of the contents thereof. Unless the Swing Line Lender has received notice (by telephone or in writing) from the Administrative Agent (including at the request of any Lender) prior to 2:00 p.m. on the date of the proposed Swing Line Borrowing (A) directing the Swing Line Lender not to make such Swing Line Loan as a result of the limitations set forth in the proviso to the first sentence of Section 2.17(a), or (B) that one or more of the applicable conditions specified in Section 4 is not then satisfied, then, subject to the terms and conditions hereof, the Swing Line Lender will, not later than 3:00 p.m. on the borrowing date specified in such Swing Line Loan Notice, make the amount of its Swing Line Loan available to the Borrower either by (i) crediting the account of the Borrower on the books of the Swing Line Lender in immediately available funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) the Swing Line Lender by the Borrower.

     (c) Refinancing of Swing Line Loans.

     (i) The Swing Line Lender at any time in its sole and absolute discretion may request, on behalf of the Borrower (which hereby irrevocably authorizes the Swing Line Lender to so request on its behalf), that each Lender make a Base Rate Loan in an amount equal to such Lender’s Revolving Percentage of the amount of Swing Line Loans then outstanding. Such request shall be made in writing (which written request shall be deemed to be a Swing Line Loan Notice for purposes hereof) and in accordance with the requirements of Section 2.2, without regard to the minimum and multiples specified therein for the principal amount of Base Rate Loans, but subject to the unutilized portion of the Total Revolving Commitments and the conditions set forth in Section 4.2. The Swing Line Lender shall furnish the Borrower with a copy of the applicable Swing Line Loan Notice promptly after delivering such notice to the Administrative Agent. Each

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Lender shall make an amount equal to its Revolving Percentage of the amount specified in such Swing Line Loan Notice available to the Administrative Agent in immediately available funds for the account of the Swing Line Lender at the Administrative Agent’s Office not later than 1:00 p.m. on the day specified in such Swing Line Loan Notice, whereupon, subject to Section 2.17(c)(ii), each Lender that so makes funds available shall be deemed to have made a Base Rate Loan to the Borrower in such amount. The Administrative Agent shall remit the funds so received to the Swing Line Lender.

     (ii) If for any reason any Swing Line Loan cannot be refinanced by such a borrowing of Revolving Loans in accordance with Section 2.17(c)(i), the request for Base Rate Loans submitted by the Swing Line Lender as set forth herein shall be deemed to be a request by the Swing Line Lender that each of the Lenders fund its risk participation in the relevant Swing Line Loan and each Lender’s payment to the Administrative Agent for the account of the Swing Line Lender pursuant to Section 2. 17(c)(i) shall be deemed payment in respect of such participation.

     (iii) If any Lender fails to make available to the Administrative Agent for the account of the Swing Line Lender any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.17(c) by the time specified in Section 2.17(c)(i), the Swing Line Lender shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the Swing Line Lender at a rate per annum equal to the greater of the Federal Funds Rate and a rate determined by the Swing Line Lender in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by the Swing Line Lender in connection with the foregoing. If such Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute such Lender’s Revolving Loan included in the relevant borrowing under the Revolving Commitments or funded participation in the relevant Swing Line Loan, as the case may be. A certificate of the Swing Line Lender submitted to any Lender (through the Administrative Agent) with respect to any amounts owing under this clause (iii) shall be conclusive absent manifest error.

     (iv) Each Lender’s obligation to make Revolving Loans or to purchase and fund risk participations in Swing Line Loans pursuant to this Section 2.1(c) shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever, (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing; provided, however, that each Lender’s obligation to make Revolving Loans pursuant to this Section 2.17(c) is subject to the conditions set forth in Section 4.2. No such funding of risk participations shall relieve or otherwise impair the obligation of the Borrower to repay Swing Line Loans, together with interest as provided herein.

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     (d) Repayment of Participations.

     (i) At any time after any Lender has purchased and funded a risk participation in a Swing Line Loan, if the Swing Line Lender receives any payment on account of such Swing Line Loan, the Swing Line Lender will distribute to such Lender its Revolving Percentage thereof in the same funds as those received by the Swing Line Lender.

     (ii) If any payment received by the Swing Line Lender in respect of principal or interest on any Swing Line Loan is required to be returned by the Swing Line Lender under any of the circumstances described in Section 9.5 (including pursuant to any settlement entered into by the Swing Line Lender in its discretion), each Lender shall pay to the Swing Line Lender its Revolving Percentage thereof on demand of the Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned, at a rate per annum equal to the Federal Funds Rate. The Administrative Agent will make such demand upon the request of the Swing Line Lender. The obligations of the Lenders under this clause shall survive the payment in full of the Obligations and the termination of this Agreement.

     (e) Interest for Account of Swing Line Lender. The Swing Line Lender shall be responsible for invoicing the Borrower for interest on the Swing Line Loans. Until each Lender funds its Base Rate Loan or risk participation pursuant to this Section 2.17 to refinance such Lender’s Revolving Percentage of any Swing Line Loan, interest in respect of such Revolving Percentage shall be solely for the account of the Swing Line Lender.

     (f) Payments Directly to Swing Line Lender. The Borrower shall make all payments of principal and interest in respect of the Swing Line Loans directly to the Swing Line Lender.

     (g) Repayment of Swing Line Loans. The Borrower shall repay each Swing Line Loan on the earlier to occur of (i) the date within one (1) Business Day of demand therefor by the Swing Line Lender and (ii) the Revolving Termination Date.

2.18 Sharing of Payments by Lenders.

     If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of the Loans made by it, or the participations in Swing Line Loans held by it resulting in such Lender’s receiving payment of a proportion of the aggregate amount of such Loans or participations and accrued interest thereon greater than its pro rata share thereof as provided herein, then the Lender receiving such greater proportion shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) participations in the Loans and subparticipations in Swing Line Loans of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them, provided that:

     (i) if any such participations or subparticipations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations or

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subparticipations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and

     (ii) the provisions of this Section shall not be construed to apply to (x) any payment made by a Borrower pursuant to and in accordance with the express terms of this Agreement or (y) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or subparticipations in Swing Line Loans to any assignee or participant, other than to a Borrower or any Subsidiary thereof (as to which the provisions of this Section shall apply).

     Each Loan Party consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against such Loan Party rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of such Loan Party in the amount of such participation.

     2.19 Cash Collateral.

     The Borrower shall have the option to pledge and deposit with or deliver to the Administrative Agent, as collateral for the Obligations, cash (“Cash Collateral”) in an amount equal to the Total Revolving Commitments then in effect pursuant to documentation in form and substance satisfactory to the Administrative Agent. The Cash Collateral may be held by BAS, as securities intermediary pursuant to a control agreement with the Administrative Agent in form and substance satisfactory to the Administrative Agent and invested in those securities identified in Section 2.1 of the Borrower’s Investment Policy described on Schedule 6.5(a) (but in no event shall such securities consist of “margin stock” within the meaning of Regulation U). If the Borrower makes the election to provide Cash Collateral, the Borrower agrees it shall do, execute or deliver all such acts, assurances and other instruments as the Administrative Agent shall reasonably request in order to perfect and maintain a valid and effective security interest in the Cash Collateral. If the Borrower provides Cash Collateral to the Administrative Agent in accordance with the terms above, the parties hereto agree that the Loan Parties shall be permitted to exceed the respective baskets contained in each of Sections 6.4(q), 6.5(h), 6.5(j), 6.5(m), 6.6(a), 6.6(b), 6.7 and 6.8(d).

     SECTION 3 REPRESENTATIONS AND WARRANTIES

     To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Revolving Loans, the Loan Parties hereby represent and warrant to the Administrative Agent and each Lender that:

     3.1 Financial Condition. The audited consolidated balance sheets of Novellus and its consolidated Subsidiaries as at December 31, 2003, December 31, 2004 and December 31, 2005, and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an unqualified report from Ernst & Young LLP, present fairly the consolidated financial condition of Novellus and its consolidated

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Subsidiaries as at such date, and the consolidated results of its operations and its consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of Novellus and its consolidated Subsidiaries as at September 30, 2006, and the related unaudited consolidated statements of income and cash flows for the three-month period ended on such date, present fairly the consolidated financial condition of Novellus and its consolidated Subsidiaries as at such date, and the consolidated results of its operations and its consolidated cash flows for the three-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). No Group Member has any material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, that are not reflected in the most recent disclosure filings made by Novellus with the SEC. During the period from December 31, 2005 to and including the date hereof there has been no Disposition by any Group Member of any material part of its business or property for which reasonable consideration has not been received.

     3.2 No Change. Since December 31, 2005, there has been no development or event that has had or could reasonably be expected to have a Material Adverse Effect.

     3.3 Existence; Compliance with Law. Each Group Member (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, except, in the case of any Non-Guarantor Subsidiary, to the extent the failure to do so could not reasonably be expected to have a Material Adverse Effect, (b) has the power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation or other organization and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except to the extent that the failure to so qualify could not, in the aggregate, reasonably be expected to have a Material Adverse Effect and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

     3.4 Power; Authorization; Enforceable Obligations. The Borrower has the power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and to obtain extensions of credit hereunder. The Borrower has taken all necessary organizational action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and to authorize the extensions of credit on the terms and conditions of this Agreement. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the extensions of credit hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the Loan Documents, except consents, authorizations, filings and notices which have been obtained or made and are in full force and effect. Each Loan Document has been duly executed and delivered on behalf of each Loan Party party thereto. This Agreement constitutes, and each other Loan Document upon execution will constitute, a

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legal, valid and binding obligation of each Loan Party that is party thereto, enforceable against each such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

     3.5 No Legal Bar. The execution, delivery and performance of this Agreement and the other Loan Documents by each Loan Party party thereto, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or any material Contractual Obligation of any Loan Party and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or any such material Contractual Obligation. No Requirement of Law or Contractual Obligation applicable to Novellus or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect.

     3.6 Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of Novellus, threatened by or against any Group Member or against any of their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) that could reasonably be expected to have a Material Adverse Effect.

     3.7 No Default. No Group Member is in default under or with respect to any of its Contractual Obligations in any respect that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing.

     3.8 Ownership of Property. Each Group Member has title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property.

     3.9 Intellectual Property. Except as disclosed from time to time in any filing made by Novellus with the SEC, each Group Member owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted. No material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does the Borrower know of any valid basis for any such claim.

     3.10 Taxes. Each Group Member has filed or caused to be filed all Federal, state and other material tax returns that are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (except to the extent the amount or validity thereof is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the relevant Group Member); no tax Lien has been filed, and, to the knowledge of each Loan Party, no claim is being asserted, with respect to any such tax, fee or other charge.

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     3.11 Federal Regulations. No part of the proceeds of any Loans, and no other extensions of credit hereunder, will be used (a) for “buying” or “carrying” any “margin stock” within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect for any purpose that violates the provisions of the Regulations of the Board or (b) for any purpose that violates the provisions of the Regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-l, as applicable, referred to in Regulation U.

     3.12 ERISA. Neither a Reportable Event nor an “accumulated funding deficiency” (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred with respect to which any Group Member has a material liability under ERISA, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither Novellus nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan that has resulted or could reasonably be expected to result in a material liability under ERISA, and neither Novellus nor any Commonly Controlled Entity would become subject to any material liability under ERISA if Novellus or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent.

     3.13 Investment Company Act; Other Regulations. No Loan Party is an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended. No Loan Party is subject to regulation under any Requirement of Law (other than Regulation X of the Board) that limits its ability to incur Indebtedness.

     3.14 Subsidiaries. As of the Closing Date, Schedule 3.14 sets forth the name and jurisdiction of incorporation of each Subsidiary.

     3.15 Use of Proceeds. The proceeds of the Loans shall be used to finance working capital and for other general corporate purposes, including to finance share repurchases.

     3.16 Environmental Matters. Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect:

     (a) the facilities and properties owned, leased or operated by any Group Member (the “Properties”) do not contain, and have not previously contained, any Materials of Environmental

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Concern in amounts or concentrations or under circumstances that constitute or constituted a violation of, or could give rise to liability under, any Environmental Law;

     (b) no Group Member has received or is aware of any notice of violation, alleged violation, non-compliance, liability or potential liability regarding compliance with Environmental Laws with regard to any of the Properties or the business operated by any Group Member (the “Business”), nor does any Loan Party have knowledge that any such notice will be received or is being threatened;

     (c) Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location that is reasonably likely to give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could give rise to liability under, any applicable Environmental Law;

     (d) no judicial proceeding or governmental or administrative action is pending or, to the knowledge of any Loan Party, threatened, under any Environmental Law to which any Group Member is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business;

     (e) there has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of any Group Member in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws;

     (f) the Properties and all operations at the Properties are in compliance, and have in the last five years been in compliance, with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the Business; and

     (g) no Group Member has assumed any liability of any other Person under Environmental Laws.

     3.17 Accuracy of Information, etc. No statement or information contained in this Agreement, any other Loan Document or any other document, certificate or statement furnished by or on behalf of any Loan Party to the Administrative Agent or the Lenders, or any of them, for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, contained as of the date such statement, information, document or certificate was so furnished, any untrue statement of a material fact or omitted to state a material fact necessary to make the statements contained herein or therein not misleading. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of Novellus to be reasonable at the time

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made, it being recognized by the Lenders that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. There is no fact known to any Loan Party that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other Loan Documents or in any other documents, certificates and statements furnished to the Administrative Agent and the Lenders for use in connection with the transactions contemplated hereby and by the other Loan Documents.

     3.18 Solvency. The Loan Parties are, and after giving effect to and the incurrence of all Indebtedness and obligations being incurred in connection herewith will be and will continue to be, Solvent on a consolidated basis.

     SECTION 4. CONDITIONS PRECEDENT

     4.1 Conditions to Initial Extension of Credit. The obligation of each Lender to make its initial Loan hereunder is subject to the satisfaction of the following conditions precedent:

     (a) Credit Agreement. The Administrative Agent shall have received this Agreement, executed and delivered by the Administrative Agent, each Loan Party and each Person listed on Schedule 1.1 (a).

     (b) Financial Statements. To the extent not otherwise publicly available, the Lenders shall have received (i) audited consolidated financial statements of Novellus for the 2003, 2004 and 2005 fiscal years and (ii) unaudited interim consolidated financial statements of Novellus for the fiscal quarter ended September 30, 2006, and such financial statements shall not, in the reasonable judgment of the Lenders, reflect any material adverse change in the consolidated financial condition of Novellus, as reflected in the financial statements or projections provided to the Lenders prior to the Closing Date.

     (c) Approvals. All material governmental and third party approvals necessary in connection with the continuing operations of the Group Members and the transactions contemplated hereby shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose materially adverse conditions on the financing contemplated hereby.

     (d) Fees. The Lenders and the Administrative Agent shall have received confirmation of wire transfers with respect to payment of all fees required to be paid, and all expenses for which invoices have been presented (including the reasonable fees and expenses of legal counsel), on or before the Closing Date.

     (e) Closing Certificate; Certified Certificate of Incorporation; Good Standing Certificates. The Administrative Agent shall have received (i) a certificate of each Loan Party, dated the Closing Date, substantially in the form of Exhibit A, with appropriate insertions and

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attachments, including the certificate of incorporation of such Loan Party certified by the relevant authority of the jurisdiction of organization of such Loan Party and an incumbency certificate including specimen signatures, and (ii) a good standing certificate for each Loan Party from its jurisdiction of organization.

     (f) Legal Opinions. The Administrative Agent shall have received the executed legal opinion of Morrison & Foerster LLP, counsel to Novellus. Such legal opinion shall cover such matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require.

     (g) Existing Credit Agreement. Receipt by the Administrative Agent of evidence that the Existing Credit Agreement has been terminated with the initial funding of the Loans.

     4.2 Conditions to Each Extension of Credit. The agreement of each Lender to make any Loan requested to be made by it on any date (including its initial Revolving Loan, but excluding, for avoidance of doubt, any continuation or conversion pursuant to Section 2.6) is subject to the satisfaction of the following conditions precedent:

     (a) Representations and Warranties. Each of the representations and warranties made by the Borrower and each other Loan Party in or pursuant to the Loan Documents (other than the representations and warranties contained in Section 3.2) shall be true and correct in all material respects on and as of such date as if made on and as of such date, except to the extent any such representation and warranty specifically relates to any earlier date, in which case such representation and warranty shall have been true and correct on and as of such earlier date.

     (b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date.

Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such borrowing that the conditions contained in this Section 4.2 have been satisfied.

     SECTION 5. AFFIRMATIVE COVENANTS

     The Loan Parties hereby agree that, so long as the Revolving Commitments remain in effect or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, the Loan Parties shall and shall cause each of their Subsidiaries to:

     5.1 Financial Statements. Furnish to the Administrative Agent and each Lender:

     (a) as soon as available, but in any event within 90 days after the end of each fiscal year of Novellus, (i) a copy of the audited consolidated balance sheet of Novellus and its consolidated Subsidiaries as at the end of such year and the related audited consolidated statements of income and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a “going concern” or like

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qualification or exception, or qualification arising out of the scope of the audit, by Ernst & Young LLP or other independent certified public accountants of nationally recognized standing and (ii) to the extent filed with the SEC, a copy of the attestation report filed with the SEC of Ernst & Young LLP or other independent certified public accountants of nationally recognized standing as to the Borrower’s internal controls pursuant to Section 404 of Sarbanes-Oxley; and

     (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of Novellus, the unaudited consolidated balance sheet of Novellus and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments).

     All such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied (except as approved by such accountants or officer, as the case may be, and disclosed in reasonable detail therein) consistently throughout the periods reflected therein and with prior periods. For avoidance of doubt, the delivery of financial statements pursuant to this Section 5.1 shall not constitute a “bring-down” of any representation and warranty contained in this Agreement.

     5.2 Certificates; Other Information. Furnish to the Administrative Agent and each Lender (or, in the case of clause (d), to the relevant Lender):

     (a) concurrently with the delivery of the financial statements referred to in Section 5.1 (a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Event of Default, except as specified in such certificate;

     (b) concurrently with the delivery of any financial statements pursuant to Section 5.1, a duly completed Compliance Certificate signed by a Responsible Officer of the Borrower, which will include a statement that, to the best of such Responsible Officer’s knowledge, the Borrower during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate;

     (c) within five days after the same are sent, copies of all financial statements and reports that the Borrower sends to the holders of any class of its debt securities or public equity securities and, within five days after the same are filed, copies of all financial statements and annual, regular, periodic and special reports and registration statements that the Borrower may file or be required to file with the SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934; and

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     (d) promptly, such additional financial and other information as any Lender may from time to time reasonably request.

     Notwithstanding the provisions of Section 9.2, documents required to be delivered pursuant to Section 5.1 or Section 5.2 (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower’s website on the Internet at the website address listed in Section 9.2 or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) the Borrower shall notify the Administrative Agent and each Lender (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. Notwithstanding anything contained herein, in every instance the Borrower shall be required to provide paper copies of the Compliance Certificates required by Section 5.2 to the Administrative Agent. Except for such Compliance Certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.

     The Borrower hereby acknowledges that (a) the Administrative Agent and/or BAS will make available to the Lenders materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “Borrower Materials”) by posting the Borrower Materials on IntraLinks or another similar electronic system (the “Platform”) and (b) certain of the Lenders may be “public-side” Lenders (i.e., Lenders that do not wish to receive material non-public information with respect to the Borrower or its securities) (each, a “Public Lender”). The Borrower hereby agrees that (w) all Borrower Materials that are to be made available to Public Lenders shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear prominently on the first page thereof; (x) by marking Borrower Materials “PUBLIC,” the Borrower shall be deemed to have authorized the Administrative Agent, BAS and the Lenders to treat such Borrower Materials as not containing any material non-public information with respect to the Borrower or its securities for purposes of United States federal and state securities laws (provided, however, that to the extent such Borrower Materials constitute Information, they shall be treated as set forth in Section 9.14); (y) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of the Platform designated as “Public Investor;” and (z) the Administrative Agent and BAS shall be entitled to treat any Borrower Materials that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform not marked as “Public Investor.” Notwithstanding the foregoing, the Borrower shall be under no obligation to mark any Borrower Materials “PUBLIC.”

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     5.3 Intentionally Omitted.

     5.4 Maintenance of Existence; Compliance. (a)(i) Except to the extent otherwise permitted under this Agreement, preserve, renew and keep in full force and effect its organizational existence and (ii) take all reasonable action to maintain all rights, privileges and franchises necessary in the normal conduct of its business, except, in the case of clause (ii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (b) comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

     5.5 Maintenance of Property; Insurance. (a) Keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted and (b) maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business, except to the extent Novellus or its Subsidiaries maintains reasonable self-insurance with respect to such risks.

     5.6 Inspection of Property; Books and Records; Discussions. (a) Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities and (b) upon reasonable prior notice, permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Group Members with officers and employees of the Group Members and with their independent certified public accountants; provided that so long as no Event of Default has occurred and is continuing, Novellus and its Subsidiaries shall only be responsible for the expenses of one such visit and inspection per calendar year by the Administrative Agent.

     5.7 Notices. Promptly give notice to the Administrative Agent and each Lender of:

     (a) the occurrence of any Default or Event of Default;

     (b) as soon as possible (and in any event within 10 Business Days after Novellus knows or has to reason to know of), any (i) default or event of default under any Contractual Obligation of any Group Member or (ii) litigation, investigation or proceeding that may exist at any time between any Group Member and any Governmental Authority, that in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect;

     (c) as soon as possible (and in any event within 10 Business Days after Novellus knows or has to reason to know of), any litigation or proceeding affecting any Group Member which (i) relates to any Loan Document or (ii) if adversely determined, could reasonably be expected to have a Material Adverse Effect;

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     (d) the following events, as soon as possible and in any event within 30 days after Novellus knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or Novellus or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan; and

     (e) any development or event that has had or could reasonably be expected to have a Material Adverse Effect.

     Each notice pursuant to this Section 5.7 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the relevant Group Member proposes to take with respect thereto.

     5.8 Additional Subsidiaries. Within thirty (30) days after the acquisition or formation of any Domestic Subsidiary that is a Material Subsidiary, cause such Person to (i) become a Guarantor by executing and delivering to the Administrative Agent a Joinder Agreement, and (ii) deliver to the Administrative Agent documents of the types referred to in Sections 4.1(e) and favorable opinions of counsel to such Person (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to in clause (a)), all in form, content and scope reasonably satisfactory to the Administrative Agent.

     SECTION 6. NEGATIVE COVENANTS

     The Borrower hereby agrees that, so long as the Revolving Commitments remain in effect or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, the Loan Parties shall not, and shall not permit any of their Subsidiaries to, directly or indirectly:

     6.1 Financial Covenants.

     (a) Permit the Quick Ratio as at the last day of any fiscal quarter of Novellus to be less than 1.25 to 1.00.

     (b) Permit the Consolidated Leverage Ratio as at the last day of any period of four consecutive fiscal quarters of the Borrower to exceed 3.25 to 1.00.

     6.2 Fundamental Changes. Merge, dissolve, liquidate, consolidate with or into another Person, or Dispose of (whether hi one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person; provided that, notwithstanding the foregoing provisions of this Section 6.2 but subject to the terms of Section 5.8, (a) the Borrower may merge or consolidate with any Person provided that the

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Borrower shall be the continuing or surviving corporation, (b) any Loan Party other than the Borrower may merge or consolidate with any other Loan Party other than the Borrower, (c) any Subsidiary may be merged or consolidated with or into any Loan Party provided that such Loan Party shall be the continuing or surviving corporation, (d) any Foreign Subsidiary may be merged or consolidated with or into any other Foreign Subsidiary and (e) any Subsidiary may dissolve or liquidate itself; provided that with respect to any Domestic Subsidiary such Domestic Subsidiary transfers all of its assets to a Loan Party prior to such dissolution or liquidation. Nothing in this Section 6.2 shall prohibit the Borrower or any Subsidiary from entering into any Disposition permitted by Section 6.7.

     6.3 Lines of Business. Enter into any business, either directly or through any Subsidiary, except for those businesses in which Novellus and its Subsidiaries are engaged on the date of this Agreement or that are reasonably related thereto.

     6.4 Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, whether now owned or hereafter acquired, other than the following:

     (a) Liens existing on the date hereof and listed on Schedule 6.4 and any renewals or extensions thereof, provided that (i) the property covered thereby is not changed (other than as a result of improvements thereto), (ii) the amount secured or benefited thereby is not increased unless permitted by Section 6.6(a) and (iii) any renewal or extension of the obligations secured or benefited thereby is permitted by Section 6.6(a);

     (b) Liens (other than Liens imposed under ERISA) for taxes, assessments or governmental charges or levies not yet due or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP;

     (c) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and suppliers and other Liens imposed by law or pursuant to customary reservations or retentions of title arising in the ordinary course of business, provided that such Liens secure only amounts not yet due and payable or, if due and payable, are unfiled and no other action has been taken to enforce the same or are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established;

     (d) pledges or deposits in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other similar legislation, other than any Lien imposed by ERISA;

     (e) deposits to secure the performance of bids, trade contracts and leases (other than Indebtedness), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

     (f) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, do not materially interfere with the ordinary conduct of the business of the applicable Person;

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     (g) Liens securing judgments for the payment of money (or appeal or other surety bonds relating to such judgments) not constituting an Event of Default under Section 7(h);

     (h) Liens securing Indebtedness permitted under Section 6.6(a);

     (i) leases or subleases granted to others not interfering in any material respect with the business of any Loan Party or any of its Subsidiaries;

     (j) any interest of title of a lessor under, and Liens arising from UCC financing statements (or equivalent filings, registrations or agreements in foreign jurisdictions) relating to, leases permitted by this Agreement;

     (k) Liens deemed to exist in connection with Investments in repurchase agreements permitted under Section 6.5;

     (1) normal and customary rights of setoff upon deposits of cash in favor of banks or other depository institutions;

     (m) Liens of a collection bank arising under Section 4-210 of the Uniform Commercial Code on items in the course of collection;

     (n) Liens of sellers of goods to the Borrower and any of its Subsidiaries arising under Article 2 of the Uniform Commercial Code or similar provisions of applicable law in the ordinary course of business, covering only the goods sold and securing only the unpaid purchase price for such goods and related expenses;

     (o) Liens created or deemed to exist in connection with any Qualified Receivables Transaction, but only to the extent that any such Lien relates to Receivables Program Assets;

     (p) Liens of the Administrative Agent on the Cash Collateral; and

     (q) other Liens securing Indebtedness or other obligations permitted hereunder in an aggregate outstanding amount not exceeding $100,000,000 at any time; provided, however, if the Borrower provides Cash Collateral to secure the Obligations in accordance with Section 2.19, the Borrower and its Subsidiaries may provide Liens securing Indebtedness or other obligations permitted hereunder in excess of the $100,000,000 limitation provided above.

     6.5 Investments. Make any Investments, except:

     (a) Investments held by the Borrower or such Subsidiary in the form of cash or Cash Equivalents;

     (b) Investments existing as of the Closing Date and set forth in Schedule 6.5(a) and any extension or renewal thereof; provided that the amount of any such Investment is not increased at the time of such extension or renewal;

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     (c) Investments specified in the Borrower’s investment policy, a copy of which is set forth on Schedule 6.5(b);

     (d) Investments in any Person that is a Loan Party prior to giving effect to such Investment;

     (e) Investments by any Subsidiary of the Borrower that is not a Loan Party in any other Subsidiary of the Borrower that is not a Loan Party;

     (f) Investments consisting of extensions of credit in the nature of accounts receivable or notes receivable arising from the grant of trade credit in the ordinary course of business, and Investments received in satisfaction or partial satisfaction thereof from financially troubled account debtors to the extent reasonably necessary in order to prevent or limit loss;

     (g) Guarantee Obligations permitted by Section 6.6;

     (h) Permitted Acquisitions;

     (i) Investments acquired in connection with any Disposition not prohibited by Section 6.7;

     (j) Investments in Subsidiaries, including Investments made in connection with the formation of Subsidiaries (provided that the aggregate amount of such Investments in any year shall not exceed an amount equal to 10% of Consolidated Total Assets as at the end of the preceding fiscal year of the Borrower plus the unused amount available for such Investments pursuant to this subsection (j) for the immediately preceding fiscal year (excluding any carry forward available from any prior fiscal year)); provided, however, if the Borrower provides Cash Collateral to secure the Obligations in accordance with Section 2.19, the Borrower and its Subsidiaries may make Investments in Subsidiaries, including Investments made in connection with the formation of Subsidiaries, in excess of the limitation on any such Investments provided above in this clause (j).

     (k) Investments made in the ordinary course of business pursuant to transactions under which the Borrower or any Subsidiary acquires, or acquires the right to use, intellectual property in exchange for a loan made to the seller, licensor or transferor of such intellectual property;

     (1) advances or loans by the Borrower or any Subsidiary to employees in the ordinary course of business; and

     (m) Other Investments, the aggregate amount of which shall not exceed $25,000,000 in the aggregate at any time outstanding; provided, however, if the Borrower provides Cash Collateral to secure the Obligations in accordance with Section 2.19, the Borrower and its Subsidiaries may make other Investments in excess of the limitation provided above in this clause (m).

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     6.6 Indebtedness.

     (a) Permit the Priority Debt Amount on any date to exceed the sum of (i) $150,000,000 plus (ii) the outstanding principal amount of Indebtedness identified on Schedule 6.6; provided, however, if the Borrower provides Cash Collateral to secure the Obligations in accordance with Section 2.19, the Borrower and its Subsidiaries may permit the Priority Debt Amount to exceed the limitation provided above in this Section 6.6(a).

     (b) Permit the aggregate principal amount of unsecured intercompany Indebtedness owing from the Non-Guarantor Subsidiaries to the Loan Parties to exceed an amount equal to (i) $400,000,000 at any time on or before September 30, 2008, (ii) $350,000,000 at any time from October 1, 2008 to and including December 31, 2008 and (iii) in any year commencing after December 31, 2008, 10% of Consolidated Total Assets as at the end of the preceding fiscal year of the Borrower plus commencing with the fiscal year ending December 31, 2009 the unused amount available for such Indebtedness pursuant to this subsection (b) for the immediately preceding fiscal year (excluding any carry forward available from any prior fiscal year); provided, however, if the Borrower provides Cash Collateral to secure the Obligations in accordance with Section 2.19, the unsecured intercompany Indebtedness owing from the Non-Guarantor Subsidiaries to the Loan Parties may exceed the limitation provided above in this Section 6.6(b).

     6.7 Dispositions. Make any Disposition unless (i) the consideration paid in connection therewith shall be paid contemporaneous with consummation of the transaction and shall be in an amount not less than the fair market value of the property disposed of, (ii) such transaction does not involve a sale or other disposition of receivables other than receivables owned by or attributable to other property concurrently being disposed of in a transaction otherwise permitted under this Section 6.7, and (iii) the aggregate net book value of all of the assets sold or otherwise disposed of by the Borrower and its Subsidiaries in all such transactions occurring during any fiscal year shall not exceed an amount equal to 10% of Consolidated Total Assets as at the end of the prior fiscal year of the Borrower plus the unused amount available for Dispositions pursuant to this clause (iii) from the immediately preceding fiscal year (excluding any carry forward available from any prior fiscal year); provided, however, if the Borrower provides Cash Collateral to secure the Obligations in accordance with Section 2.19, there shall be no limit on the amount of Dispositions made by the Borrower and its Subsidiaries.

     6.8 Restricted Payments. Declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except that:

(a) (i) each Subsidiary may make Restricted Payments to the Borrower or any Guarantor, (ii) each Foreign Subsidiary may make Restricted Payments to its direct parent company and (iii) each Domestic Subsidiary may make Restricted Payments to its direct parent company if such direct parent company is either the Borrower or a Domestic Subsidiary; provided, however that if such direct parent company is not a Loan Party, such direct parent company shall immediately distribute the proceeds of such Restricted Payment to a Loan Party;

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     (b) each Foreign Subsidiary may make Restricted Payments to Novellus Singapore and/or Novellus Systems B.V.;

     (c) the Borrower and each Subsidiary may declare and make dividend payments or other distributions payable solely in the Capital Stock of such Person;

     (d) the Borrower may purchase, redeem, or acquire shares of its Capital Stock; provided that (i) no Default exists prior to and immediately after giving effect to such purchase, redemption or acquisition of such Capital Stock, and (ii) if the Consolidated Leverage Ratio (calculated on a pro forma basis immediately after giving effect to any such purchase, redemption or acquisition of such Capital Stock) is greater than 2.5 to 1.0, the aggregate amount of such purchases, redemptions and acquisitions of such Capital Stock made during the term of this Agreement shall not exceed $1,000,000,000, it being understood and agreed that if the Consolidated Leverage Ratio (calculated on a pro forma basis immediately after giving effect to any such purchase, redemption or acquisition of such Capital Stock) is less than or equal to 2.5 to 1.0 there shall be no limit on the amount of purchases, redemptions and acquisitions of such Capital Stock; provided, however, if the Borrower provides Cash Collateral to secure the Obligations in accordance with Section 2.19, there shall be no limit on the amount of purchases, redemptions and acquisitions of Capital Stock by the Borrower;

     (e) the Borrower may repurchase fractional shares of its Capital Stock in connection with a reverse stock split or make cash payments in Lieu of fractional shares of its Capital Stock in connection with the conversion of securities exerciseable for or convertible into Capital Stock; provided, that no Default exists immediately prior to or immediately after giving effect to any such repurchase or payment; and

     (f) the Borrower may make Restricted Payments in any fiscal year in an aggregate amount not to exceed $100,000,000 during such fiscal year provided that no Default exists prior to and immediately after giving effect to any such Restricted Payment.

     6.9 Transactions with Affiliates and Insiders. Enter into or permit to exist any transaction or series of transactions with any officer, director or Affiliate of such Person other than (a) advances of working capital to any Loan Party, (b) transfers of cash and assets to any Loan Party, (c) indemnification of directors and officers in the ordinary course of business, (d) intercompany transactions expressly permitted by Section 6.2, Section 6.5, Section 6.6, Section 6.7 or Section 6.8, (e) normal and reasonable compensation and reimbursement and advance of expenses of officers and directors in the ordinary course of business, (f) any License and Manufacturing Transaction and (g) except as otherwise specifically limited in this Agreement, other transactions which are entered into in the ordinary course of such Person’s business on terms and conditions substantially as favorable to such Person as would be obtainable by it in a comparable arms-length transaction with a Person other than an officer, director or Affiliate.

     SECTION 7. EVENTS OF DEFAULT

If any of the following events shall occur and be continuing:

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     (a) the Borrower shall fail to pay any principal of any Loan when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan, or any other amount payable hereunder or under any other Loan Document, within five days after any such interest or other amount becomes due in accordance with the terms hereof; or

     (b) any representation or warranty made or deemed made by any Loan Party herein or in any other Loan Document or that is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed made; or

     (c) any Loan Party shall default in the observance or performance of any agreement contained in clause (i) or (ii) of Section 5.4(a), Section 5.7(a) or Section 6 of this Agreement; or

     (d) any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days after notice to Novellus from the Administrative Agent or the Required Lenders; or

     (e) any Group Member shall (i) default in making any payment of any principal of any Indebtedness (including any Guarantee Obligation, but excluding the Loans) on the scheduled due date with respect thereto; or (ii) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (iii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee Obligation) to become payable; provided, that a default, event or condition described in clause (i), (ii) or (iii) of this paragraph (e) shall not at any time constitute an Event of Default unless, at such time, one or more defaults, events or conditions of the type described in clauses (i), (ii) and (iii) of this paragraph (e) shall have occurred and be continuing with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate $25,000,000; or

     (f) (i) any Group Member shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any Group Member

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shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Group Member any case, proceeding or other action of a nature referred to in clause (i) above that (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against any Group Member any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) any Group Member shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any Group Member shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or

     (g) (i) any Person shall engage in any “prohibited transaction” (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any “accumulated funding deficiency” (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of any Group Member or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) any Group Member or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could, in the reasonable judgment of the Required Lenders, reasonably be expected to have a Material Adverse Effect; or

     (h) one or more judgments or decrees shall be entered against any Group Member involving in the aggregate a liability (to the extent not paid or fully covered by insurance as to which the relevant insurance company has acknowledged coverage) of $125,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or

     (i) a Change of Control shall have occurred;

then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to the Borrower, automatically the Revolving Commitments shall immediately terminate and the Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents shall immediately become due and payable, (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the

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Borrower declare the Revolving Commitments to be terminated forthwith, whereupon the Revolving Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable, and (C) the Administrative Agent may exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Borrower.

     SECTION 8. THE ADMINISTRATIVE AGENT

     8.1 Appointment and Authority. Each of the Lenders hereby irrevocably appoints Bank of America to act on its behalf as the Administrative Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Section are solely for the benefit of the Administrative Agent and the Lenders, and neither the Borrower nor any other Loan Party shall have rights as a third party beneficiary of any of such provisions.

     8.2 Rights as a Lender. The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with any Loan Party or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders.

     8.3 Exculpatory Provisions. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, the Administrative Agent:

     (a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

     (b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel,

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may expose the Administrative Agent to liability or that is contrary to any Loan Document or applicable law; and

     (c) shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to any Loan Party or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.

     The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 7 and 9.1) or (ii) in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Administrative Agent by the Borrower or a Lender.

     The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Section 4 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.

     8.4 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan. The Administrative Agent may consult with legal counsel (who may be counsel for the Loan Parties), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

     8.5 Delegation of Duties. The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and

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powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

     8.6 Resignation of Administrative Agent. The Administrative Agent may at any time give notice of its resignation to the Lenders and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may on behalf of the Lenders, appoint a successor Administrative Agent meeting the qualifications set forth above; provided that if the Administrative Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (1) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents and (2) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in this Section. Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent, and the retiring Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Section). The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the retiring Administrative Agent’s resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 9.5 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent was acting as Administrative Agent.

     Any resignation by Bank of America as Administrative Agent pursuant to this Section shall also constitute its resignation as Swing Line Lender. Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, (a) such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring Swing Line Lender and (b) the retiring Swing Line Lender shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents.

     8.7 Non-Reliance on Administrative Agent and Other Lenders. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on

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such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.

     8.8 No Other Duties; Etc. Anything herein to the contrary notwithstanding, none of the bookrunners, arrangers, syndication agents, documentation agents or co-agents shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Administrative Agent or a Lender hereunder.

     8.9 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:

     (a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 2.9 and 9.5) allowed hi such judicial proceeding; and

     (b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 2.9 and 9.5.

Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

     8.10 Guaranty Matters. The Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion, to release any Guarantor from its obligations under the Guaranty if such Person ceases to be a Subsidiary as a result of a transaction permitted hereunder. Upon request by the Administrative Agent at any time, the Required Lenders will

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confirm in writing the Administrative Agent’s authority to any Guarantor from its obligations under the Guaranty, pursuant to this Section 8.10.

     SECTION 9. MISCELLANEOUS

     9.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by the Borrower or any other Loan Party therefrom, shall be effective unless in writing signed by the Required Lenders and the Borrower or the applicable Loan Party, as the case may be, and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, further, that

     (a) no such amendment, waiver or consent shall:

     (i) extend or increase the Revolving Commitment of a Lender (or reinstate any Revolving Commitment terminated pursuant to Section 7) without the written consent of such Lender whose Revolving Commitment is being extended or increased (it being understood and agreed that a waiver of any condition precedent set forth in Section 4.2 or of any Default or a mandatory reduction in Revolving Commitments is not considered an extension or increase in Revolving Commitments of any Lender);

     (ii) postpone any date fixed by this Agreement or any other Loan Document for any payment of principal (excluding mandatory prepayments), interest, fees or other amounts due to the Lenders (or any of them) or any scheduled or mandatory reduction of the Revolving Commitments hereunder or under any other Loan Document without the written consent of each Lender entitled to receive such payment or whose Revolving Commitments are to be reduced;

     (iii) reduce the principal of, or the rate of interest specified herein on, any Loan, or (subject to clause (i) of the final proviso to this Section 9.1) any fees or other amounts payable hereunder or under any other Loan Document without the written consent of each Lender entitled to receive such payment of principal, interest, fees or other amounts; provided, however, that only the consent of the Required Lenders shall be necessary to revise Sections 2.8(b) and (c) or to waive any obligations of the Borrower therein;

     (iv) change Section 2.18 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender directly affected thereby;

     (v) change any provision of this Section 9.1 (a) or the definition of “Required Lenders” without the written consent of each Lender directly affected thereby; or

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     (vi) release the Borrower or, except in connection with a merger or consolidation permitted under Section 6.2 or a Disposition permitted under Section 6.7, all or substantially all of the Guarantors without the written consent of each Lender directly affected thereby;

     (b) unless also signed by the Swing Line Lender, no amendment, waiver or consent shall affect the rights or duties of the Swing Line Lender under this Agreement; and

     (c) unless also signed by the Administrative Agent, no amendment, waiver or consent shall affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document;

provided, however, that notwithstanding anything to the contrary herein, (i) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto, (ii) no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Revolving Commitment of such Lender may not be increased or extended without the consent of such Lender and (iii) each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code of the United States supersedes the unanimous consent provisions set forth herein.

     9.2 Notices.

     (a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in Section 5.2 or subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:

     (i) if to the Borrower or any other Loan Party, the Administrative Agent or the Swing Line Lender, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 9.2; and

     (ii) if to any other Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire.

Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).

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     (b) Electronic Communications. Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Section 2 if such Lender, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Section by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.

     Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

     (c) The Platform. THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.” THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM. In no event shall the Administrative Agent or any of its Related Parties (collectively, the “Agent Parties”) have any liability to the Borrower, any Lender or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Borrower’s or the Administrative Agent’s transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided, however, that in no event shall any Agent Party have any liability to the Borrower, any Lender or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct or actual damages).

     (d) Change of Address, Etc. Each of the Borrower, the Administrative Agent and the Swing Line Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto. Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by

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notice to the Borrower, the Administrative Agent and the Swing Line Lender. In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.

     (e) Reliance by Administrative Agent and Lenders. The Administrative Agent and the Lenders shall be entitled to rely and act upon any notices (including telephonic Loan Notices and Swing Line Loan Notices) purportedly given by or on behalf of any Loan Party even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Loan Parties shall indemnify the Administrative Agent, each Lender and the Related Parties of each of them from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of a Loan Party. All telephonic notices to and other telephonic communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.

     9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

     9.4 Survival of Representations and Warranties. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans and other extensions of credit hereunder.

     9.5 Payment of Expenses; Payments Set Aside.

     (a) Costs and Expenses. The Loan Parties shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates (including the reasonable fees, charges and disbursements of counsel for the Administrative Agent), in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender (including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender), and shall pay all reasonable fees and time charges for attorneys who may be employees of the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Loan Documents, including its rights under this

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Section, or (B) in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans.

     (b) Indemnification by the Loan Parties . The Loan Parties shall indemnify the Administrative Agent (and any sub-agent thereof), each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the reasonable fees, charges and disbursements of any counsel for any Indemnitee), and shall indemnify and hold harmless each Indemnitee from all reasonable fees and time charges and disbursements for attorneys who may be employees of any Indemnitee, incurred by any Indemnitee or asserted against any Indemnitee by any third party or by the Borrower or any other Loan Party arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, or, in the case of the Administrative Agent (and any sub-agent thereof) and its Related Parties only, the administration of this Agreement and the other Loan Documents, (ii) any Loan or the use or proposed use of the proceeds therefrom, (iii) any actual or alleged presence or release of Materials of Environmental Concern on or from any property owned or operated by a Loan Party or any of its Subsidiaries, or any environmental liability related in any way to a Loan Party or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower or any other Loan Party, and regardless of whether any Indemnitee is a party thereto, in all cases, whether or not caused by or arising, in whole or in part, out of the comparative, contributory or sole negligence of the Indemnitee; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee or (y) result from a claim brought by the Borrower or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee’s obligations hereunder or under any other Loan Document, if the Borrower or such Loan Party has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction.

     (c) Reimbursement by Lenders. To the extent that the Loan Parties for any reason fail to indefeasibly pay any amount required under subsection (a) or (b) of this Section to be paid by them to the Administrative Agent (or any sub-agent thereof) or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent) or such Related Party, as the case may be, such Lender’s Revolving Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) in its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent) in connection with such capacity. The obligations of the Lenders under this subsection (c) are subject to the provisions of Section 2.11 (f).

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     (d) Waiver of Consequential Damages, Etc. To the fullest extent permitted by applicable law, no Loan Party shall assert, and each Loan Party hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or the use of the proceeds thereof. No Indemnitee referred to in subsection (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby, except to the extent that such damages are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee.

     (e) Payments. All amounts due under this Section shall be payable not later than ten Business Days after demand therefor.

     (f) Survival. The agreements in subsections (a) — (f) of this Section shall survive the resignation of the Administrative Agent, the replacement of any Lender, the termination of the Revolving Commitments and the repayment, satisfaction or discharge of all the other Obligations.

     (g) Payments Set Aside. To the extent that any payment by or on behalf of any Loan Party is made to the Administrative Agent or any Lender, or the Administrative Agent or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any bankruptcy, insolvency or similar law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender severally agrees to pay to the Administrative Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of the Lenders under clause (b) of the preceding sentence shall survive the payment in full of the Obligations and the termination of this Agreement.

     9.6 Successors and Assigns; Participations and Assignments.

     (a) Successors and Assigns Generally. The provisions of this Agreement and the other Loan Documents shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder or thereunder without the prior written consent of the Administrative Agent and each Lender and no Lender

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may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

     (b) Assignments by Lenders. Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including all or a portion of its Revolving Commitment and the Loans (including for purposes of this subsection (b), participations in Swing Line Loans) at the time owing to it); provided that any such assignment shall be subject to the following conditions:

     (i) Minimum Amounts.

     (A) in the case of an assignment of the entire remaining amount of the assigning Lender’s Revolving Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and

     (B) in any case not described in subsection (b)(i)(A) of this Section, the aggregate amount of the Revolving Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Revolving Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); provided, however, that (A) concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single assignee (or to an assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met and (B) members of an Assignee Group shall be considered one Lender for purposes of establishing the Administrative Agent’s administrative fee pursuant to the Fee Letter;

     (ii) Required Consents. No consent shall be required for any assignment except to the extent required by subsection (b)(i)(B) of this Section and, in addition:

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     (A) the consent of the Borrower (such consent not to be unreasonably withheld or delayed) shall be required unless (1) an Event of Default has occurred and is continuing at the time of such assignment or (2) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund;

     (B) the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required if such assignment is to a Person that is not a Lender, an Affiliate of such Lender or an Approved Fund with respect to such Lender; and

     (C) the consent of the Swing Line Lender (such consent not to unreasonably withheld or delayed) shall be required for any assignment.

     (iii) Assignment and Assumption. The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount of $3,500 provided, however, that the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment. The assignee, if it is not a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

     (iv) No Assignment to Borrower. No such assignment shall be made to the Borrower or any of the Borrower’s Affiliates or Subsidiaries.

     (v) No Assignment to Natural Persons. No such assignment shall be made to a natural person.

     Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.13, 2.14 and 9.5 with respect to facts and circumstances occurring prior to the effective date of such assignment). Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.

     (c) Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Administrative Agent’s office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Revolving Commitments of, and principal amounts of the Loans owing to, each

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Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

     (d) Participations. Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrower or any of the Borrower’s Affiliates or Subsidiaries) (each, a “Participant”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Revolving Commitment and/or the Loans (including such Lender’s participations in Swing Line Loans) owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in Section 9.1 that affects such Participant. Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.13 and 2.14 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.7 as though it were a Lender, provided such Participant agrees to be subject to Section 2.11 as though it were a Lender.

     (e) Limitation on Participant Rights. A Participant shall not be entitled to receive any greater payment under Section 2.12 or 2.13 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.13 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.13(d) as though it were a Lender.

     (f) Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

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     (g) Electronic Execution of Assignments. The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act

     (h) Resignation as Swing Line Lender after Assignment. Notwithstanding anything to the contrary contained herein, if at any time Bank of America assigns all of its Revolving Commitment and Loans pursuant to subsection (b) above, Bank of America may, upon thirty days’ notice to the Borrower, resign as Swing Line Lender. In the event of any such resignation as Swing Line Lender, the Borrower shall be entitled to appoint from among the Lenders a successor Swing Line Lender hereunder; provided, however, that no failure by the Borrower to appoint any such successor shall affect the resignation of Bank of America as Swing Line Lender. If Bank of America resigns as Swing Line Lender, it shall retain all the rights of the Swing Line Lender provided for hereunder with respect to Swing Line Loans made by it and outstanding as of the effective date of such resignation, including the right to require the Lenders to make Base Rate Loans or fund risk participations in outstanding Swing Line Loans pursuant to Section 2.17(c). Upon the appointment of a successor Swing Line Lender, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring Swing Line Lender.

     9.7 Set-off. If an Event of Default shall have occurred and be continuing, each Lender and each of their respective Affiliates is hereby authorized at any time and from time to time, after obtaining the prior written consent of the Administrative Agent, to the fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender or any such Affiliate to or for the credit or the account of the Borrower or any other Loan Party against any and all of the obligations of the Borrower or such Loan Party now or hereafter existing under this Agreement or any other Loan Document to such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Borrower or such Loan Party may be contingent or unmatured or are owed to a branch or office of such Lender different from the branch or office holding such deposit or obligated on such indebtedness. The rights of each Lender and its Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender or its Affiliates may have. Each Lender agrees to notify the Borrower and the Administrative Agent promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application.

     9.8 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Agreement by facsimile transmission shall be effective as delivery of a

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manually executed counterpart hereof. A set of the copies of this Agreement signed by all the parties shall be lodged with Novellus and the Administrative Agent.

     9.9 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

     9.10 Integration. This Agreement and the other Loan Documents represent the entire agreement of the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents.

     9.11 GOVERNING LAW; JURISDICTION; ETC.

     (a) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 AND SECTION 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK) WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THAT WOULD REQUIRE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.

     (b) SUBMISSION TO JURISDICTION. THE BORROWER AND EACH OTHER LOAN PARTY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT THE ADMINISTRATIVE AGENT OR ANY LENDER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY

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OTHER LOAN DOCUMENT AGAINST THE BORROWER OR ANY OTHER LOAN PARTY OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.

     (c) WAIVER OF VENUE. THE BORROWER AND EACH OTHER LOAN PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (B) OF THIS SECTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.

     (d) SERVICE OF PROCESS. EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 9.2. NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

     9.12 Treatment of Certain Information; Confidentiality. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and representatives and to any direct or indirect contractual counterparty (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to a Loan Party and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower.

     For purposes of this Section, “Information” means all information received from a Loan Party or any Subsidiary relating to the Loan Parties or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by such Loan Party or any Subsidiary,

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provided that, in the case of information received from a Loan Party or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

     Each of the Administrative Agent and the Lenders acknowledges that (a) the Information may include material non-public information concerning the Borrower or a Subsidiary, as the case may be, (b) it has developed compliance procedures regarding the use of material non-public information and (c) it will handle such material non-public information in accordance with applicable law, including Federal and state securities laws.

     9.13 WAIVERS OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

     9.14 USA Patriot Act. Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the Act.

     9.15 California Judicial Reference. If any action or proceeding is filed in a court of the State of California by or against any party hereto in connection with any of the transactions contemplated by this Agreement or any other Loan Document, (a) the court shall, and is hereby directed to, make a general reference pursuant to California Code of Civil Procedure Section 638 to a referee (who shall be a single active or retired judge) to hear and determine all of the issues in such action or proceeding (whether of fact or of law) and to report a statement of decision, provided that at the option of any party to such proceeding, any such issues pertaining to a “provisional remedy” as defined in California Code of Civil Procedure Section 1281.8 shall be heard and determined by the court, and (b) without limiting the generality of Section 11.04, the Borrower shall be solely responsible to pay all fees and expenses of any referee appointed hi such action or proceeding.

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     9.16 No Advisory or Fiduciary Relationship. In connection with all aspects of each transaction contemplated hereby, the Borrower acknowledges and agrees, and acknowledges its Affiliates’ understanding, that: (i) the credit facility provided for hereunder and any related arranging or other services in connection therewith (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document) are an arm’s-length commercial transaction between the Borrower and its Affiliates, on the one hand, and the Administrative Agent and BAS, on the other hand, and the Borrower is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents (including any amendment, waiver or other modification hereof or thereof); (ii) in connection with the process leading to such transaction, the Administrative Agent and BAS each is and has been acting solely as a principal and is not the financial advisor, agent or fiduciary, for the Borrower or any of Affiliates, stockholders, creditors or employees or any other Person; (iii) neither the Administrative Agent nor BAS has assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Borrower with respect to any of the transactions contemplated hereby or the process leading thereto, including with respect to any amendment, waiver or other modification hereof or of any other Loan Document (irrespective of whether the Administrative Agent or BAS has advised or is currently advising the Borrower or any of its Affiliates on other matters) and neither the Administrative Agent nor BAS has any obligation to the Borrower or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; (iv) the Administrative Agent and BAS and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower and its Affiliates, and neither the Administrative Agent nor BAS has any obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship; and (v) the Administrative Agent and BAS have not provided and will not provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, waiver or other modification hereof or of any other Loan Document) and the Borrower has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate. The Borrower hereby waives and releases, to the fullest extent permitted by law, any claims that it may have against the Administrative Agent or BAS with respect to any breach or alleged breach of agency or fiduciary duty.

     SECTION 10. GUARANTY

     10.1 The Guaranty. Each of the Guarantors hereby jointly and severally guarantees to each Lender and the Administrative Agent as hereinafter provided, as primary obligor and not as surety, the prompt payment of the Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) strictly in accordance with the terms thereof. The Guarantors hereby further agree that if any of the Obligations are not paid in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise), the Guarantors will, jointly and severally, promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Obligations, the same will be promptly paid in full when due (whether at extended maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) in accordance with the terms of such extension or renewal.

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     Notwithstanding any provision to the contrary contained herein or in any other of the Loan Documents, the obligations of each Guarantor under this Agreement and the other Loan Documents shall be limited to an aggregate amount equal to the largest amount that would not render such obligations subject to avoidance under the bankruptcy, insolvency or similar law or any comparable provisions of any applicable state law.

     10.2 Obligations Unconditional. The obligations of the Guarantors under Section 10.1 are joint and several, absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Loan Documents or any other agreement or instrument referred to therein, or any substitution, release, impairment or exchange of any other guarantee of or security for any of the Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 10.2 that the obligations of the Guarantors hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against the Borrower or any other Guarantor for amounts paid under this Section 10 until such time as the Obligations have been paid in full and the Revolving Commitments have expired or terminated. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by law, the occurrence of any one or more of the following shall not alter or impair the liability of any Guarantor hereunder, which shall remain absolute and unconditional as described above:

     (a) at any time or from time to time, without notice to any Guarantor, the time for any performance of or compliance with any of the Obligations shall be extended, or such performance or compliance shall be waived;

     (b) any of the acts mentioned in any of the provisions of any of the Loan Documents or any other agreement or instrument referred to in the Loan Documents shall be done or omitted;

     (c) the maturity of any of the Obligations shall be accelerated, or any of the Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Loan Documents or any other agreement or instrument referred to in the Loan Documents shall be waived or any other guarantee of any of the Obligations or any security therefor shall be released, impaired or exchanged in whole or in part or otherwise dealt with;

     (d) any Lien granted to, or in favor of, the Administrative Agent or any Lender or Lenders as security for any of the Obligations shall fail to attach or be perfected; or

     (e) any of the Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any Guarantor).

     With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any

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requirement that the Administrative Agent or any Lender exhaust any right, power or remedy or proceed against any Person under any of the Loan Documents or any other agreement or instrument referred to in the Loan Documents or against any other Person under any other guarantee of, or security for, any of the Obligations.

     10.3 Reinstatement. The obligations of the Guarantors under this Section 10 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Obligations is rescinded or must be otherwise restored by any holder of any of the Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Administrative Agent and each Lender on demand for all reasonable costs and expenses (including, without limitation, the fees, charges and disbursements of counsel) incurred by the Administrative Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law.

     10.4 Certain Additional Waivers. Each Guarantor agrees that such Guarantor shall have no right of recourse to security for the Obligations, except through the exercise of rights of subrogation pursuant to Section 10.2 and through the exercise of rights of contribution pursuant to Section 10.6. Each Guarantor waives any rights and defenses that are or may become available to such Guarantor by reason of §§ 2787 to 2855, inclusive, and §§ 2899 and 3433 of the California Civil Code.

     10.5 Remedies. The Guarantors agree that, to the fullest extent permitted by law, as between the Guarantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, the Obligations may be declared to be forthwith due and payable as provided in Section 7 (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7) for purposes of Section 10.1 notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or the Obligations being deemed to have become automatically due and payable), the Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors for purposes of Section 10.1. The Guarantors acknowledge and agree that their obligations hereunder are secured in accordance with the terms of the Collateral Documents and that the Lenders may exercise their remedies thereunder in accordance with the terms thereof.

     10.6 Rights of Contribution. The Guarantors agree among themselves that, in connection with payments made hereunder, each Guarantor shall have contribution rights against the other Guarantors as permitted under applicable law. Such contribution rights shall be subordinate and subject in right of payment to the obligations of such Guarantors under the Loan Documents and no Guarantor shall exercise such rights of contribution until all Obligations have been paid in full and the Commitments have terminated.

     10.7 Additional Guarantor Waivers and Agreements.

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     (a) Each Guarantor understands and acknowledges that if the Lenders foreclose judicially or nonjudicially against any real property security for the Obligations, that foreclosure could impair or destroy any ability that such Guarantor may have to seek reimbursement, contribution or indemnification from the Borrower or others based on any right such Guarantor may have of subrogation, reimbursement, contribution, or indemnification for any amounts paid by such Guarantor under this Guaranty. Each Guarantor further understands and acknowledges that in the absence of this paragraph, such potential impairment or destruction of such Guarantor’s rights, if any, may entitle such Guarantor to assert a defense to this Guaranty based on Section 580d of the California Code of Civil Procedure as interpreted in Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968). By executing this Guaranty, each Guarantor freely, irrevocably, and unconditionally: (i) waives and relinquishes that defense and agrees that such Guarantor will be fully liable under this Guaranty even though the Lenders may foreclose, either by judicial foreclosure or by exercise of power of sale, any deed of trust securing the Obligations; (ii) agrees that such Guarantor will not assert that defense in any action or proceeding which the Lenders may commence to enforce this Guaranty; (iii) acknowledges and agrees that the rights and defenses waived by Holdings in this Guaranty include any right or defense that Holdings may have or be entitled to assert based upon or arising out of any one or more of §§ 580a, 580b, 580d, or 726 of the California Code of Civil Procedure or § 2848 of the California Civil Code; and (iv) acknowledges and agrees that the Lenders are relying on this waiver in creating the Obligations, and that this waiver is a material part of the consideration which the Lenders are receiving for creating the Obligations.

     (b) Each Guarantor waives all rights and defenses that such Guarantor may have because any of the Obligations is secured by real property. This means, among other things: (i) the Lenders may collect from such Guarantor without first foreclosing on any real or personal property collateral pledged by the other Loan Parties; and (ii) if the Lenders foreclose on any real property collateral pledged by the other Loan Parties: (A) the amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (B) the Lenders may collect from such Guarantor even if the Lenders, by foreclosing on the real property collateral, have destroyed any right such Guarantor may have to collect from the Borrower. This is an unconditional and irrevocable waiver of any rights and defenses such Guarantor may have because any of the Obligations is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon § 580a, 580b, 580d, or 726 of the California Code of Civil Procedure.

     (c) Each Guarantor waives any right or defense it may have at law or equity, including California Code of Civil Procedure § 580a, to a fair market value hearing or action to determine a deficiency judgment after a foreclosure.

     10.8 Guarantee of Payment; Continuing Guarantee.

The guarantee in this Section 10 is a guaranty of payment and not of collection, is a continuing guarantee, and shall apply to all Obligations whenever arising.

75

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

BORROWER:	NOVELLUS SYSTEMS, INC., a California corporation
	By:	/s/ William H. Kurtz
		William H. Kurtz
		Executive Vice President and Chief Financial Officer
GUARANTORS:	NOVELLUS SYSTEMS INTERNATIONAL, INC., a California corporation
	By:	/s/ William H. Kurtz
		William H. Kurtz
		President
	NOVELLUS SYSTEMS HOLDING COMPANY, a Delaware Corporation
	By:	/s/ William H. Kurtz
		William H. Kurtz
		President
	SPEEDFAM-IPEC CORPORATION, a Delaware corporation
	By:	/s/ William H. Kurtz
		William H. Kurtz President
	NOVELLUS SYSTEMS, INC. CREDIT AGREEMENT

ADMINISTRATIVE AGENT:	BANK OF AMERICA, N.A., as Administrative Agent
	By:	/s/ Brenda H. Little
		Name: Brenda H. Little Title: Assistant Vice President
	NOVELLUS SYSTEMS, INC. CREDIT AGREEMENT

LENDERS:	BANK OF AMERICA, N.A., as Swing Line Lender and a Lender
	By:	/s/ Lee A. Merkle-Raymend Name: Lee A. Merkle-Raymend Title: Managing Director
	NOVELLUS SYSTEMS, INC. CREDIT AGREEMENT

DEUTSCHE BANK AG NEW YORK BRANCH, as a Lender
By:	/s/ Yvonne Tilden
	Name: Yvonne Tilden Title: Vice President
By:	/s/ Anca Trifan
	Name: Anca Trifan Title: Director
NOVELLUS SYSTEMS, INC. CREDIT AGREEMENT

.	ABN AMRO BANK N.V., as a Lender
	By:	/s/ Dianne D. Barkley
		Name: Dianne D. Barkley Title: Managing Director
	By:	/s/ Tracy Dziedzic
		Name: Tracy Dziedzic Title: Managing Director

MIZUHO CORPORATE BANK LTD., as a Lender
By:	/s/ Bertram Tang	`
	Name: Bertram Tang
	Title: Senior Vice President & Team Leader
NOVELLUS SYSTEMS, INC. CREDIT AGREEMENT

UNION BANK OF CALIFORNIA, N.A., as a Lender
By:	/s/ Allan B. Miner	`
	Name: Allan B. Miner
	Title: Vice President
NOVELLUS SYSTEMS, INC. CREDIT AGREEMENT

BNP PARIBAS, as a Lender
By:	/s/ Stuart Darby
	Name:  Stuart Darby
	Title: Vice President
By :	/s/ Pierre- Nicholas Rogers
	Name: Pierre- Nicholas Rogers Title: Managing Director

HSBC BANK USA, NATIONAL ASSOCIATION, as a Lender
By:	/s/ Jeffrey S. Hughes Name: Jeffrey S. Hughes
	Title: Vice President & Senior Relationship Manager
NOVELLUS SYSTEMS, INC. CREDIT AGREEMENT

EX-10.24

Exhibit 10.24

Novellus Systems,Inc.
4000 North First Street
San Jose, CA 95134
TEL: (408) 943-9700
FAX: (408) 943-3422

August 24, 2005

William Kurtz
9 Shannon Court
Moraga, CA 94556
925-377-7630

Dear Bill:

I am pleased to offer you the position of Executive Vice President & CFO, reporting to Rick Hill, Chief Executive Officer.

Your starting salary will be $13,461.54 bi-weekly, which when annualized is $350,000.

In addition to this, a Stock Option Grant of 100,000 shares will be available to you subject to approval by the Stock Option and Compensation Committee of the Board of Directors. These options will vest 25% per year over a four (4) year period beginning on your date of hire, and will be priced when granted by the Stock Option and Compensation Committee.

You will also receive a restricted stock award in the amount of 50,000 shares of the Company’s common stock. These shares are not stock options, but rather fully paid for shares of restricted stock subject to Board of Director and will vest 20% per year over a five (5) year period beginning on your start date.

You will also be eligible to participate in the Novellus Key Director/Manager Bonus Program, which provides up to 100% of base salary contingent upon successful completion of company and personal performance objectives. Your bonus will be guaranteed 200% of the pro-rated amount if the company pays any bonus for 2005. On-going participation in this program is subject to annual review by the Executive Staff and Compensation Committee.

Novellus has an excellent benefits program including health, dental, vision, life and long-term disability insurance coverage. Novellus pay one hundred percent of the cost of your coverage and a portion for your dependents in accordance with the terms of the benefits program in question.

This offer of employment is contingent upon your:

(1) Completion of the Novellus Employment Application

(2) Completion of the background check authorization and disclosure form and successful execution of a background check in accordance with Company Policy

(3) Signing of the Novellus Proprietary Information Agreement

(4) Signing of the Novellus Employment Practices Acknowledgement

(5) Providing verification of your eligibility for employment in the United States

A Novellus Application, Disclosure and Authorization Form, Employment Eligibility Verification form (1-9), W-4, Employee Data Sheet, and Voluntary Self-Identification Form are enclosed for you to complete and return with your signed offer letter.

Novellus is an at-will employer, which means that either you or the Company has the right to terminate employment at any time, with or without advance notice, and with or without cause, for any reason or no reason.

This offer is the full and complete statement of the parties understanding, supersedes any other communication, whether verbal or written, regarding your employment and can only be modified by a written statement signed by you and an Officer of the Company (or his or her authorized designee).

Please acknowledge your acceptance of this offer by signing and returning one copy of the offer letter with the enclosed forms in the self-addressed stamped envelope. Please discuss your start date with your hiring manager and indicate in the space provided. The entire Novellus staff looks forward to you joining us and becoming a key person with our growing team.

Sincerely,

/s/ Lori Cox
Lori Cox
VP of Human Resources	/s/ William H. Kurtz	August 24, 2005
Novellus Systems, Inc.	Accepted (Signature)	Date
	9/1/05 Start Date

EX-10.25

Exhibit 10.25

Novellus Systems, Inc.
4000 North First Street
San Jose, CA 95134
TEL: (408) 943-9700
FAX: (408) 943-3422

EXECUTIVE EMPLOYMENT AGREEMENT

     This Executive Employment Agreement, dated as of October 12, 2005, is between Novellus Systems, inc. a California corporation (the “Company”) and Dr. Thomas Caulfbeld, an individual currently residing at 119 Hemlock Terrace, Carmel, New York 10512 (“Executive”).

I. POSITION AND RESPONSIBILITIES

A. Position. Executive is employed by the Company to render services to the Company in the position of Executive Vice President of Sales and Marketing, reporting directly to Richard S. Hill, or his successor as Chief Executive Officer. Executive shall perform such duties and responsibilities as are normally related to such position in accordance with the standards of the industry and any enhanced duties now or hereafter assigned to Executive by the Company. Executive shall abide by the rules, regulations, and practices as adopted or modified from time to time in the Company’s sole discretion.

B. Other Activities. Except upon the prior written consent of the Company, Executive will not, during the term of this Agreement, (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that might interfere with Executive’s duties and responsibilities hereunder or create a conflict of interest with the Company.

C. No Conflict. Executive represents and warrants that Executive’s execution of this Agreement, Executive’s employment with the Company, and the performance of Executive’s proposed duties under this Agreement shall not violate any obligations Executive may have to any other employer, person or entity, including any obligations with respect to proprietary or confidential information of any other person or entity.

II. COMPENSATION AND BENEFITS

A. Base Salary. In consideration of the services to be rendered under this Agreement, the Company shall pay Executive an initial salary, payable bi-weekly, at the rate of Three Hundred Eighty-five Thousand Dollars ($385,000) per year (“Base Salary”). The Base

plans established by the Company, and as may be amended from time to time in the Company’s sole discretion.

G. Expenses. The Company shall reimburse Executive for reasonable business expenses incurred in the performance of Executive’s duties hereunder in accordance with the Company’s expense reimbursement guidelines.

III. AT-WILL EMPLOYMENT; TERMINATION BY COMPANY

A. At-Will Termination by Company. The employment of Executive shall be “at-will” at all times. The Company may terminate Executive’s employment with the Company at any time, without any advance notice, for any reason or no reason at all, notwithstanding anything to the contrary contained in or arising from any statements, policies or practices of the Company relating to the employment, discipline or termination of its employees. Upon and after such termination, all obligations of the Company under this Agreement shall cease.

B. Severance. Except in situations where the employment of Executive is terminated For Cause, By Death or By Disability (as defined in Section 4 below), in the event that the Company terminates the employment of Executive at any time prior to the third anniversary of the date Executive begins his employment, Executive will receive a lump-sum amount, within 30 days of such termination, equal to the product of (i) Executive’s then-monthly base salary and (ii) the number of months remaining until the third anniversary of the date Executive begins his employment, payable in the form of salary continuation. Such Severance shall be reduced by any remuneration paid to Executive because of Executive’s employment or self-employment during the severance period, and Executive shall promptly report all such remuneration to the Company in writing. Executive’s eligibility for Severance is conditioned on Executive having first signed a release agreement in the form attached as Exhibit A. Executive shall not be entitled to any severance payments if Executive’s employment is terminated For Cause, By Death or By Disability (as defined in Section IV below) or if Executive’s employment is terminated by Executive (in accordance with Section V below).

IV. OTHER TERMINATIONS BY COMPANY

A. Termination for Cause. For purposes of this Agreement, “For Cause” shall mean: (i) Executive commits a crime involving dishonesty, breach of trust, or physical harm to any person; (ii) Executive willfully engages in conduct that is in bad faith and materially injurious to the Company, including but not limited to, misappropriation of trade secrets, fraud or embezzlement; (iii) Executive commits a material breach of this Agreement, which breach is not cured within twenty days after written notice to Executive from the Company; (iv) Executive willfully refuses to implement or follow a lawful policy or directive of the Company, which breach is not cured within twenty days after written notice to Executive from the Company; or (v) Executive engages in misfeasance or malfeasance demonstrated by

a pattern of failure to perform job duties diligently and professionally, which conduct is not cured within twenty days of written notice to Executive, to the extent such conduct can be cured. The Company may terminate Executive’s employment For Cause at any time, without any advance notice. The Company shall pay to Executive all compensation to which Executive is entitled up through the date of termination, subject to any other rights or remedies of Employer under law; and thereafter all obligations of the Company under this Agreement shall cease.

B. By Death. Executive’s employment shall terminate automatically upon Executive’s death. The Company shall pay to Executive’s beneficiaries or estate, as appropriate, any compensation then due and owing. Thereafter all obligations of the Company under this Agreement shall cease. Nothing in this Section shall affect any entitlement of Executive’s heirs or devisees to the benefits of any life insurance plan or other applicable benefits.

C. By Disability. If Executive becomes eligible for the Company’s long term disability benefits or if, in the sole opinion of the Company, Executive is unable to carry out the responsibilities and functions of the position held by Executive by reason of any physical or mental impairment for more than ninety consecutive days or more than one hundred and twenty days in any twelve-month period, then, to the extent permitted by law, the Company may terminate Executive’s employment. The Company shall pay to Executive all compensation to which Executive is entitled up through the date of termination, and thereafter all obligations of the Company under this Agreement shall cease. Nothing in this Section shall affect Executive’s rights under any disability plan in which Executive is a participant.

V. TERMINATION BY EXECUTIVE

Executive may terminate employment with the Company at any time for any reason or no reason at all, upon four weeks’ advance written notice. During such notice period Executive shall continue to diligently perform all of Executive’s duties hereunder. The Company shall have the option, in its sole discretion, to make Executive’s termination effective at any time prior to the end of such notice period as long as the Company pays Executive all compensation to which Executive is entitled up through the last day of the four week notice period. Thereafter all obligations of the Company shall cease. Notwithstanding any other provision in this Agreement, in the event the Executive resigns for Good Reason (as defined below) (whether or not Good Reason exists due to a Change of Control (as defined below)), the Company shall pay the Executive the Severance described in Section III.B. above and Executive’s restricted stock award described in Section II(C) above shall immediately vest in full. Executive’s eligibility for Severance is conditioned on Executive having first signed a release agreement in the form attached as Exhibit A. “Change of Control” of the Company shall mean a transaction whereby the stockholders of the Company immediately before the transaction do not retain immediately after the transaction ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting securities of the

combined company or the sale of all or substantially all of the Company’s assets. “Good Reason” shall mean any of the following: (a) a demotion or material diminution of the Executive’s duties, responsibilities and/or position in the Company, without the Executive’s consent, (b) a reduction of the Executive’s Base Salary, without Executive’s consent or (c) a material breach of any provision of this Agreement by the Company, absent cure after twenty (20) days’ written notice by the Executive.

VI. TERMINATION OBLIGATIONS

A. Return of Property. Executive agrees that all property (including without limitation all equipment, tangible proprietary information, documents, records, notes, contracts and computer-generated materials) furnished to or created or prepared by Executive incident to Executive’s employment with the Company belongs to the Company and shall be promptly returned to the Company upon termination of Executive’s employment.

B. Resignation, Cooperation and Indemnity. Upon termination of Executive’s employment, Executive shall be deemed to have resigned from all offices and directorships then held with the Company. Following any termination of employment, Executive shall cooperate with the Company in the winding up of pending work on behalf of the Company and the orderly transfer of work to other employees. Executive shall also cooperate with the Company in the defense of any action brought by any third party against the Company that relates to Executive’s employment by the Company provided that the Company pays for all expenses Executive incurs in connection with such cooperation. The Company shall indemnify Executive against any expenses (including attorneys’ fees), liability, judgments, and/or amounts paid as settlement incurred in connection with any dispute, action, suit or legal proceeding arising from or relating to Executive’s employment by the Company or his duties and responsibilities in connection with such employment, except that, in the event it is determined in such dispute, action, suit or legal proceeding that Executive acted in bad faith, without the authority of the Company or outside the scope of his employment, then the Company shall be relieved of any indemnity obligation under this Section and Executive shall be required to reimburse the Company for any amounts already paid by the Company pursuant to this Section.

VII. INVENTIONS AND PROPRIETARY INFORMATION; PROHIBITION ON THIRD PARTY INFORMATION

A. Proprietary Information Agreement. Executive agrees to sign and be bound by the terms of the Proprietary Information and Inventions Agreement, which is attached as Exhibit B (“Proprietary Information Agreement”).

B. Non-Solicitation. Executive acknowledges that because of Executive’s position in the Company, Executive will have access to material intellectual property and confidential information. During the term of Executive’s employment and for one year thereafter, in

Salary shall be paid in accordance with the Company’s regularly established payroll practice. Executive’s Base Salary will be reviewed for increases from time to time in accordance with the established procedures of the Company for adjusting salaries for similarly situated employees and may be adjusted in the sole discretion of the Company. Nothwithstanding any other provision in this Agreement, Executive’s base salary shall not be less than $385,000 per year, unless agreed by Executive.

B. Stock Options. As a condition of Executive entering into this Agreement, the Company shall provide Executive with an option to purchase 125,000 shares of the Common Stock of the Company which option will vest 25% per year over a four (4) year period beginning on the date Executive begins his employment. The exercise price per share of such options will be the fair market value of the Company’s stock on the date Executive begins his employment. Executive’s entitlement to the stock options is conditioned upon Executive’s signing of a standard form of stock option agreement and is subject to its terms and the terms of the stock incentive plan under which the options are granted.

C. Restricted Stock. As a condition of the Executive entering into this Agreement, the Company shall provide Executive with a restricted stock award of 80,000 shares of the Common Stock of the Company. Executive’s entitlement to such restricted stock award is conditioned upon Executive’s signing of a restricted stock purchase agreement and is subject to its terms and the terms of the stock incentive plan under which the restricted stock award is granted, which award shall be subject to a three-year cliff vest. Such three year cliff vesting period will begin on the date Executive begins his employment; provided, however, in the event of Executive’s death or termination without Cause (as defined below), such restricted stock award shall be fully vested.

D. Bonus Plan. Executive will be eligible to participate in the Company’s Key Director/Manager Bonus Program, which provides up to 100% of base salary (the “Target Bonus”) contingent upon successful completion of company and personal performance objectives, with the Target Bonus based 50% on commissions and 50% on corporate objectives, subject to annual review by the Company’s Executive Staff and the Compensation Committee; provided, however, the Company shall pay Executive a bonus of One Hundred Thousand Dollars ($100,000) for the year 2005.

E. Signing Bonus. Both parties shall make their best efforts to allow Executive to begin his employment with the Company by November 1, 2005. So long as Executive has used his best efforts to begin his employment with the Company on or prior to November 1, 2005, Company shall pay Executive a one-time signing bonus in the amount of One Hundred Ninety-one Thousand Three Hundred Four Dollars ($191,304) by no later than thirty (30) days after Executive’s start date.

F. Benefits. Executive shall be eligible to participate in the benefits made generally available by the Company to similarly-situated Executives, in accordance with the benefit

addition to Executive’s other obligations hereunder or under the Proprietary Information Agreement, Executive shall not, for Executive or any third party, directly or indirectly (a) divert or attempt to divert from the Company any business of any kind, including without limitation the solicitation of or interference with any of its customers, clients, members, business partners or suppliers, or (b) solicit or otherwise induce any person employed by the Company to terminate his employment.

C. Non-Disclosure of Third Party Information. Executive represents and warrants and covenants that Executive shall not disclose to the Company, or use, or induce the Company to use, any proprietary information or trade secrets of others at any time, including but not limited to any proprietary information or trade secrets of any former employer, if any; and Executive acknowledges and agrees that any violation of this provision shall be grounds for Executive’s immediate termination and could subject Executive to substantial civil liabilities and criminal penalties. Executive further specifically and expressly acknowledges that no officer or other employee or representative of the Company has requested or instructed Executive to disclose or use any such third party proprietary information or trade secrets.

VIII. ARBITRATION

Executive agrees to sign and be bound by the terms of the Arbitration Agreement, which is attached as Exhibit C.

IX. AMENDMENTS; WAIVERS; REMEDIES

This Agreement may not be amended or waived except by a writing signed by Executive and by a duly authorized representative of the Company other than Executive. Failure to exercise any right under this Agreement shall not constitute a waiver of such right. Any waiver of any breach of this Agreement shall not operate as a waiver of any subsequent breaches. All rights or remedies specified for a party herein shall be cumulative and in addition to all other rights and remedies of the party hereunder or under applicable law.

X. ASSIGNMENT; BINDING EFFECT

A. Assignment. The performance of Executive is personal hereunder, and Executive agrees that Executive shall have no right to assign and shall not assign or purport to assign any rights or obligations under this Agreement. This Agreement may be assigned or transferred by the Company; and nothing in this Agreement shall prevent the consolidation, merger or sale of the Company or a sale of any or all or substantially all of its assets.

B. Binding Effect. Subject to the foregoing restriction on assignment by Executive, this Agreement shall inure to the benefit of and be binding upon each of the parties; the affiliates, officers, directors, agents, successors and assigns of the Company; and the heirs, devisees, spouses, legal representatives and successors of Executive.

XI. NOTICES

All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered: (a) by hand; (b) by a nationally recognized overnight courier service; or (c) by United States first class registered or certified mail, return receipt requested, to the principal address of the other party, as set forth below. The date of notice shall be deemed to be the earlier of (i) actual receipt of notice by any permitted means, or (ii) five business days following dispatch by overnight delivery service or the United States Mail. Executive shall be obligated to notify the Company in writing of any change in Executive’s address. Notice of change of address shall be effective only when done in accordance with this paragraph.

Company’s Notice Address:

Novellus Systems, Inc.
4000 North First Street
San Jose, CA 95134

Executive’s Notice Address:

Dr. Thomas Caulfield
119 Hemlock Terrace
Carmel,NY 10512

XII. SEVERABILITY

If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable, or void, such provision shall be enforced to the fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law.

XIII. TAXES

All amounts paid under this Agreement (including without limitation Base Salary, bonuses and Severance) shall be paid less all applicable state and federal tax withholdings and any other withholdings required by any applicable jurisdiction.

XIV. GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of the State of California.

XV. INTERPRETATION

This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. Sections and section headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Agreement. Whenever the context requires, references to the singular shall include the plural and the plural the singular.

XVI. OBLIGATIONS SURVIVE TERMINATION OF EMPLOYMENT

Executive agrees that any and all of Executive’s obligations under this agreement, including but not limited to Exhibits B and C, shall survive the termination of employment and the termination of this Agreement.

XVII. COUNTERPARTS

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement, but all of which together shall constitute one and the same instrument.

XVIII. AUTHORITY

Each party represents and warrants that such party has the right, power and authority to enter into and execute this Agreement and to perform and discharge all of the obligations hereunder; and that this Agreement constitutes the valid and legally binding agreement and obligation of such party and is enforceable in accordance with its terms.

XIX. ENTIRE AGREEMENT

This Agreement is intended to be the final, complete, and exclusive statement of the terms of Executive’s employment by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements, except for agreements specifically referenced herein (including the Executive Proprietary Information and Inventions Agreement attached as Exhibit B, the Arbitration Agreement attached as Exhibit C, and the Stock Plan and Stock Option Agreement and Restricted Stock Agreement of the Company). To the extent that the practices, policies or procedures of the Company, now or in the future, apply to Executive and are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. Any subsequent change in Executive’s duties, position, or compensation will not affect the validity or scope of this Agreement.

XX. EXECUTIVE ACKNOWLEDGEMENT

EXECUTIVE ACKNOWLEDGES EXECUTIVE HAS HAD THE OPPORTUNITY TO CONSULT LEGAL COUNSEL CONCERNING THIS AGREEMENT, THAT EXECUTIVE HAS READ AND UNDERSTANDS THE AGREEMENT, THAT EXECUTIVE IS FULLY AWARE OF ITS LEGAL EFFECT, AND THAT EXECUTIVE HAS ENTERED INTO IT FREELY BASED ON EXECUTIVE’S OWN JUDGMENT AND NOT ON ANY REPRESENTATIONS OR PROMISES OTHER THAN THOSE CONTAINED IN THIS AGREEMENT.

In Witness Whereof, the parties have duly executed this Agreement as of the date first written above.

Novellus Systems, Inc.:		Executive:
By:	/s/ Richard S. Hill Richard S. Hill Chief Executive Officer	/s/ Dr. Thomas Caulfield Dr. Thomas Caulfield

EX-10.26

Exhibit 10.26

Novellus Systems,Inc.
4000 North First Street
San Jose, CA 95134
TEL: (408) 943-9700
FAX: (408) 943-3422

February 2,2005

Ginetto Addiego



Dear Ginetto:

I am pleased to offer you the position of Senior Vice President of Corporate Operations, reporting to Rick Hill, Chief Executive Officer.

Your starting salary will be $11,923.08 bi-weekly, which when annualized is $310,000.

In addition to this, a Stock Option Grant of 100,000 shares will be available to you subject to approval by the Board of Directors. These options will vest 25% per year over a four (4) year period beginning on the date of grant typically the 3^rd Thursday of the month after your start date.

You will also receive a restricted stock award in the amount of 30,000 shares of the Company’s common stock. These shares are not stock options, but rattier fully paid for shares of restricted stock subject to Board of Director and Shareholder approval in April of 2005. Shares will vest 10,000 per year over a three (3) year period beginning on your start date.

You will also be eligible to participate in the Novellus Key Director/Manager Bonus Program, which provides up to 100% of base salary contingent upon successful completion of company and personal performance objectives. This bonus will be pro-rated for the first year. On-going participation in this program is subject to annual review by the Executive Staff and Compensation Committee.

Novellus has an excellent benefits program including health, dental, vision, life and long-term disability insurance coverage. Novellus will pay one hundred percent of the cost of your coverage and a portion for your dependents in accordance with the terms of the benefits program in question.

This offer of employment is contingent upon your:

(1) Completion of the Novellus Employment Application

(2) Completion of the background check authorization and disclosure form and successful execution of a background check in accordance with Company Policy

(3) Signing of the Novellus Proprietary Information Agreement

(4) Signing of the Novellus Employment Practices Acknowledgement

(5) Providing verification of your eligibility for employment in the United States

A Novellus Application, Disclosure and Authorization Form, Employment Eligibility Verification form (1-9), W-4, Employee Data Sheet, and Voluntary Self-Identification Form are enclosed for you to complete and return with your signed offer letter.

Novellus is an at-will employer, which means that either you or the Company has the right to terminate employment at any time, with or without advance notice, and with or without cause, for any reason or no reason.

This offer is the full and complete statement of the parties understanding, supersedes any other communication, whether verbal or written, regarding your employment and can only be modified by a written statement signed by you and an Officer of the Company (or his or her authorized designee). This offer is valid until February 11,2005.

Please acknowledge your acceptance of this offer by signing and returning one copy of the offer letter with the enclosed forms in the self-addressed stamped envelope. Please discuss your start date with your hiring manager and indicate in the space provided. The entire Novellus staff looks forward to you joining us and becoming a key person with our growing team.

Sincerely,

/s/ Lori Cox
Lori Cox
Vice President of Human Resources	/s/ Ginetto Addiego	2/7/2005
Novellus Systems, Inc.	Accepted (Signature)	Date
	2/14/05 Start Date

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF NOVELLUS

Novellus Systems International, Inc.	Novellus Systems Japan
Novellus Systems Export, Inc.	KSP Bldg., R&D C-10F,
4000 N. First St.	3-2-1 Sakado, Takatsu-ku, Kawasaki-shi
San Jose, CA 95134 USA	Kanagawa-ken 213-0012, Japan
T 408.943.9700	T 81.44.850.1500
F 408.943.3422	F 81.44.850.1778
Novellus Systems BV	Novellus Systems Korea Co. Ltd.
European Logistics	2F, DaeWoo Engineering Building
Ganderweg 1	9-3 SuNae-Dong, BunDang-Ku,
PO Box 75519	SungNam City
Luchthaven, Schiphol	Kyungki-Do, 463-020, Korea
The Netherlands 1118 ZN	T 82.31.738.1114
T 31.20.655.6205	F 82.31.714.9921
F 31.20.655.6195
	Novellus Systems (H.K.) Ltd., Taiwan
Novellus Systems SARL	9F, No. 6, Lane 99
Parc de la Julienne, Bat. D, 1er etage,	Pu-Ting Road
91830 Le Coudray Montceaux	Hsinchu City, Taiwan 30801 R.O.C.
France	T 886.3.5730550
T 33.1.64.93.7070	F 886.3.5730553
F 33.1.64.93.8787
Novellus Systems SARL	Novellus Systems Semiconductor
Parc Technologique des Fontaines	Equipment (Shanghai) Co. Ltd.
Chemin des Fontaines	Unit 10 SOHO Building
38190 Bernin	439 Chun Xiao Road, Pudong New Area,
France	Shanghai 201203, P.R.China
T 33.4.76.08.0000	T 86.21.50802056
F 33.4.76.08.7667	F 86.21.50802103
Novellus Systems GmbH	Novellus Systems International
Moritzburger Weg 67, Entrance E 1st Floor	Trading (Shanghai) Co. Ltd.
01109 Dresden, Germany	Rm. 237, No. 2, Tai Zhong South Road, Waigaoqiao Free Trade
T 49.351.8838.3200	Zone, Pudong New Area
F 49.351.8838.3299	Shanghai 200131, P.R. China
	T 86.21.50802056
	F 86.21.50802103
Novellus Systems Ireland Ltd.	Novellus Singapore Pte LTD
Mill Street	3 Tampines Grande
Maynooth, County Kildare	#09-01 AIA Tampines
Ireland	Singapore 528799
T 353.1.629.3270	T 65.6353.9288
F 353.1.601.6584	F 65.6353.6833
Novellus Systems Italy	Novellus Systems (Malaysia) Sdn. Bhd.
Via 16a Strada 48-50	Suite B3-1 Ground Floor
Zona Industriale	Kulim Hi-Tech Park,
Piano d’Arci	09000 Kulim
95121 Catania, Italy	Kedah Darul Amam, Malaysia
T 39.095.592.810	T 604.403.3368
F 39.095.592.810	F 604.403.3378

Novellus Systems Israel Ltd.	Novellus Systems (India) Pvt. Ltd.
2 Tzoran St. (0-3S)	Le Parc Richmonde, 2nd Fl.
The New Industrial Zone	51 Richmond Road
Qiryat-Gat, 82109	Bangalore, India 560025
T 972.7.666.2743	T 91.80.22296146
F 972.7.666.6362	F 91.80.22296145
SpeedFam-IPEC, Inc.	SpeedFam-IPEC Limited
4717 E. Hilton Avenue, Suite 200	Brindley Road, Dodwells Bridge
Phoenix, AZ 85034	Industrial Estates
T 480.379.0147	Hinckley Leicestershire
F 480.894.5275	LE10 3BY England
	T 44.1455.631707
	F 44.1455.611360
Peter Wolters Surface Technologies
GmbH & Co KG	Peter Wolters Aktiengesellschaft
Büsumer Str. 96	Büsumer Str. 96
24768 Rendsburg	24768 Rendsburg
Germany	Germany
T 49.4331.458.0	T 49.4331.458.0
F 49.4331.290	F 49.4331.290
Peter Wolters Verwaltungs GmbH	Peter Wolters Laepp — and Poliertechnik GmbH
Büsumer Str. 96	Benzstr. 17
24768 Rendsburg	D-70771 Leinfelden-Echterdingen
Germany	T 49.711.903.632.0
T 49.4331.458.0	F 49.711.903
F 49.4331.290
Peter Wolters Japan Co. Ltd.	RIWO Drahtwerk GmbH
Taisho Building	Büsumer Str. 96
12-28, Esaka-cho 1-chome	24768 Rendsburg
Suita-shi	Germany
Osaka, Japan	T 49.4331.458.0
T 81.66.821.7024	F 49.4331.290
F 81.66.821.7031
Peter Wolter UK Ltd.	Voumard (UK) Limited.
Brindley Road, Dodwells Bridge	15 Connelly Close
Industrial Estates	Plains Estate Arnold
Hinckley Leicestershire	Nottingham NG5 6RA
LE10 3BY	United Kingdom
United Kingdom	T 0044.115.967.0069
T 44.1455.63.17.07
F 44.1455.61.13.60
Voumard Machines Co S.A.	Voumard Incorporated
Rouges-Terres 61	175 Clearbrook Road
2068 Hauterive	P.O. Box 445
Switzerland	Elmsford, NY 10523-0445 USA
T 0041.32727.3333	T 914.345.3000

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement (Form S-8 No. 33-126807) pertaining to the Novellus Systems, Inc. 2001 Stock Incentive Plan and Novellus Systems, Inc. Amended and Restated 1992 Employee Stock Purchase Plan,

(2) Registration Statement (Form S-8 Nos. 33-62807, 333-11825, 333-35487, 333-65567, 333-80453) pertaining to the Novellus Systems, Inc. Amended and Restated 1992 Stock Option Plan, and the Novellus Systems, Inc. Amended and Restated 1992 Employee Stock Purchase Plan,

(3) Registration Statement (Form S-8 No. 333-54056) pertaining to the Gasonics International Corporation 1994 Stock Option/Stock Issuance Plan, and the Gamma Precision Technology 1998 Stock Option Plan,

(4) Registration Statement (Form S-8 No. 333-54058) pertaining to the Novellus Systems, Inc. Amended and Restated 1992 Stock Option Plan,

(5) Registration Statement (Form S-8 No. 333-70146) pertaining to the Novellus Systems, Inc. 2001 Stock Incentive Plan,

(6) Registration Statement (Form S-8 No. 333-54056) pertaining to the GaSonics International Corporation 1994 Stock Option/Stock Issuance Plan, Gamma Precision Technology 1998 Stock Option Plan, GaSonics International Corporation 2000 Supplemental Stock Option Plan, and the Novellus Systems, Inc. 401(k) Plan,

(7) Registration Statement (Form S-8 No. 333-89742) pertaining to the Novellus Systems, Inc. Amended and Restated 1992 Stock Option Plan, Novellus Systems, Inc. Amended and Restated 1992 Employee Stock Purchase Plan, Novellus Systems, Inc. 2001 Stock Incentive Plan, Novellus Systems, Inc. 2001 Non-Qualified Stock Option Plan, Novellus Systems, Inc. 401(k) Plan, GaSonics International Corporation 1994 Stock Option/Stock Issuance Plan, Gamma Precision Technology 1998 Stock Option Plan, and the GaSonics International Corporation 2000 Supplemental Stock Option Plan,

(8) Registration Statement (Form S-8 No. 333-101730) pertaining to the SpeedFam, Inc. 1991 Employee Incentive Stock Option Plan, as amended, SpeedFam-IPEC, Inc. 1992 Stock Option Plan, as amended, 1995 Stock Plan for Employees and Directors of SpeedFam-IPEC International, Inc., as amended, 2001 Nonstatutory Stock Option Plan of SpeedFam-IPEC, Inc., and the Stand-Alone Nonstatutory Stock Option Agreement of SpeedFam-IPEC, Inc., dated June14, 2001,

(9) Registration Statement (Form S-8 No. 333-102784) pertaining to the Novellus Systems, Inc. 2001 Non-Qualified Stock Option Plan, as amended,

(10) Registration Statement (Form S-8 No. 333-121248) pertaining to the Novellus Systems, Inc. Retirement Plan, and

(11) Registration Statement (Form S-8 No. 333-117169) pertaining to the New Employee Stand-Alone Non-Statutory Stock Option Agreement, New Employee Stand-Alone Restricted Stock Award and the Novellus Systems, Inc. Retirement Plan;

of our reports dated February 27, 2007, with respect to the consolidated financial statements and schedule of Novellus Systems, Inc., Novellus Systems, Inc.’s management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Novellus Systems, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2006.

/s/ Ernst & Young LLP  

San Jose, California
February 27, 2007

EX-31.1

Exhibit 31.1

NOVELLUS SYSTEMS, INC.

CERTIFICATION

I, Richard S. Hill, certify that:

1. I have reviewed this annual report on Form 10-K of Novellus Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2007	By:	/s/ Richard S. Hill
		Richard S. Hill
		Chairman of the Board of Directors and Chief Executive Officer

EX-31.2

Exhibit 31.2

NOVELLUS SYSTEMS, INC.

CERTIFICATION

I, William H. Kurtz, certify that:

1. I have reviewed this annual report on Form 10-K of Novellus Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2007	By:	/s/ William H. Kurtz
		William H. Kurtz
		Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

NOVELLUS SYSTEMS, INC.

CERTIFICATION

In connection with the annual report of Novellus Systems, Inc. (the “Company) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission (the “Report), I, Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: February 26, 2007	By:	/s/ Richard S. Hill
		Richard S. Hill
		Chairman of the Board of Directors and Chief Executive Officer

EX-32.2

Exhibit 32.2

NOVELLUS SYSTEMS, INC.

CERTIFICATION

In connection with the annual report of Novellus Systems, Inc. (the “Company) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission (the “Report), I, William H. Kurtz, Executive Vice President and Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: February 26, 2007	By:	/s/ William H. Kurtz
		William H. Kurtz
		Executive Vice President and Chief Financial Officer