10-K

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

Form 10-K

(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, 2007
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 (Zip code)
(Address of principal executive offices)

(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 (NASDAQ Global Select Market)

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.  o

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

Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

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

As of June 30, 2007 the aggregate market value of voting and non-voting stock held by non-affiliates of the Registrant was $3,548,697,995 based on the average of the high and low price of the Common Stock as reported on the NASDAQ National Market on such date.

The number of shares of the Registrant’s Common Stock outstanding on February 22, 2008 was 101,966,783.

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 2008 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.

2007 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

			Page
PART I
	Item 1:	Business		2
	Item 1A:	Risk Factors		11
	Item 1B:	Unresolved Staff Comments		19
	Item 2:	Properties		19
	Item 3:	Legal Proceedings		20
	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		21
	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		43
	Item 8:	Financial Statements and Supplementary Data		46
	Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		82
	Item 9A:	Controls and Procedures		82
	Item 9B:	Other Information		85
PART III
	Item 10:	Directors, Executive Officers and Corporate Governance		85
	Item 11:	Executive Compensation		85
	Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		85
	Item 13:	Certain Relationships and Related Transactions, and Director Independence		86
	Item 14:	Principal Accountant Fees and Services		86
PART IV
	Item 15:	Exhibits and Financial Statement Schedules		86
Signatures				90
EXHIBIT 10.9
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 primarily develops, manufactures, sells and supports equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. Customers for this equipment manufacture chips for sale or for incorporation in their own products, or provide chip-manufacturing services to third parties. Novellus also develops, manufactures, sells and supports grinding, lapping and polishing equipment for a broad spectrum of industrial applications.

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, 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. Following each deposition step, a planarization or polishing process is employed to achieve a flat surface for the manufacturing steps that follow. To construct copper wires, the manufacturing process used is a mirror image of that described for aluminum: the insulator is etched and the copper wiring is deposited within the etched insulator. 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 semiconductor manufacturing products are used in a number of different process steps. Our 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 film which can be etched with patterns for depositing conductive materials into the etched dielectric. Our CVD Tungsten systems are used to deposit small tungsten conductive lines or plugs between layers of metal. Our PVD systems deposit conductive aluminum and copper metal layers by sputtering metal atoms from the surface of a target source. Our Electrofill^tm ECD systems deposit copper to form the conductive wiring on integrated circuits using copper interconnects.

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 (Peter Wolters), a German company specializing in lapping and polishing equipment sold for a broad range of industrial applications. With the acquisition of Peter Wolters, Novellus entered into market sectors beyond semiconductor manufacturing. In November 2005, we acquired Voumard Machine Co. SA (Voumard), a manufacturer of high-precision machine tools based in Neuchatel, Switzerland. The Voumard acquisition further expanded Peter Wolter’s product offerings to include specialized, high-precision grinding equipment.

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.

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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 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 our other filings with the SEC.

Semiconductor Industry Background

For more than twenty years 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 maturing. While unit demand for chips continues to rise, their average selling prices continue to decline. Semiconductor equipment is a major factor in the cost structure of the semiconductor industry, and there is growing pressure on chip manufacturers to reduce manufacturing costs while increasing the performance of their products. 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 more than 40 years later, states that the density of the 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, with up to eleven layers of interconnect circuitry. By increasing circuit density, manufacturers can pack more electronic components on a given surface area, and thereby provide higher performance at about 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 typically requires fewer metal layers than one made with aluminum, providing a considerable reduction in manufacturing cost. In comparison to aluminum, copper wiring also allows a substantial improvement in device speed and a significant reduction in device power consumption.

A similar transition is underway 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, increasing speed and lowering power consumption. 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 300mm wafers because of the potential manufacturing cost advantages in comparison to 200 mm wafers. 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. Approximately 84% of all wafer fabrication equipment we sold during 2007 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. 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

It is Novellus’ business objective 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 processing architecture, which is incorporated in many of our products, is an example of our commitment to providing superior productivity and manufacturing repeatability. 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 that 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. 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, repair and ongoing support of those systems. We operate a global network of customer support services that provide 24-hour access to technical experts, documentation, spare parts, and product upgrades. We provide training and support programs that are custom-tailored to the needs of individual customers that range from turnkey maintenance solutions to economical self-maintenance plans.

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 as our new international headquarters for systems sales. This change 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.

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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 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 trench isolation (STI) films as part of the transistor formation, as well as to deposit pre-metal 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 300mm wafers. Concept Three SPEED is based on the production-proven Concept Two product.

SPEED NExT^tm — 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 for 300mm 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^tm — 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. In 2007, we introduced three new versions of VECTOR: the VECTOR Express^tm, optimized for deposition of thin films of less than 1000 angstroms; the VECTOR Express AHM for ashable hard mask film deposition; and the VECTOR Extreme^tm, designed for the demands of high-volume memory “megafabs.”

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UVTP Products

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 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, as well as conductive aluminum wires in a subtractive aluminum manufacturing process. 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^tm — In 2000, we introduced the 300mm INOVA xT, which also 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.

INOVA NExT HCM IONX^tm — The latest variant of the INOVA platform, introduced in 2007, incorporates a copper resputtering technology called HCM IONX to improve copper seed conformality, eliminate low-k dielectric damage, and extend PVD technology for seed deposition applications at 32 nm.

ECD Products

Our Electrofill products are used to build the copper primary conductive wires 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, featuring a proprietary plating cell, was introduced in 1998. When coupled with the INOVA PVD product, SABRE provides a complete manufacturing module for building 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 platform 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 materials other than copper.

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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^® 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.

GAMMA^® 2130 — The GAMMA 2130 system is our photoresist strip system for 300mm wafers. Like the GAMMA 2100, the GAMMA 2130 has a multi-station sequential processing architecture.

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 in order 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 Novellus 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. Like MOMENTUM, XCEDA also has four polishing modules and a through-the-pad slurry delivery system.

Industrial Applications Group Products

We established our Industrial Applications Group in 2004 with the acquisition of Peter Wolters, a German company. We further expanded with the acquisition of Voumard in 2005. 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.

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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, including Europe, the United States, Korea, Japan, China, Taiwan, Southeast Asia and Israel. 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.

Customers

Intel and Samsung each accounted for 11%, 13% and 17% of our net sales for the years ended December 31, 2007, 2006 and 2005, respectively. Sales to our ten largest customers in 2007, 2006, and 2005 accounted for 59%, 63%, and 66% of our net sales, respectively. We expect that sales of our products to relatively few customers, none of which has 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 for the year ended December 31, 2007 were $1.2 billion, or 74% of net sales. For the year ended December 31, 2006, export sales 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.

Backlog

As of December 31, 2007, our backlog was $354.5 million, with no cancellations in the period from December 31, 2007 to February 22, 2008. As of December 31, 2006, our backlog was $566.0 million. 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 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 CVD, PVD and ECD 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.

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In the Industrial Application Group (IAG), we focus our research activities on developing new products and improving existing products for the prime wafer industry (wafer grinding, double side polishing, CMP) as well as for the metal and ceramic industry (grinding, lapping, deburring). Continuous improvements of existing systems and processes enable us to further meet our customer’s requirements, as specifications for workpiece tolerances continue to tighten. With new mechatronic concepts we will be able to control the process conditions in our systems more accurately and achieve better results at lower costs. New products and processes are developed to provide solutions for further production steps beside those that are already covered by our systems. Moreover, we are investigating new technologies in high precision machining and surface finish to extend our existing product portfolio and maintain our technical leadership.

Expenditures for research and development during 2007, 2006, and 2005 were $241.0 million, $244.2 million, and $247.3 million, respectively. These expenditures represented approximately 15%, 15%, and 18% of our net sales in 2007, 2006, and 2005, 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 outsource 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 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 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.

In the Semiconductor Group, 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 for 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 capabilities 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 PSK, Inc. In the CMP market, our major competitors are Applied and Ebara Corporation.

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The primary competitive factors in the market for machine tools are reliability, price, delivery time, service and technological characteristics. Manufacturers can be categorized by the size of material their products can machine and the precision level they can achieve. IAG’s primary competition comes from several Japanese, German, Taiwanese and Korean manufacturers.

Patents and Proprietary Rights

We intend to continue to pursue patent and trade secret protection for our technology. We currently hold 656 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.

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, 2007, we had 3,698 full-time and temporary employees. Certain employees outside of the United States in the Industrial Applications Group 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.

10

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 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 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.

11

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 reduced the demand for semiconductor processing equipment, including equipment that we manufacture and market. The rate of changes in demand has accelerated, rendering the global semiconductor industry more volatile. During periods of reduced and declining demand, we must be able to quickly and effectively align our costs with prevailing market conditions, and at the same time 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 or develop sufficient manufacturing capacity, and hire and assimilate a sufficient number of qualified people to meet customer demand. In the period from 2001 through 2006, we implemented restructuring plans to align our business with fluctuating conditions. Future restructurings may be required to respond to future changes. Net orders, net sales and operating results may be adversely affected if we fail to respond to changing industry cycles in a timely and effective manner. We experienced a decrease in bookings beginning in the fourth quarter of 2006 and continuing through the third quarter of 2007. In the fourth quarter of 2007 our bookings increased over the third quarter of 2007. We could experience decreases in bookings in the future, and as a result, our net sales and operating results may be adversely affected.

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, ability to reduce price through product bundling, greater experience with high-volume manufacturing, greater customer service capabilities, or larger and more established sales organizations and customer bases. To 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 may adversely affect our profitability and our ability to respond to pricing pressures from competitors and customers.

12

Our growth and ability to meet customer demands depend in part on our ability to obtain from our suppliers timely deliveries of parts, components and subassemblies for the manufacture and support of our products. Although we make reasonable efforts to ensure that such parts are available from multiple suppliers, certain key parts may be obtained only 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 or from a small group of 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 adversely affected.

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 may be 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 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 sell to a limited number of customers, and we expect that sales to 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. Because products are configured to customer specifications, changing, rescheduling or canceling may result in significant non-recoverable costs.

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;

•  Potential 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;

•  Adverse conditions in credit markets;

•  Global or regional economic downturns; and

•  Political instability, natural disasters, acts of war or terrorism.

13

We enter into foreign currency forward exchange contracts to hedge against the short-term impact of currency fluctuations, including forecasted sales transactions denominated in Japanese yen. 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 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, legal or regulatory changes, terrorism in Asia or geo-political instability in Asia, including the possible outbreak of hostilities or epidemics involving Singapore, 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.

From time to time we may enhance, modify or upgrade our enterprise resource planning and other key software applications, which could cause unexpected problems to occur and could cause disruption to the management of our business.

From time to time, we may enhance, modify or upgrade our enterprise resource planning (ERP) system used for our worldwide operations, as well as other key software applications used in our operations. Our ERP system is integral to our ability to accurately and efficiently maintain our books and records, record our transactions, provide critical information to our management and prepare our financial statements.

Enhancements may eventually become more costly, difficult and time-consuming to purchase and implement than we currently anticipate. We may encounter unexpected difficulties or costs or other challenges, any of which may disrupt our business or cause delays in the reporting of our financial results. Our existing systems, procedures or controls may not be adequate to support our operations and require us to change our internal business practices. Corrections and improvements may be required as we enhance, modify or upgrade our systems, procedures and controls, and could cause us to incur additional costs and require additional management attention, placing burdens on our internal resources. If we fail to manage these changes effectively, it could adversely affect our ability to manage our business and our operating results.

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.

14

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 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 in the absence of infringement by our products of third parties’ intellectual property rights, we have elected in the past and may in the future elect to seek licenses or enter into settlements to avoid the costs of protracted litigation and the 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.

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 with consultants and other parties. If these agreements are breached, our remedies may not be sufficient to cover our losses.

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 assurance 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.

Other Litigation

In addition to the litigation risks mentioned above, we are currently involved or 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.

15

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

We are subject to taxation in the United States and other 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 and services and the use of intangible assets. We could face significant future challenges on these transfer pricing issues in one or more jurisdictions and may not achieve anticipated tax rate reductions related to the international business structure implemented in 2006. 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 equipment industry.

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 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.

16

We face risks associated with acquisitions, divestitures, and other transactions.

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.

When we make a decision to sell assets or a business, we may encounter difficulty completing the transaction as a result of a range of possible factors such as new or changed demands from the buyer. These circumstances may cause us to incur additional time or expense or to accept less favorable terms, which may adversely affect the overall benefits of the transaction.

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

Our financial results may fall short of anticipated levels; forecasting revenues and profitability is complex and our forecasts may be inaccurate.

Management typically provides quarterly financial forecasts. These forecasts when made are based on assumptions believed to be reasonable at the time. However, actual results may vary from forecasted results for a variety of reasons. Our lengthy sales cycle, coupled with customers’ competing capital budget considerations, make the timing of customer orders difficult to predict. In addition, our backlog at the beginning of a quarter typically does not include all orders required to achieve our sales objectives for that quarter and is not a reliable indicator of our future sales. As a result, our revenues and operating results for a quarter depend on our shipping orders as scheduled during that quarter, receiving customer acceptance of shipped products during the quarter, and obtaining new orders for products to be shipped in that same quarter. Any delay in, or cancellation of, scheduled shipments and customer acceptances or in shipments from new orders could materially and adversely affect our financial results.

17

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:

•  Economic conditions in the electronics and semiconductor industry generally and the equipment industry specifically;

•  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;

•  Emergence of new industry standards;

•  Competitive pricing pressures;

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

•  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;

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

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

•  Foreign currency exchange rate fluctuations;

•  Fluctuation in warranty costs;

•  Variability in manufacturing yields; and

•  Ability to fund capital requirements.

As of February 27, 2008, we held approximately $123.5 million of tax free investments, classified as current assets, with an auction reset feature (“auction rate securities”) whose underlying assets are generally student loans which are substantially backed by the federal government or closed-end municipal funds. From February 1, 2008 through February 27, 2008, $71.7 million of our auction rate securities were part of failed auctions and there is no assurance that currently successful auctions on the other auction rate securities in our investment portfolio will continue to succeed. As a result our ability to liquidate our investment and fully recover the carrying value of our investment in the near term may be limited or not exist. An auction failure means that the parties wishing to sell securities could not. All of our auction rate securities, including those subject to the failure, are currently rated AAA, the highest rating by a rating agency. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. We believe we will be able to liquidate our investment without significant loss within the next year, and we currently believe these securities are not significantly impaired, primarily due to either the government guarantee of the underlying securities or more than 200% collateral in the case of closed-end funds. However, it could take until the final maturity of the underlying notes (up to 50 years) to realize our investments’ recorded value. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.

18

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 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 (EU). The EU also makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. Other countries, such as the United States, China and Japan, have enacted or may enact similar laws or regulations similar to the EU. 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, 2007 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		32,000
	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	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
				Total	Owned		1,325,000	Sq. Ft.
					Leased		32,000	Sq. Ft.

In our Semiconductor Group, we also lease several domestic field offices totaling approximately 28,000 square feet of space and several sites outside the United States totaling approximately 242,000 square feet of space, that we use as sales and customer service centers. Our facilities in Europe include approximately 73,000 square feet of leased space in various countries including Germany, France, Italy, Ireland, and Israel. Our facilities in Asia include approximately 169,000 square feet of leased space in various countries including China, India, Japan, Korea, Malaysia, Singapore, Taiwan and Vietnam. We also domestically own and lease approximately 571,000 square feet of space of which approximately 398,000 square feet is leased to others and the remaining is unutilized.

In our Industrial Applications Group, we also lease five field offices totaling approximately 28,000 square feet in Germany, Switzerland, China and Japan. We also own and lease to others 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), declaratory relief and injunctions for causes of actions involving alleged breach of contract, fraud, unfair competition and breach of warranty. The Superior Court dismissed Linear’s claims for fraud and unfair competition on October 5, 2004. The Court of Appeal affirmed this dismissal on June 18, 2007. Trial on the remaining claims is currently set for November 10, 2008. At this time, we cannot predict the ultimate outcome of this case, nor can we estimate a range of potential loss, if any. However, we believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Other Litigation

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.

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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:

	2007
	High		Low
First Quarter	$	34.82	$	29.96
Second Quarter		33.85		28.37
Third Quarter		33.03		25.90
Fourth Quarter		28.72		25.65

	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

As of February 22, 2008, there were 773 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.

Following is a summary of our stock repurchases for the quarter ended December 31, 2007.

					Total Number of		Approximate Dollar
					Shares Purchased as		Value of Shares
					Part of Publicly		that May yet be
	Total Number of		Average Price Paid		Announced Plans or		Purchased Under the
Period	Shares Purchased		Per Share		Programs		Plans or Programs
September 30, 2007 through November 3, 2007		2,883,762	$	27.84		2,883,762	$	1.3 billion
November 4, 2007 through December 1, 2007		6,176,907	$	26.19		6,176,907	$	1.1 billion
December 2, 2007 through December 31, 2007		4,681,008	$	26.62		4,681,008	$	1.0 billion
Total		13,741,677	$	26.68		13,741,677	$	1.0 billion

At various times, the Board of Directors has authorized us to repurchase our outstanding common stock, including approvals of $1.0 billion on September 14, 2004 and another $1.0 billion on October 26, 2007. As of December 31, 2007, we had a remaining amount of $1.0 billion available for stock repurchases under these authorizations.

In addition to shares repurchased above, we withheld 11,257 shares through net share settlements during the three months ended December 31, 2007 upon the vesting of restricted stock awards to cover tax withholding obligations.

21

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, 2002 to December 31, 2007.

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 12/31/02 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,
	2002		2003		2004		2005		2006		2007
Novellus Systems, Inc.	$	100.00	$	149.75	$	99.32	$	85.90	$	122.58	$	98.18
S & P 500	$	100.00	$	128.68	$	142.69	$	149.70	$	173.34	$	182.87
RDG Technology Composite	$	100.00	$	150.27	$	153.63	$	158.57	$	173.85	$	204.38

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, 2007 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 and Peter Wolters AG on June 28, 2004. 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,
	2007			2006			2005			2004			2003
	(In thousands, except per share data)
Consolidated Statements of Operations Data:
Net sales	$	1,570,049		$	1,658,516		$	1,340,471		$	1,357,288		$	925,070
Gross profit		769,189	(1)		824,349	(3,4)		599,126	(6,7)		665,130	(8)		380,000	(10)
Income (loss) before cumulative effect of change in accounting principle		213,700	(1,2)		189,068	(3,4,5)		110,107	(7)		156,690	(9)		(5,034	)(10)
Cumulative effect of change in accounting principle		—			948	(4)		—			—			(62,780	)(11)
Net income (loss)	$	213,700	(1,2)	$	190,016	(3,4,5)	$	110,107	(7)	$	156,690	(9)	$	(67,814	)(10)
Per common share:
Income (loss) before cumulative effect of change in accounting principle
Basic	$	1.78		$	1.51		$	0.80		$	1.07		$	(0.03	)
Diluted	$	1.75		$	1.49		$	0.80		$	1.06		$	(0.03	)
Cumulative effect of change in accounting principle, net of tax
Basic	$	—		$	0.01		$	—		$	—		$	(0.42	)
Diluted	$	—		$	0.01		$	—		$	—		$	(0.42	)
Net income (loss)
Basic	$	1.78		$	1.52		$	0.80		$	1.07		$	(0.45	)
Diluted	$	1.75		$	1.50	(3)	$	0.80		$	1.06		$	(0.45	)
Shares used in basic per share calculations		119,782			125,286			137,447			145,956			150,680
Shares used in diluted per share calculations		121,915			126,483			138,423			147,937			150,680

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December 31,	2007		2006		2005		2004		2003
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	596,766	$	853,328	$	654,983	$	592,187	$	1,009,312
Working capital	$	894,749	$	1,151,458	$	1,019,168	$	1,045,294	$	1,350,906
Total assets	$	2,076,943	$	2,362,492	$	2,290,249	$	2,401,832	$	2,338,900
Long-term debt	$	143,267	$	127,862	$	124,858	$	161,103	$	—
Shareholders’ equity	$	1,529,087	$	1,834,705	$	1,779,283	$	1,861,834	$	2,071,860

(1)	Stock-based compensation recorded in cost of sales, SG&A and R&D expenses was $1.9 million, $17.6 million and $8.7 million, respectively, for the year ended December 31, 2007.
(2)	The fiscal year 2007 results include a net restructuring and other benefit of $8.0 million, primarily resulting from a gain on sale of property and buildings in San Jose, California.
(3)	On January 1, 2006, we adopted SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (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.
(4)	The fiscal year 2006 results include a $0.9 million benefit, net of tax, from the cumulative effect of a change in accounting principle due to the adoption of SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). 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.
(5)	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.
(6)	In 2005, we recorded a credit to cost of sales of approximately $15.1 million related to the sale of inventories previously written down.
(7)	In 2005, we recorded net restructuring and other charges of $9.2 million and inventory write-downs due to restructuring of $5.3 million.
(8)	In 2004, we recorded a credit to cost of sales of approximately $9.0 million related to the sale of inventories previously written down.
(9)	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.
(10)	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.
(11)	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.

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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 I, Item 6. Selected Financial Data” 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 in “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 in “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 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 in “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;

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

•  The statements in “Item 1. Business — Manufacturing” regarding 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, which statements are subject to various risks and uncertainties, including, without limitation, a prolonged inability to obtain certain components imperative to our operations and our failure to work efficiently with suppliers;

•  The statement in “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 in “Item 1. Business — Patents and Proprietary Rights” regarding (1) our intentions to vigorously protect our intellectual property rights; and (2) our belief that the outcomes of current litigation will not have a material impact on our business, financial condition or results of operations; and (3) our belief 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 risk 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 risk that litigation could result in substantial cost and diversion of our effort and the risk 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 in “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;

•  The statement in “Item 2. Properties” that our facilities are sufficient to meet our needs for the foreseeable future, which statement is subject to certain risks and uncertainties, including, among others, inaccurate estimates related to our facility needs and an unexpected need to expand operations;

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

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•  The statement in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview of Our Business and Industry” regarding (1) our close relationships with our customers and substantial investments in R&D positioning us for future growth; (2) our expectation that net orders will continue to fluctuate; (3) our belief as to strong underlying industry demand over the long term; and (4) our goal to continue to implement cost reduction and expense control measures that will further reduce our ongoing operating costs and expenses, which statements are subject to numerous risks and uncertainties, including, without limitation, our inability to maintain our customer accounts, realize marketable products from our investments, attain market acceptance for new product introductions or inability to reduce expenses through business shutdowns;

•  The statements in “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 (1) continuation of our R&D commitment to improvement of new products and enhancement of our current product lines; and (2) 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 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 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Income Taxes” regarding (1) our expectation to achieve tax rates lower than current federal rates due to the geographical mix of income at lower rates, foreign tax credit planning strategies and unbenefitted capital and foreign losses from prior years; (2) our belief that we have accurate accruals for any potential adjustment resulting from foreign tax examinations and (3) our belief that the majority of deferred tax assets will be realized due to anticipated future income, which statements are subject to certain risks and uncertainties including changes to our eligibility for foreign tax credits, shifts in our geographical mix of income, our inability to adequately estimate the amount of potential adjustments and difficulties in accurately predicting future incomes impact upon deferred taxes;

•  The statements in “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) our belief that deferred tax assets will be realized due to 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;

•  The statement in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” that (1) we expect to use any proceeds from our credit agreement for working capital and other corporation purposes; and (2) our current cash positions, operating cash flow and available borrowings will be sufficient to meet our needs for the next 12 months to execute our business plan; which statements are subject to certain risks and uncertainties, including, among others, unanticipated limitations on the use of proceeds from certain credit agreements and inability to accurately predict cash outlays, and an unanticipated need for additional liquid assets in the next 12 months to fund operations and repurchases of our Common Stock;

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•  The statement in “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” that (1) we expect to use any proceeds from our credit agreement for working capital and other corporation purposes; (2) our current cash positions, operating cash flow and available borrowings will be sufficient to meet our needs for the next 12 months to execute our business plan; (3) our belief that we will be able to liquidate our investments in auction rate securities without significant loss within the next year, and (4) our belief that the auction rate securities will not be significantly impaired due to the government’s guarantee of the underlying securities, which statements are subject to certain risks and uncertainties, including, among others, unanticipated limitations on the use of proceeds from certain credit agreements and inability to accurately predict cash outlays, an unanticipated need for additional liquid assets in the next 12 months to fund operations and repurchases of our Common Stock, inability to accurately predict our ability to recover the carrying value of our investment in auction rate securities, market changes negatively affecting auction rate securities and the government’s inability to guarantee the underlying securities;

•  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 — Contractual Obligations” that we expect to make payments of $1.6 million related to our pension and post-retirement benefit plans in fiscal 2008, which statement is subject to certain risks and uncertainties, including, without limitation, inaccuracies related to the amount of payments to be made to the Company’s pension and post-retirement benefit plans;

•  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 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Accounting Pronouncements” that (1) we do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next twelve months and (2) we do not anticipate the adoption of SFAS 157, SFAS 141R, SFAS 159 or SFAS 160 will have a significant impact on our Consolidated Financial Statements, which statements are subject to certain risks and uncertainties, including, without limitation, inability to accurately assess the impact of recent accounting pronouncements on our Consolidated Financial Statements;

•  The statement in “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 — Cash Flow Hedging” that we anticipate reclassifying net losses from OCI to earnings within 12 months, which statement is subject to certain risks and uncertainties, including, without limitation, inability to reclassify net losses from OCI to earnings within 12 months due to fluctuations in foreign currency forward exchange contracts and the inability to anticipate hedge effectiveness;

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•  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 (1) 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 and (2) our belief that there is no significant risk of nonperformance of payment obligations of counterparties, which statements are subject to certain risks and uncertainties, including, without limitation, our inability to retain current customers due to unforeseeable market changes, unexpected loss of a major customer that accounts for a high percent of our total sales, and inability to accurately predict the creditworthiness of large financial institutions;

•  Our statement in “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 3. Financial Instruments” that our investment securities are liquid and management intends, if necessary, to liquidate the securities to fund operations in the next 12 months, which statements is subject to certain risks and uncertainties, including, without limitation, unanticipated need for additional liquid assets in the next 12 months to fund operations;

•  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 statement in “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 7. Restructuring and Other Charges (Benefits)” that we estimate that future rent obligations will be paid in cash through 2017, which statement is subject to certain risks and uncertainties, including, without limitation unanticipated amendments to our leased facilities and inability to accurately predict the effectiveness of our restructuring plans; and

•  Our statement in “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 12. Income Taxes” that we do not anticipate a reduction of our unrecognized tax benefits as a result of a lapse of the applicable statute of limitations during the next 12 months, which statement is subject to certain risks and uncertainties, including, without limitation unanticipated changes to the Company’s tax position.

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;

•  Financial Performance Overview;

•  Results of Operations;

•  Critical Accounting Policies;

•  Liquidity and Capital Resources;

•  Off-Balance Sheet Arrangements;

•  Contractual Obligations;

•  Purchase Commitments; and

•  Recent Accounting Pronouncements.

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Overview of Our Business and Industry

Novellus Systems, Inc. is a California corporation organized in 1984. At Novellus, we primarily develop, manufacture, sell and support equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. Customers for these products manufacture chips for sale or for incorporation in their own products, or provide chip-manufacturing services to third parties. The segment of our business serving this area is the Semiconductor Group.

In 2004, we diversified by acquiring Peter Wolters AG, a 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. We call this segment the Industrial Applications Group (IAG). In November 2005 we acquired Voumard, a privately-held manufacturer of high-precision machine manufacturing tools based in Neuchatel, Switzerland, to expand our product offerings within IAG.

In the Semiconductor Group, 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.

In the Industrial Applications Group, our business depends on capital expenditures made by manufacturers in sectors such as vehicles, aircraft and electronic products, parts and components. At the broadest level, machine tools demand is highly sensitive to macroeconomic conditions as our customer base includes some of the most cyclically sensitive industries in the economy. As a result, such variables as the outlook for overall economic growth, fixed investment and durable goods shipments directly affect the growth of our business. Our industrial business also depends on niche applications in addition to the general machine tool cycle. As we continue to expand our capabilities in this segment, our operations are increasingly impacted by the wafer industry which, similar to the semiconductor segment, is also characterized by intense competition and rapidly changing technology.

We focus on certain key quarterly financial data to manage our business. Net sales, gross profit, net income and net income per share are the primary measures we use to monitor performance. We also use certain non-GAAP measures, such as shipments and net orders, to assess business trends and performance. Shipments consists of products shipped to customers, without regard to net sales adjustments such as deferrals associated with customer acceptance. Shipments and net orders, which are also referred to as bookings, are used to forecast and plan future operations. Net orders consist of current period orders less current period cancellations. We do not report orders for systems with delivery dates more than 12 months after receipt of the order.

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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,
2007:
Net sales	$	396,974		$	416,335		$	393,277		$	363,463		$	1,570,049
Gross profit	$	194,909		$	208,110		$	194,307		$	171,863		$	769,189
Net income	$	53,783		$	57,345		$	49,711		$	52,861		$	213,700
Diluted net income per share	$	0.42		$	0.45		$	0.41		$	0.47		$	1.75
Shipments	$	389,052		$	436,382		$	387,817		$	363,055		$	1,576,306
Increase (decrease) in shipments from prior period		(0	)%		12	%		(11	)%		(6	)%		(2	)%
Net orders	$	412,219		$	332,201		$	305,329		$	343,086		$	1,392,835
Increase (decrease) in net orders from prior period		(7	)%		(19	)%		(8	)%		12	%		(22	)%
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
Shipments	$	354,160		$	457,320		$	414,213		$	390,151		$	1,615,844
Increase (decrease) in shipments from prior period		12	%		29	%		(9	)%		(6	)%		20	%
Net orders	$	416,770		$	457,545		$	470,322		$	441,620		$	1,786,257
Increase (decrease) in net orders from prior period		19	%		10	%		3	%		(6	)%		43	%
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
Shipments	$	360,663		$	347,595		$	316,423		$	316,574		$	1,341,255
Increase (decrease) in shipments from prior period		8	%		(4	)%		(9	)%		0	%		(4	)%
Net orders	$	301,594		$	309,214		$	286,929		$	351,018		$	1,248,755
Increase (decrease) in net orders from prior period		(9	)%		3	%		(7	)%		22	%		(17	)%

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Due to the cyclical nature of our business, we expect that net orders will continue to fluctuate. 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.

The decrease in net orders from fiscal 2006 is the result of weakening in the DRAM and foundry semiconductor sectors. We believe there is strong underlying demand in the industry over the long term. However, capacity continued to outpace demand through 2007. We took preemptive action in the Semiconductor Group to reduce expenses in the second half of 2007, including business shutdowns, which reduced operating expenses by approximately $5.2 million in 2007. In 2008, our goal is to continue to implement cost reduction and expense control measures that will further reduce our ongoing operating costs and expenses.

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 2007, 2006 and 2005 may not necessarily be indicative of future operating results.

Financial Performance Overview

The following is an overview of our financial performance for the year ended December 31, 2007 compared to the year ended December 31, 2006:

•  Net sales decreased 5.3% to $1.6 billion from $1.7 billion;

•  Net income increased 12.5% to $213.7 million from $190.0 million;

•  Diluted net income per share increased to $1.75 from $1.50;

•  Net orders decreased 22.0% to $1.4 billion from $1.8 billion; and

•  Shipment revenue remained relatively consistent at $1.6 billion.

Results of Operations

Net Sales

	Years Ended December 31,									% Change			% Change
	2007			2006			2005			in 2007			in 2006
	(Dollars in thousands)
Semiconductor Group	$	1,395,703		$	1,547,540		$	1,236,515			(10	)%		25	%
Industrial Applications Group		174,346			110,976			103,956			57	%		7	%
Net sales	$	1,570,049		$	1,658,516		$	1,340,471			(5	)%		24	%
International net sales %		74	%		72	%		73	%

The net sales we report is correlated to shipments in the current period, previously reported shipments and timing of customer acceptance. Semiconductor Group net sales decreased $151.8 million from 2006 to 2007 primarily as a result of weakening DRAM and foundry semiconductor industry demand. Industrial Applications Group net sales increased $63.4 million in 2007 from 2006 due primarily to strong demand for polishing systems by silicon wafer manufacturers. Favorable changes in exchange rates contributed to increased net sales by 9% in the Industrial Applications Group from 2006 to 2007.

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Net sales related to our Semiconductor Group increased $311.0 million from 2005 to 2006, while sales related to our Industrial Applications Group increased 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.

Geographical net sales as a percentage of total net sales based on the location of our customers’ facilities were as follows:

	Years Ended December 31,
	2007			2006			2005
Asia		66	%		63	%		62	%
North America		26	%		28	%		27	%
Europe		8	%		9	%		11	%

A significant portion of our net sales is generated in Asia, primarily because a substantial portion of the world’s semiconductor manufacturing capacity is located there. We consider the Asia region to include Korea, Japan, Singapore, Malaysia, China and Taiwan. During 2006, we established an international headquarters in Singapore for international sales, which more closely aligns our operational structure with our customer base. We plan to continue 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
	2007			2006			2005			in 2007			in 2006
	(Dollars in thousands)
Gross profit	$	769,189		$	824,349		$	599,126			(7	)%		38	%
% of net sales		49	%		50	%		45	%

The decrease in gross profit as a percentage of net sales in 2007 compared to 2006 is due primarily to changes in product mix and a higher percentage of net sales from the Industrial Applications Group where margins are generally lower than the Semiconductor Group.

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.

Our gross profit from period to period is affected by the treatment of certain product sales in accordance with our revenue recognition policy. See Note 2 of our Consolidated Financial Statements for further disclosure of our accounting policy.

Selling, General and Administrative (SG&A)

	Years Ended December 31,									% Change			% Change
	2007			2006			2005			in 2007			in 2006
	(Dollars in thousands)
SG&A expense	$	266,018		$	261,389		$	206,939			2	%		26	%
% of net sales		17	%		16	%		15	%

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

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SG&A expense increased $4.6 million in 2007 from 2006. This primarily relates to an overall increase in employee compensation costs. Merit pay increases during the year were partially offset by reductions in share-based compensation expense and cost savings from additional business shutdowns. Share-based compensation decreased by $4.8 million, primarily due to the reversal of 2006 expense for performance-based restricted stock awards where vesting is no longer probable and the increase in our estimated option forfeiture rate in 2007 from 2006. SG&A expense increased as a percentage of net sales as a result of the 5% decline in net sales from the prior year.

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 related 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.

Research and Development (R&D)

	Years Ended December 31,									% Change			% Change
	2007			2006			2005			in 2007			in 2006
	(Dollars in thousands)
R&D expense	$	241,025		$	244,201		$	247,315			(1	)%		(1	)%
% of net sales		15	%		15	%		18	%

R&D expense includes compensation and benefits for 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.

R&D expense decreased in absolute dollars in 2007 from 2006 generally due to lower stock-based compensation expense of $2.5 million, combined with reduced depreciation and related facility costs resulting from previous restructuring actions. As a result, R&D expense as a percentage of net sales remained consistent with the prior year.

The slight decrease in R&D expense in 2006 from 2005 results from lower R&D program spending and lower depreciation and related facility costs due to restructuring. This decrease 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.

Legal Settlement

	Years Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Legal settlement	$	—		$	3,250		$	—
% of net sales		0	%		less than 1	%		0	%

In 2006, we incurred a charge of $3.3 million to settle a customer indemnity claim. No such legal charges were incurred during the years ended December 31, 2007 and 2005.

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Restructuring and Other Charges (Benefits)

	Years Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Restructuring and other charges (benefits)	$	(8,013	)	$	10,735		$	9,175
% of net sales		(1	)%		1	%		1	%

In the fourth quarter of 2007, we completed the sale of certain facilities in San Jose, California, resulting in a gain of $9.1 million that is included in operating income as part of Restructuring and other charges (benefits). This sale substantially completes the actions contemplated under the restructuring plan implemented during the first quarter of 2006. Offsetting the gain on sale of assets was $1.1 million in additional expenses resulting from changes in estimates associated primarily with facility exit costs.

During the first quarter of 2006, we implemented a restructuring plan to dispose of certain owned facilities located in San Jose, California. We considered the change in planned use of the facilities as an indicator of impairment and determined that two of the facilities were impaired, resulting in impairment charges of $8.9 million to write these facilities down to their estimated fair value.

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. These charges were offset by the reversal of a previously recorded restructuring accrual of $5.5 million due to a change in future estimated sublease income.

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.

The charges for vacated facilities relate primarily 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 experienced cash flow savings of $2.0 million and $1.3 million in 2007 and 2006, respectively, due primarily to sublease income. We anticipate savings of approximately $2.3 million in 2008 associated with this restructuring plan.

See Note 7 of our Consolidated Financial Statements for further discussion of our restructuring activities.

Interest and Other Income, net

	Years Ended December 31,									% Change			% Change
	2007			2006			2005			in 2007			in 2006
	(Dollars in thousands)
Interest and other income, net	$	44,630		$	34,145		$	22,916			31	%		49	%
% of net sales		3	%		2	%		2	%

Interest and other income, net includes interest income, interest expense and other non-operating items.

Interest and other income, net increased $10.5 million in 2007 compared to 2006. This is due primarily to increased interest income of $10.6 million associated with higher interest rates during the year.

The increase in interest and other income, net in absolute dollars for 2006 compared to 2005 is due primarily 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. Fiscal 2006 results also include a gain of $2.8 million related to our acquisition of Voumard.

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Income Taxes

Our effective tax rate was 32%, 44% and 31% in 2007, 2006 and 2005, respectively. The reduction in our effective tax rate in 2007 from 2006 relates primarily to the inclusion of a non-recurring charge of $46.1 million for foreign losses with no current tax benefit associated with the implementation of our new global business structure and an $8.0 million benefit from the adjustment of tax reserves resulting from the conclusion of certain tax examinations. These 2006 charges and benefits are also the primary drivers behind the increase in our effective tax rate in 2006 from 2005. We expect to achieve tax rates lower than current federal rates as we benefit from geographical mix of income at lower rates, foreign tax credit planning strategies and unbenefitted capital and foreign losses from prior years.

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.

With certain exceptions, we are no longer subject to U.S. federal or state income tax examination by tax authorities for years prior to 2004, although the utilization of tax loss and credit carryforwards from fiscal years 2001 through 2003 could also be subject to examination. In addition, certain of our foreign subsidiaries are subject to examination by foreign taxing authorities. We believe that adequate accruals have been provided for any potential adjustments that may result from these examinations. The timing of the settlement of these examinations is uncertain.

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 recognition of revenue, valuation of inventory, valuation of goodwill and other intangible assets, valuation of deferred tax assets, adequacy of warranty obligations, measurement of restructuring and impairment charges, compliance with hedge accounting for derivatives, measurement of stock-based compensation expense and litigation. We base our estimates on historical experience and on various 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. 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

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. It is common for us to ship equipment and transfer title to the buyer, prior to meeting specific revenue recognition criteria related to delivery. In these cases we record the deferred revenue and associated cost of sale in deferred profit on our Consolidated Balance Sheet until all revenue recognition criteria have been met.

Our equipment sales generally have two elements: (a) the equipment and (b) installation of that equipment. While installation services are not essential to the functionality of the delivered equipment, final payment is not billable until customer acceptance for many of our sales contracts. Provided that we meet 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. For those sales contracts where final payment is not billable until customer acceptance, the final payment (which typically exceeds the fair value of the installation services) is recognized upon customer acceptance. 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.

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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.

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 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 perform our goodwill impairment test in the fourth quarter of each fiscal year separately for each of our reporting units. We define reporting units as the individual segments we operate. The first step of the test identifies if potential impairment may have occurred, while the second step measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of the asset exceeds the fair value. To date, no impairment losses for goodwill have been recognized. We amortize our intangible assets with definite lives on a straight-line basis over their estimated useful lives.

Income Taxes

As of December 31, 2007, we had approximately $98.5 million of net deferred tax assets. We believe 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, a valuation allowance for deferred tax assets would decrease income in the period in which such determination is made. In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainties in Income Taxes — An Interpretation of FASB Statement No. 109” (FIN 48), which we adopted effective January 1, 2007. FIN 48 requires that we recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. No cumulative adjustment to retained earnings was required upon our adoption of FIN 48.

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 record the estimated cost of warranty coverage to cost of sales when revenue is recognized. 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 in the future could 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.

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Restructuring and Impairment Charges

Restructuring activities are 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 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.

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

Cash, Cash Equivalents and Short-Term Investments

	December 31,		December 31,
	2007		2006
	(Dollars in thousands)
Cash and cash equivalents	$	175,071	$	58,463
Short-term investments		421,695		794,865
Total cash, cash equivalents and short-term investments	$	596,766	$	853,328

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We have historically financed our operating and capital resource requirements through cash flows from operations, sales of equity securities and borrowings. Our primary source of liquidity as of December 31, 2007 consisted of $596.8 million of cash, cash equivalents and short-term investments. This amount represents a decrease of $256.6 million from $853.3 million as of December 31, 2006, which is primarily due to the purchase of our common stock of $578.5 million offset by cash generated from operations.

As of February 27, 2008, we held approximately $123.5 million of tax free investments, classified as current assets, with an auction reset feature (“auction rate securities”) whose underlying assets are generally student loans which are substantially backed by the federal government or closed-end municipal funds. From February 1, 2008 through February 27, 2008, $71.7 million of our auction rate securities were part of failed auctions and there is no assurance that currently successful auctions on the other auction rate securities in our investment portfolio will continue to succeed. As a result our ability to liquidate our investment and fully recover the carrying value of our investment in the near term may be limited or not exist. An auction failure means that the parties wishing to sell securities could not. All of our auction rate securities, including those subject to the failure, are currently rated AAA, the highest rating by a rating agency. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. We believe we will be able to liquidate our investment without significant loss within the next year, and we currently believe these securities are not significantly impaired, primarily due to either the government guarantee of the underlying securities or more than 200% collateral in the case of closed-end funds. However, it could take until the final maturity of the underlying notes (up to 50 years) to realize our investments’ recorded value. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.

Cash Flow Summary

	Years Ended December 31
	2007			2006			2005
	(Dollars in thousands)
Net cash provided by (used in):
Operating activities	$	305,689		$	447,153		$	273,556
Investing activities		364,107			(234,223	)		(136,047	)
Financing activities		(553,862	)		(197,870	)		(203,964	)
Effects of exchange rate changes on cash and cash equivalents		674			3,000			741
Net increase in cash and cash equivalents	$	116,608		$	18,060		$	(65,714	)

Operating

Net cash provided by operating activities for the year ended December 31, 2007 was $305.7 million. The primary sources of cash from operating activities were net income of $213.7 million, adjusted to exclude the effect of non-cash charges and benefits of $126.4 million, and increases in working capital levels of $34.4 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 of $190.0 million, adjusted to exclude the effect of non-cash charges and benefits of $149.9 million, and changes in working capital levels of $107.3 million. During 2006 we began to utilize programs to factor or sell accounts receivable, resulting in increased cash and lower accounts receivable in 2006 compared to 2005.

Net cash provided by operating activities for the year ended December 31, 2005 was $273.6 million. The primary sources of cash from operating activities were net income of $110.1 million, adjusted to exclude non-cash charges of $130.5 million, and changes in working capital levels of $33.0 million.

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Investing

Net cash provided by investing activities for the year ended December 31, 2007 was $364.1 million, consisting primarily of cash received from net purchases, sales and maturities of short-term investments of $367.8 million and proceeds on the sale of property and equipment of $47.2 million which are primarily related to the sale of property and buildings in San Jose. Net cash was reduced by capital expenditures of $33.2 million.

Net cash used in investing activities in the year ended December 31, 2006 was $234.2 million, consisting 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.

Net cash used in investing activities in the year ended December 31, 2005 was $136.0 million, consisting primarily of cash paid for capital expenditures of $44.7 million and net purchases, sales and maturities of marketable securities of $128.1 million.

Financing

Net cash used in financing activities for the year ended December 31, 2007 was $553.9 million, due primarily to the repurchase of common stock for $578.5 million and payments on short-term lines of credit of $18.1 million. These outflows were partially offset by proceeds from employee stock compensation plans of $41.9 million.

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.

Net cash used in financing activities for the year ended December 31, 2005 was $204.0 million, due primarily to the repurchase of common stock for $226.7 million and payments on long-term debt of $19.9 million, partially offset by proceeds from employee stock compensation plans of $29.9 million.

Liquidity

We have available short-term credit facilities with various financial institutions totaling $89.7 million. These credit facilities bear interest at various rates, expire on various dates through December 2008 and are used for general corporate purposes. As of December 31, 2007, $1.5 million of borrowings were outstanding under the short-term lines of credit at a weighted-average interest rate of 1.3%, $27.7 million was pledged against outstanding letters of credit and the remaining $60.5 million was unutilized.

We also have long-term credit facilities with various institutions totaling $338.9 million, of which $195.7 million was unutilized as of December 31, 2007. These credit facilities bear interest at a weighted-average rate of 5.0% and expire through December 2037. As of December 31, 2007, we had $143.3 million in long-term debt outstanding under these credit arrangements.

Our long-term debt outstanding at December 31, 2007 consists primarily of amounts outstanding under a $153.1 million credit arrangement denominated in Euros used to fund the acquisition of Peter Wolters AG in 2004 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.

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. The Agreement includes an option to increase the total line by up to an additional $100.0 million under certain circumstances. We expect to use proceeds, if any, for working capital and other general corporate purposes, including the repurchase of our own common stock. 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. We were in compliance with these covenants as of December 31, 2007. No amounts have been borrowed under the Agreement as of December 31, 2007.

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At various times, the Board of Directors has authorized us to repurchase our outstanding common stock, including approvals of $1.0 billion on September 14, 2004 and another $1.0 billion on October 26, 2007. As of December 31, 2007, we had a remaining amount of $1.0 billion available for stock repurchases under these authorizations.

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, 2007, the maximum potential amount of future payments that we could be required to make under these letters of credit was approximately $27.7 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, we would have a maximum exposure of $178.1 million as of December 31, 2007.

Contractual Obligations

We have non-cancelable operating leases for various facilities. Rent expense was approximately $3.8 million, $4.3 million and $4.9 million for the years ended December 31, 2007, 2006 and 2005, respectively, net of sublease income of $1.0 million for each year. 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
	2008		2009		2010		2011		2012		Thereafter		Income			Total
	(In thousands)
Non-cancelable operating leases	$	8,851	$	8,489	$	8,158	$	7,850	$	5,011	$	20,984	$	(23,205	)	$	36,138

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, 2007.

	Years Ending December 31,
	2009		2010		2011		2012		Thereafter
	(In thousands)
Long-term debt obligations	$	142,014	$	43	$	43	$	43	$	1,124

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, 2007 related to our pension plans and post-retirement medical plan of $6.9 million. We funded $0.6 million to these plans in fiscal 2007. We expect to make payments of $1.6 million in fiscal 2008.

41

During the first quarter of 2007, we adopted the provisions of FIN 48. Historically interest and penalties and unrecognized tax benefits were classified as current liabilities. Beginning with the adoption of FIN 48, we reclassified interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities within the Consolidated Balance Sheet. As of December 31, 2007, we recorded unrecognized tax benefits of $25.6 million and interest and penalties of $1.8 million, both of which are classified as non-current liabilities in the Consolidated Balance Sheet. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audit outcomes.

Purchase Commitments

We have firm purchase commitments with various suppliers to ensure the availability of components. Our minimum obligation at December 31, 2007 under these arrangements was $95.3 million. Primarily all amounts under these arrangements are due in 2008. 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 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 an employee is entitled to paid time off after working for a specified period of time. We adopted the interpretation effective January 1, 2007, resulting in an adjustment to beginning retained earnings of $3.8 million, net of tax of $2.2 million, and an increase to short-term and long-term sabbatical liability of $2.0 million and $4.0 million, respectively. We recognized $0.9 million of additional expense during 2007 as a result of adopting EITF 06-2.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainties in Income Taxes — An Interpretation of FASB Statement No. 109” (FIN 48), which we adopted effective January 1, 2007. FIN 48 requires that we recognize the financial statement effects of a tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. No cumulative adjustment to retained earnings was required upon our adoption of FIN 48. As of January 1, 2007, we recorded unrecognized tax benefits of $11.3 million of which $10.5 million was recorded in long-term liabilities and $0.8 million of state and research development credits were reflected in net deferred tax assets. In addition, we recorded cumulative interest and penalties of $0.1 million. See Note 12 of our Consolidated Financial Statements for further disclosure of the impact of adopting FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which establishes specific criteria for the fair value measurements of financial and nonfinancial assets and liabilities under current accounting rules. SFAS 157 also requires expanded disclosures related to fair value measurements. The new fair value criteria is primarily applied prospectively upon adoption of SFAS 157. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB amended SFAS 157 to exclude SFAS 13, “Accounting for Leases” from its scope and approved a one-year delay in applying SFAS 157 to certain fair value measurements, primarily related to non-financial instruments such as business combinations, acquired goodwill and intangibles, long-lived assets held for disposal and liabilities related to exit or disposal activities. The adoption of SFAS 157 is not expected to have a significant impact on the fair value measurement of our financial instruments. We are currently evaluating the impact of SFAS 157 on our Consolidated Financial Statements.

42

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of SFAS 115” (SFAS 159). SFAS 159 permits a company to voluntarily elect to use fair value, instead of historic or original cost, to account for certain financial assets and liabilities. The fair value option is designated on an item-by-item basis, is irrevocable and requires that changes in fair value in subsequent periods be recognized in earnings in the period of change. On the date of adoption, if the fair value option is elected for any existing financial assets or liabilities, all previously unrealized gains or losses, if any, will be charged directly to retained earnings as a cumulative-effect adjustment. Items eligible for the fair value option include available-for-sale securities, held-to-maturity securities, fair value hedges of financial instruments, loans payable and warranty obligations. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect that the adoption of SFAS 159 will have a significant impact on our Consolidated Financial Statements. Subsequent to our January 1, 2008 adoption of SFAS 159, the election to use the fair value method for future eligible transactions will be made on a case-by-case and instrument-by-instrument basis.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R). Under SFAS 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS 141R will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (SFAS 160), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We do not expect that the adoption of SFAS 160 will have a significant impact on our Consolidated Financial Statements as all of our subsidiaries are currently wholly owned.

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 resale markets to ensure portfolio liquidity. We have no material cash flow exposure due to foreign currency 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.

43

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, 2007 and 2006. 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
December 31, 2007	1 Year			Years			Years			Years			Years			Total
	(In thousands)
Assets:
Cash and cash equivalents	$	175,071		$	—		$	—		$	—		$	—		$	175,071
Average interest rate		2.84	%		—			—			—			—			2.84	%
Short-term investments	$	74,573		$	15,739		$	2,000		$	16,800		$	308,900		$	418,012
Average interest rate		4.95	%		6.66	%		5.23	%		7.23	%		6.14	%		5.99	%
Restricted cash and cash equivalents	$	161,050		$	—		$	—		$	—		$	—		$	161,050
Average interest rate		4.80	%		—			—			—			—			4.80	%
Liabilities:
Short-term borrowings	$	1,509		$	—		$	—		$	—		$	—		$	1,509
Average interest rate		1.33	%		—			—			—			—			1.33	%
Long-term borrowings	$	—		$	142,057		$	86		$	215		$	909		$	143,267
Average interest rate		—			4.97	%		4.00	%		4.00	%		4.00	%		4.96	%

	Periods of Maturity
	Less than			1 to 3			3 to 5			5 to 10			Over 10
December 31, 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	%

The “less than 1 year” category of short-term investments contains $14.0 million and $14.8 million at December 31, 2007 and 2006, respectively, of other investments that do not have contractual maturities. Also included in short-term investments is interest receivable of $3.7 million and $5.2 million as of December 31, 2007 and 2006, respectively, that is not included in the tables above.

44

As discussed above in Liquidity and Capital Resources, as of February 27, 2008, we held approximately $123.5 million of tax free investments, classified as current assets, with an auction reset feature (“auction rate securities”). From February 1, 2008 through February 27, 2008, $71.7 million of our auction rate securities were part of failed auctions and there is no assurance that currently successful auctions on the other auction rate securities in our investment portfolio will continue to succeed. We believe we will be able to liquidate our investment without significant loss within the next year, and we currently believe these securities are not significantly impaired, primarily due to either the government guarantee of the underlying securities or more than 200% collateral in the case of closed-end funds. However, it could take until the final maturity of the underlying notes (up to 50 years) to realize our investments’ recorded value. Based on our expected operating cash flows, and our other sources or cash, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.

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 those currency risks, we expanded our foreign currency exposure management policy in 2006. We utilize foreign currency forward contracts to mitigate our exposure 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, 2007 and 2006.

	December 31, 2007
	Notional			Average		Estimated Fair
	Sell (Buy)			Contract Rate		Value-Gain (Loss)
	(In thousands, except for average contract rate)
Foreign currency forward exchange contracts:
Japanese yen	$	127,602			113.40	$	1,554
Israeli shekel		1,460			3.94		0
Swiss franc		1,226			1.15		0
Euro		173			0.68		(7	)
Other		(4	)				(4	)
	$	130,457				$	1,543

	December 31, 2006
	Notional			Average		Estimated Fair
	Sell (Buy)			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

45

Item 8.   Financial Statements and Supplementary Data

NOVELLUS SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2007			2006			2005
	(In thousands, except per share data)
Net sales	$	1,570,049		$	1,658,516		$	1,340,471
Cost of sales		800,860			834,167			741,345
Gross profit		769,189			824,349			599,126
Operating expenses:
Selling, general and administrative		266,018			261,389			206,939
Research and development		241,025			244,201			247,315
Legal settlement		—			3,250			—
Restructuring and other charges (benefits)		(8,013	)		10,735			9,175
Total operating expenses		499,030			519,575			463,429
Operating income		270,159			304,774			135,697
Interest income		38,414			27,782			20,738
Interest expense		(6,376	)		(4,290	)		(3,510	)
Other income, net		12,592			10,653			5,688
Interest and other income, net		44,630			34,145			22,916
Income before provision for income taxes and cumulative effect of a change in accounting principle		314,789			338,919			158,613
Provision for income taxes		101,089			149,851			48,506
Income before cumulative effect of a change in accounting principle		213,700			189,068			110,107
Cumulative effect of a change in accounting principle, net of tax of $594		—			948			—
Net income	$	213,700		$	190,016		$	110,107
Net income per share:
Basic:
Income before cumulative effect of a change in accounting principle	$	1.78		$	1.51		$	0.80
Cumulative effect of a change in accounting principle		—			0.01			—
Basic net income per share	$	1.78		$	1.52		$	0.80
Diluted:
Income before cumulative effect of a change in accounting principle	$	1.75		$	1.49		$	0.80
Cumulative effect of a change in accounting principle		—			0.01			—
Diluted net income per share	$	1.75		$	1.50		$	0.80
Shares used in basic per share calculations		119,782			125,286			137,447
Shares used in diluted per share calculations		121,915			126,483			138,423

See accompanying Notes to the Consolidated Financial Statements.

46

NOVELLUS SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2007		2006
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	175,071	$	58,463
Short-term investments		421,695		794,865
Accounts receivable, net of allowance for doubtful accounts of $1,988 in 2007 and $1,753 in 2006		346,866		310,888
Inventories		212,995		198,571
Deferred tax assets, net		48,965		102,266
Assets held for sale		—		21,966
Prepaid and other current assets		18,366		18,274
Total current assets		1,223,958		1,505,293
Property and equipment, net		320,009		364,599
Restricted cash and cash equivalents		161,050		143,769
Goodwill		238,944		225,431
Intangibles and other assets		132,982		123,400
Total assets	$	2,076,943	$	2,362,492
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	97,135	$	76,406
Accrued payroll and related expenses		73,273		81,836
Accrued warranty		54,857		55,349
Other accrued liabilities		48,172		40,534
Income taxes payable		2,011		38,879
Deferred profit		52,252		41,351
Current obligations under lines of credit		1,509		19,480
Total current liabilities		329,209		353,835
Long-term debt		143,267		127,862
Long-term income taxes payable		27,408		—
Other non-current liabilities		47,972		46,090
Total liabilities		547,856		527,787
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 — 105,344 in 2007 and 125,452 in 2006		1,219,533		1,393,914
Retained earnings		304,278		438,196
Accumulated other comprehensive income		5,276		2,595
Total shareholders’ equity		1,529,087		1,834,705
Total liabilities and shareholders’ equity	$	2,076,943	$	2,362,492

See accompanying Notes to the Consolidated Financial Statements.

47

NOVELLUS SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2007			2006			2005
	(In thousands)
Cash flows from operating activities:
Net income	$	213,700		$	190,016		$	110,107
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (gain) on disposal of property and equipment		(9,168	)		1,699			2,182
Non-cash portion of restructuring and other charges		—			10,199			14,337
Depreciation and amortization		66,924			69,729			82,776
Deferred income taxes		31,855			20,790			22,858
Stock-based compensation		28,118			34,941			4,209
Tax benefit from stock-based compensation		4,464			29,656			4,132
Excess tax benefit from stock-based compensation		(855	)		(15,612	)		—
Other-than-temporary impairment of short-term investment		1,763			—			—
Other non-cash charges, net		3,327			—			—
Cumulative effect of a change in accounting principle		—			(1,542	)		—
Changes in operating assets and liabilities:
Accounts receivable, net		(31,511	)		82,539			(6,167	)
Inventories		(6,515	)		(12,174	)		52,884
Prepaid and other assets		(266	)		27,085			(10,421	)
Accounts payable		3,904			(7,764	)		1,580
Accrued payroll and related expenses		(6,490	)		27,306			(3,541	)
Accrued warranty		(846	)		501			8,795
Other liabilities		7,413			(18,259	)		(2,011	)
Income taxes payable		(10,412	)		35,595			(5,945	)
Deferred profit		10,284			(27,552	)		(2,219	)
Net cash provided by operating activities		305,689			447,153			273,556
Cash flows from investing activities:
Proceeds from sales of short-term investments		1,203,486			672,263			329,434
Proceeds from maturities of short-term investments		206,665			197,464			395,806
Purchases of short-term investments		(1,042,393	)		(1,045,876	)		(853,334	)
Capital expenditures		(33,216	)		(39,384	)		(44,744	)
Proceeds from sale of property and equipment		47,185			2,235			2,676
Decrease (increase) in restricted cash and cash equivalents		(17,281	)		(3,557	)		36,496
Purchase of Voumard Machine, Co. SA and Voumard GmbH, net of cash acquired		(339	)		(765	)		(5,384	)
Other investing activities		—			(16,603	)		3,003
Net cash provided by (used in) investing activities		364,107			(234,223	)		(136,047	)
Cash flows from financing activities:
Proceeds from employee stock compensation plans		41,917			42,383			29,864
Proceeds from (repayments of) lines of credit, net		(18,117	)		4,193			12,726
Payments on long-term debt		(43	)		(10,194	)		(19,902	)
Repurchases of common stock		(578,474	)		(249,864	)		(226,652	)
Excess tax benefit from stock-based compensation		855			15,612			—
Net cash used in financing activities		(553,862	)		(197,870	)		(203,964	)
Effects of exchange rate changes on cash and cash equivalents		674			3,000			741
Net change in cash and cash equivalents		116,608			18,060			(65,714	)
Cash and cash equivalents at beginning of period		58,463			40,403			106,117
Cash and cash equivalents at end of period	$	175,071		$	58,463		$	40,403
Supplemental disclosures:
Cash paid during the year for:
Interest	$	7,070		$	3,850		$	4,136
Income taxes, net	$	72,488		$	65,238		$	14,263

See accompanying Notes to the Consolidated Financial Statements.

48

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, 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 short-term investments		—			—			—			—			(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 short-term investments		—			—			—			—			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 obligation, 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
Adoption of EITF 06-2 “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43,” net of tax of $2,200		—			—			—			(3,800	)		—			(3,800	)
Components of comprehensive income:
Net income		—			—			—			213,700			—			213,700
Net change in unrealized loss on short-term investments, net of tax of $85		—			—			—			—			(237	)		(237	)
Foreign currency translation adjustments, net of tax of $159		—			—			—			—			4,486			4,486
Net change in unrealized loss on derivative instruments		—			—			—			—			(2,249	)		(2,249	)
Net change in unrealized loss on pension obligation, net of tax of $207		—			—			—			—			681			681
Comprehensive income																	216,381
Issuance of common stock under employee compensation plans, net		1,626			44,946			—			—			—			44,946
Income tax benefits realized from activity in employee stock plans		—			2,158			—			—			—			2,158
Stock based compensation		—			28,299			—			—			—			28,299
Repurchases of common stock		(21,734	)		(249,784	)		—			(343,818	)		—			(593,602	)
Balance at December 31, 2007		105,344		$	1,219,533		$	—		$	304,278		$	5,276		$	1,529,087

See accompanying Notes to the Consolidated Financial Statements.

49

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. The segment of our business serving this area is the Semiconductor Group.

In 2004, Novellus entered into the Industrial Applications market through the acquisition of 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 include the financial position, results of operations and cash flows of Peter Wolters from the date of acquisition. We further enhanced those product offerings in 2005 by acquiring 90% of Voumard Machines Co. SA (Voumard), a manufacturer of high-precision machine manufacturing tools based in Neuchâtel, Switzerland. We acquired the remainder of Voumard during transactions consummated in November 2006 and August 2007. The acquisition was accounted for as a purchase business combination. Our Consolidated Financial Statements include the financial position, results of operations and cash flows of Voumard from the date of acquisition. The segment of our business serving this market is the 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 estimates on an ongoing basis, including those related to recognition of revenue, adequacy of the allowance for doubtful accounts, valuation of inventory, valuation of deferred tax assets, valuation of goodwill and other intangible assets, adequacy of warranty obligations, measurement of restructuring and impairment charges, compliance with hedge accounting for derivatives, contingencies and litigation, and measurement of stock-based compensation. We base estimates on historical experience and on other market based assumptions that are believed to be reasonable under 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 measurement. Actual results may differ from these estimates under different assumptions or conditions.

Net Income 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, which consist of restricted stock and restricted stock units that are settled in our common shares.

Diluted net income per share is computed by dividing net income by the weighted-average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist primarily of stock options and restricted stock awards.

50

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	Years Ended December 31,
	2007		2006		2005
	(In thousands, except per share amounts)
Numerator:
Net income	$	213,700	$	190,016	$	110,107
Denominator:
Basic weighted-average shares outstanding		119,782		125,286		137,447
Dilutive potential common shares		2,133		1,197		976
Diluted weighted-average shares outstanding		121,915		126,483		138,423
Basic net income per share	$	1.78	$	1.52	$	0.80
Diluted net income per share	$	1.75	$	1.50	$	0.80

For the years ended December 31, 2007, 2006 and 2005, 12.3 million, 9.2 million and 19.8 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. Generally options are considered anti-dilutive when their exercise prices are greater than or equal to the average market value of our common shares during the period of measurement. Restricted stock awards representing 0.9 million, 0.8 million and 0.2 million shares were excluded from the computation of diluted shares outstanding for the years ended December 31, 2007, 2006 and 2005, respectively, as the shares were subject to performance conditions that had not been met.

Revenue Recognition

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. It is common for us to ship equipment and transfer title to the buyer, prior to meeting specific revenue recognition criteria related to delivery. In these cases we record the deferred revenue and associated cost of sale in deferred profit on our Consolidated Balance Sheet until all revenue recognition criteria have been met.

Our equipment sales generally have two elements: (a) the equipment and (b) installation of that equipment. While installation services are not essential to the functionality of the delivered equipment, final payment is not billable until customer acceptance for many of our sales contracts. Provided that we meet 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. For those sales contracts where final payment is not billable until customer acceptance, the final payment (which typically exceeds the fair value of the installation services) is recognized upon customer acceptance.

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.

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.

51

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 generally 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 specific invoices are deemed to be uncollectible, 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 when not paid in accordance with the contractual terms of each 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.

Income Taxes

As of December 31, 2007, we had approximately $98.5 million of net deferred tax assets. We believe 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, a valuation allowance for deferred tax assets would decrease income in the period in which such determination is made. We account for uncertain tax positions in accordance with FIN 48. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

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	3 — 7 years
Buildings	30 — 40 years
Building and leasehold improvements	Shorter of useful life or remaining lease term

52

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 perform our goodwill impairment test in the fourth quarter of each fiscal year separately for each of our reporting units. We define reporting units as the individual segments we operate. The first step of the test identifies if potential impairment may have occurred, while the second step measures the amount of the impairment, if any. Impairment is recognized when the carrying amount of the asset exceeds the fair value. To date, no impairment losses for goodwill have been recognized. We amortize our intangible assets with definite lives on a straight-line basis over their estimated useful lives.

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 record the estimated cost of warranty coverage to cost of sales when revenue is recognized. 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 are 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 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.

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 had no such accruals as of December 31, 2007 or 2006.

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).

53

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Derivatives

Our policy is to enter into foreign currency forward exchange contracts with maturities of less than 12 months to mitigate the impact of currency exchange fluctuations on (a) probable anticipated system sales denominated in Japanese yen; (b) our net investment in certain foreign subsidiaries; and (c) existing monetary asset and liability balances denominated in foreign currencies. In accordance with Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), all derivatives are recorded at fair value in either other current assets or other current liabilities. Cash flows from derivative instruments are reported in cash flows from operating activities.

Cash Flow Hedging

We designate and document as cash flow hedges foreign currency forward exchange contracts on sales transactions in which costs are denominated in U.S. dollars and the related revenues are generated in Japanese yen. 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 (OCI) until the sale is recognized. Ineffectiveness, along with the excluded time value of the forward contracts, is recorded in either net sales or cost of sales as designated at the inception of the forward contract. During the year ended December 31, 2007, a gain of $2.6 million was recorded in net sales due to hedge ineffectiveness. During the year ended December 31, 2006, a gain of $1.1 million was recorded in cost of sales due to hedge ineffectiveness. In the event it becomes probable that an anticipated hedged transaction will not occur as a result of the associated shipment date pushing outside of the forecasted range, the gains or losses on the related cash flow hedges are immediately reclassified from accumulated OCI to either net sales or cost of sales in the Consolidated Statement of Operations. During the year ended December 31, 2007 we reclassified a loss of $1.7 million from OCI into net sales as a result of the discontinuance of hedge accounting of certain anticipated transactions.

The following table summarizes the pre-tax impact of cash flow hedges on OCI during the years ended December 31, 2007 and 2006.

	December 31,			December 31,
	2007			2006
	(In thousands)
Accumulated losses, beginning of period	$	(329	)	$	—
Effective change of cash flow hedges		(4,012	)		(2,135	)
Reclassification to cost of sales		329			1,806
Reclassification to net sales		1,434			—
Accumulated losses, end of period	$	(2,578	)	$	(329	)

We anticipate reclassifying the accumulated losses recorded as of December 31, 2007 from OCI to earnings within 12 months.

54

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net Investment Hedging

During 2006, we began to hedge our net investment in certain foreign subsidiaries to reduce economic currency risk. The foreign currency forward exchange 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 forward exchange contracts are properly aligned with the net investment in subsidiaries. Changes in the spot to spot value are recorded as foreign currency translation adjustments within OCI. Ineffectiveness, if any, along with the excluded time value of the forward contracts, is recorded in other income, net, and resulted in gains of $0.8 million during each of the years ended December 31, 2007 and 2006, respectively. Losses of $1.0 million and $2.8 million were recorded in OCI for net investment hedges during the years ended December 31, 2007 and 2006, respectively.

Non-Designated Hedges

We enter into foreign currency forward exchange contracts to hedge intercompany balances that are denominated in currencies other than the U.S. dollar. The fair value of those contracts is remeasured each period and the corresponding gain or loss is recorded in other income, net. The maturities of these contracts are generally less than 12 months. We do not apply special hedge accounting treatment under SFAS 133 because the gains or losses are recorded in other income, net, each period, where they are expected to substantially offset the remeasurement gain or loss on the corresponding intercompany balances. During the years ended December 31, 2007, 2006 and 2005 a gain of $0.5 million, a gain of $2.7 million and a loss of $6.0 million, respectively, were recorded in other income, net, related to these contracts.

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 2007, 2006 and 2005 were $2.2 million, $1.4 million and $3.6 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 2007, 2006 and 2005 accounted for 74%, 72% and 71% of our total system sales, respectively. Two customers accounted for 15% and 12% of receivables at December 31, 2007. One customer accounted for 11% of receivables at December 31, 2006. 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.

55

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral. Based on a customer’s financial strength we may require prepayment or an irrevocable letter of credit. We have an exposure to non-performance 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 non-performance 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 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.

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, require 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.

Recent Accounting Pronouncements

In June 2006, the Emerging Issues Task Force (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 an employee is entitled to paid time off after working for a specified period of time. We adopted EITF 06-2 effective January 1, 2007, resulting in an adjustment to beginning retained earnings of $3.8 million, net of tax of $2.2 million, and an increase to short-term and long-term sabbatical liability of $2.0 million and $4.0 million, respectively. We recognized $0.9 million of additional expense during 2007 as a result of adopting EITF 06-2.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainties in Income Taxes — An Interpretation of FASB Statement No. 109” (FIN 48), which we adopted effective January 1, 2007. FIN 48 requires that we recognize the financial statement effects of a tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. No cumulative adjustment to retained earnings was required upon our adoption of FIN 48. As of January 1, 2007, we recorded unrecognized tax benefits of $11.3 million of which $10.5 million was recorded in long-term liabilities and $0.8 million of state and research development credits were reflected in net deferred tax assets. In addition, we recorded cumulative interest and penalties of $0.1 million. See Note 12 of our Consolidated Financial Statements for further disclosure of the impact of adopting FIN 48.

56

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which establishes specific criteria for the fair value measurements of financial and nonfinancial assets and liabilities under current accounting rules. SFAS 157 also requires expanded disclosures related to fair value measurements. The new fair value criteria is primarily applied prospectively upon adoption of SFAS 157. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB amended SFAS 157 to exclude SFAS 13, “Accounting for Leases” from its scope and approved a one-year delay in applying SFAS 157 to certain fair value measurements, primarily related to non-financial instruments such as business combinations, acquired goodwill and intangibles, long-lived assets held for disposal and liabilities related to exit or disposal activities. The adoption of SFAS 157 is not expected to have a significant impact on the fair value measurement of our financial instruments. We are currently evaluating the impact of SFAS 157 on our Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of SFAS 115” (SFAS 159). SFAS 159 permits a company to voluntarily elect to use fair value, instead of historic or original cost, to account for certain financial assets and liabilities. The fair value option is designated on an item-by-item basis, is irrevocable and requires that changes in fair value in subsequent periods be recognized in earnings in the period of change. On the date of adoption, if the fair value option is elected for any existing financial assets or liabilities, all previously unrealized gains or losses, if any, will be charged directly to retained earnings as a cumulative-effect adjustment. Items eligible for the fair value option include available-for-sale securities, held-to-maturity securities, fair value hedges of financial instruments, loans payable and warranty obligations. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect that the adoption of SFAS 159 will have a significant impact on our Consolidated Financial Statements. Subsequent to our January 1, 2008 adoption of SFAS 159, the election to use the fair value method for future eligible transactions will be made on a case-by-case and instrument-by-instrument basis.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R). Under SFAS 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS 141R will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (SFAS 160), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We do not expect that the adoption of SFAS 160 will have a significant impact on our Consolidated Financial Statements as all of our subsidiaries are currently wholly owned.

57

NOVELLUS SYSTEMS, INC.

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, 2007
			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In thousands)
Tax-exempt securities	$	404,008	$	58	$	(9	)	$	404,057
Other		14,102		—		(147	)		13,955
Total	$	418,110	$	58	$	(156	)	$	418,012

	December 31, 2006
			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
	Cost		Gains		Losses			Value
	(In thousands)
Tax-exempt securities	$	775,540	$	9	$	(676	)	$	774,873
Other		13,950		891		—			14,841
Total	$	789,490	$	900	$	(676	)	$	789,714

Also included in our short-term investments balance is interest receivable of $3.7 million and $5.2 million as of December 31, 2007 and 2006, 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, 2007 are as follows:

	Amount
	(In thousands)
Due in less than one year	$	235,623
Due in 1 to 3 years		15,739
Due in 3 to 5 years		2,000
Due in 5 to 10 years		16,800
Due in greater than 10 years		308,900
Total	$	579,062

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 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 $14.0 million of other investments that do not have contractual maturities.

58

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The breakdown of short-term investments with unrealized losses at December 31, 2007 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)
Tax-exempt securities	$	—	$	—		$	21,653	$	(9	)	$	21,653	$	(9	)
Other	$	589	$	(147	)	$	—	$	—		$	589	$	(147	)

The gross unrealized losses related to investments are primarily due to changes in interest rates and changes in quoted market prices. 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,
	2007				2006
	Carrying		Estimated Fair		Carrying		Estimated Fair
	Value		Value		Value		Value
	(In thousands)
Restricted cash and cash equivalents — non-current	$	161,050	$	161,050	$	143,769	$	143,769
Current obligations under lines of credit	$	1,509	$	1,509	$	19,480	$	19,480
Long-term debt	$	143,267	$	143,267	$	127,862	$	127,862

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.

As part of our asset and liability management, we enter into forward foreign currency exchange contracts in order to manage foreign exchange risk. The notional amounts, net assets recorded and estimated fair values of our forward foreign currency exchange contracts are as follows:

	December 31,
	2007						2006
	Notional				Estimated		Notional				Estimated
	Amount		Net Assets		Fair Value		Amount		Net Assets		Fair Value
	(In thousands)
Sell (buy) foreign currencies	$	130,457	$	1,543	$	1,543	$	138,479	$	3,032	$	3,032

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, 2007 and 2006.

59

NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4.   Balance Sheet Details

Inventories

	December 31,
	2007		2006
	(In thousands)
Purchased and spare parts	$	147,475	$	152,727
Work-in-process		39,105		30,524
Finished goods		26,415		15,320
Total inventories	$	212,995	$	198,571

Property and equipment, net

	December 31,
	2007			2006
	(In thousands)
Machinery and equipment	$	612,839		$	608,690
Buildings and land		198,983			192,568
Building and leasehold improvements		65,672			79,133
Furniture and fixtures		25,465			22,517
		902,959			902,908
Less accumulated depreciation		(582,950	)		(538,309	)
Total property and equipment	$	320,009		$	364,599

Depreciation expense for the years ended December 31, 2007, 2006 and 2005 was $59.8 million, $63.4 million and $76.8 million, respectively.

Accrued warranty

Changes in our accrued warranty liability are as follows:

	Years Ended December 31,
	2007			2006			2005
	(In thousands)
Balance, beginning of period	$	55,349		$	54,553		$	45,526
Warranties issued		80,899			84,860			79,146
Settlements		(74,618	)		(82,799	)		(84,632	)
Acquired liability		—			—			610
Changes in liability for pre-existing warranties, including expirations		(6,773	)		(1,265	)		13,903
Balance, end of period	$	54,857		$	55,349		$	54,553

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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 December 31,
	2007			2006
	(In thousands)
Balance, beginning of period	$	225,431		$	255,584
Deferred tax liability adjustment		(1,954	)		(41,606	)
Foreign currency translation and other		15,467			11,453
Balance, end of period	$	238,944		$	225,431

During 2007 and 2006, we determined that certain valuation allowances recorded during a prior acquisition in the Semiconductor Group were no longer required, and we accordingly reversed $2.0 million and $41.6 million, respectively, against goodwill.

Intangible Assets

Our acquired intangible assets are as follows:

	Weighted
	Average
	Amortization				Accumulated
December 31, 2007	Period		Gross		Amortization			Net
	(Years)				(In thousands)
Patents and other intangibles		12.0	$	16,661	$	(1,679	)	$	14,982
Developed technology		6.0		30,270		(22,169	)		8,101
Trademark		10.0		7,473		(2,616	)		4,857
Total		8.4	$	54,404	$	(26,464	)	$	27,940

	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

The amortization expense for the identifiable intangible assets was approximately $7.1 million, $6.3 million and $6.0 million for the years ended December 31, 2007, 2006 and 2005, respectively. Our estimated amortization expense for the identifiable intangible assets for each of the next five fiscal years will be approximately $7.0 million for 2008, $4.4 million for 2009, $3.2 million for 2010, $2.1 million for 2011 and $2.1 million for 2012. In 2006 we purchased a portfolio of intellectual property for $16.3 million, which is being amortized over a weighted average period of 12 years. As of December 31, 2007, we have no identifiable intangible assets with indefinite lives.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. We acquired the remainder of Voumard in November 2006. 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.

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

In August 2007, we purchased the remaining non-controlling interest in a subsidiary of Voumard for $0.3 million.

Note 7.   Restructuring and Other Charges (Benefits)

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 (benefits), except for $1.0 million of asset impairment in 2005, are related to the Semiconductor Group. As of December 31, 2007, substantially all actions under our restructuring plans had been completed, except for payments of future rent obligations, which we estimate will be paid in cash through 2017.

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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes restructuring activity:

	Facility			Asset						Restructuring			Inventory
	Exit Costs			Impairments			Severance			Total			Write-Down
	(In thousands)
Balance at December 31, 2004	$	42,957		$	163		$	160		$	43,280		$	—
Restructuring charges		—			14,172			838			15,010			5,250
Non-cash adjustment		—			(14,265	)		—			(14,265	)		(5,250	)
Cash payments		(8,065	)		(70	)		(135	)		(8,270	)		—
Adjustment of prior restructuring cost		(5,835	)		—			—			(5,835	)		—
Balance at December 31, 2005		29,057			—			863			29,920			—
Restructuring charges		6,235			10,199			51			16,485			—
Non-cash adjustment		1,161			(10,199	)		—			(9,038	)		—
Cash payments		(11,130	)		—			(544	)		(11,674	)		—
Adjustment of prior restructuring cost		(5,525	)		—			(225	)		(5,750	)		—
Balance at December 31, 2006		19,798			—			145			19,943			—
Cash payments		(3,269	)		—			(46	)		(3,315	)		—
Adjustment of prior restructuring cost		1,125			—			—			1,125			—
Balance at December 31, 2007	$	17,654		$	—		$	99		$	17,753		$	—

Facilities Exit Costs and Asset Impairment

In the fourth quarter of 2007, we completed the sale of certain facilities in San Jose, California resulting in a gain of $9.1 million that is included in operating income as part of Restructuring and other charges (benefits). This sale substantially completes the actions contemplated under the restructuring plan implemented during the first quarter of 2006. Partially offsetting the gain on sale was $1.1 million in additional expense resulting from changes in estimates associated primarily with facility exit costs.

In 2006, we implemented a restructuring plan to dispose of certain owned facilities located in San Jose, California. We considered the change in planned use of the facilities as an indicator of impairment and determined that two of the facilities were impaired, resulting in impairment charges of $8.9 million to write these facilities down to their estimated fair value.

Restructuring charges related to facility exit costs were increased by $1.1 million in 2007 and reduced by $5.5 million and $5.8 million in 2006 and 2005, respectively, primarily 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 certain 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 did not expect to recover the carrying value of these assets through future cash flows.

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8.   Borrowing Arrangements

Current Obligations Under Lines of Credit

We have available short-term credit facilities with various financial institutions totaling $89.7 million. These credit facilities bear interest at various rates, expire on various dates through December 2008 and are used for general corporate purposes. As of December 31, 2007, $1.5 million of borrowings were outstanding under the short-term lines of credit at a weighted-average interest rate of 1.3%, $27.7 million was pledged against outstanding letters of credit and the remaining $60.5 million was unutilized.

Long-Term Debt

In aggregate, we have long-term credit facilities with various institutions totaling $338.9 million, of which $195.7 million was unutilized as of December 31, 2007. These credit facilities bear interest at a weighted-average rate of 5.0% and expire through December 2037. As of December 31, 2007, we had $143.3 million in long-term debt outstanding under these facilities.

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 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 common stock. 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, 2007.

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% (5.0% at December 31, 2007), and requires us to maintain certain financial covenants. We were in compliance with these covenants as of December 31, 2007. Outstanding balances of $142.0 million and $126.6 million were recorded as long-term debt at December 31, 2007 and 2006, respectively. This credit facility is secured by cash or short-term investments on deposit and is due and payable on or before June 25, 2009. Amounts to secure this borrowing are included within restricted cash and cash equivalents in the Consolidated Balance Sheets at December 31, 2007 and 2006.

We maintained borrowings of $1.3 million at December 31, 2007 and 2006 under a separate credit agreement. This facility is for general corporate purposes and bears interest of 4.0% at December 31, 2007. Amounts under this credit arrangement are due and payable in installments through December 31, 2037.

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, 2007.

	Years Ending December 31,
	2009		2010		2011		2012		Thereafter
	(In thousands)
Long-term debt obligations	$	142,014	$	43	$	43	$	43	$	1,124

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9.   Other Income, net

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

	Years Ended December 31,
	2007			2006			2005
	(In thousands)
Other income	$	10,024		$	4,820		$	810
Other expense		(184	)		(1,772	)		(578	)
Foreign currency gain, net		4,515			4,808			5,456
Other-than-temporary impairment of short-term investment		(1,763	)		—			—
Gain on acquisition of Voumard		—			2,797			—
Total other income, net	$	12,592		$	10,653		$	5,688

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, 2007, the maximum potential amount of future payments that we could be required to make under these letters of credit was approximately $27.7 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, we would have a maximum exposure of $178.1 million as of December 31, 2007.

Lease Commitments

We have non-cancelable operating leases for various facilities. Rent expense was approximately $3.8 million, $4.3 million and $4.9 million for the years ended December 31, 2007, 2006 and 2005, respectively, net of sublease income of $1.0 million for each year. 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
	2008		2009		2010		2011		2012		Thereafter		Income			Total
	(In thousands)
Non-cancelable operating leases	$	8,851	$	8,489	$	8,158	$	7,850	$	5,011	$	20,984	$	(23,205	)	$	36,138

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Purchase Commitments

We have firm purchase commitments with various suppliers to ensure the availability of components. Our minimum obligation at December 31, 2007 under these arrangements was $95.3 million. Primarily all amounts under these arrangements are due in 2008. 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 orders 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), declaratory relief and injunctions for causes of actions involving alleged breach of contract, fraud, unfair competition and breach of warranty. The Superior Court dismissed Linear’s claims for fraud and unfair competition on October 5, 2004. The Court of Appeal affirmed this dismissal on June 18, 2007. Trial on the remaining claims is currently set for November 10, 2008. At this time, we cannot predict the ultimate outcome of this case, nor can we estimate a range of potential loss, if any. However, we believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

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. 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

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

	Years Ended December 31,
	2007		2006			2005
	(In thousands)
Domestic	$	221,329	$	433,658		$	126,099
Foreign		93,460		(94,739	)		32,514
Total	$	314,789	$	338,919		$	158,613

In 2006 we implemented a new global business structure. A key element of the structure involves the sharing of certain expenses. Our 2006 and 2007 geographic breakout of income before income taxes reflects additional intercompany expenses incurred by our foreign subsidiaries.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	Years Ended December 31,
	2007			2006			2005
	(In thousands)
Federal
Current	$	30,350		$	77,401		$	4,139
Deferred		35,910			45,090			21,851
		66,260			122,491			25,990
State
Current		2,518			8,482			441
Deferred		4,226			4,431			8,737
		6,744			12,913			9,178
Foreign
Current		32,656			19,662			17,211
Deferred		(4,571	)		(5,215	)		(3,873	)
		28,085			14,447			13,338
Total provision for income taxes	$	101,089		$	149,851		$	48,506

Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. We calculate and provide for income taxes in each of the tax jurisdictions in which we operate, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each such jurisdiction. The estimates used could differ from actual results, and this may have a significant impact on operating results in future periods.

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 as follows:

	Years Ended December 31,
	2007			2006			2005
	(In thousands)
Expected provision at 35%	$	110,176		$	118,622		$	55,515
State tax, net of federal benefit		6,743			8,374			5,966
Tax-exempt interest		(9,275	)		(6,988	)		(5,885	)
Research and development credits		(3,921	)		(1,886	)		(1,913	)
Domestic manufacturing/export sales incentive		(825	)		(9,723	)		(2,971	)
Foreign income/losses taxed at different rates		(2,575	)		46,106			—
Adjustments of tax accounts		—			(8,529	)		—
Share-based compensation		4,759			1,739			—
Other		(3,993	)		2,136			(2,206	)
Total provision for income taxes	$	101,089		$	149,851		$	48,506

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 deferred tax assets and liabilities are as follows:

	December 31,
	2007			2006
	(In thousands)
Deferred tax assets:
Reserves and accruals	$	67,456		$	86,933
Capitalized in-process research and development		26,438			31,344
Deferred profit		6,015			25,369
Net operating loss carryforwards		36,860			41,216
Credits		6,333			14,570
Other		9,218			11,493
Total deferred tax assets		152,320			210,925
Valuation allowance		—			(3,770	)
Deferred tax assets, net of valuation allowance		152,320			207,155
Deferred tax liabilities:
Depreciation		(53,707	)		(69,148	)
Acquisition related items		(129	)		(8,023	)
Total net deferred tax assets	$	98,484		$	129,984

The net decrease in valuation allowance was $3.8 million, $64.2 million and $12.3 million during the years ended December 31, 2007, 2006 and 2005.

As of December 31, 2007, we had state tax credit carryforwards of approximately $9.5 million. If not utilized, these carryforwards will begin to expire in 2008.

As of December 31, 2007, our federal and state net operating losses for tax return purposes were $104.4 million and $13.0 million, respectively. If not utilized, these carryforwards will begin to expire in 2010.

On January 1, 2007, we adopted the provisions of FIN 48, as amended. No cumulative adjustment to retained earnings was required upon adoption. Historically, interest and penalties and unrecognized tax benefits were classified as current liabilities. With the adoption of FIN 48, we classify interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities in the Consolidated Balance Sheets. The total amount of unrecognized tax benefits as of the date of adoption of FIN 48 was $11.3 million including $0.8 million of state and research development credits which were reflected in net deferred tax assets. As of December 31, 2007, the total amount of unrecognized tax benefits is $26.6 million including $1.0 million of state and research credits reflected in net deferred tax assets. Of the total unrecognized tax benefits, $25.9 million, if recognized, would affect our effective tax rate.

Our policy to include interest and penalties related to unrecognized tax benefits within the provision for income taxes did not change as a result of adopting FIN 48. As of December 31, 2007, the total amount of interest and penalties accrued is $1.8 million, which is classified as a non-current liability in the Consolidated Balance Sheet. At adoption on January 1, 2007, cumulative interest and penalties was $0.1 million. For fiscal year 2007, interest and penalties expense is $1.7 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Liability for Unrecognized
	Tax Benefits
	(In thousands)
Balance at January 1, 2007	$	11,298
Additions for tax positions of prior years		3,710
Additions for tax positions of current year		14,542
Reductions for tax positions of prior years		(2,915	)
Balance at December 31, 2007	$	26,635

With certain exceptions, we are no longer subject to U.S. federal or state income tax examinations by tax authorities for years prior to 2004, although the utilization of tax loss and credit carryforwards from fiscal years 2001 through 2003 could also be subject to examination. We believe that adequate accruals have been provided for any potential adjustments that may result from current examinations. The timing of the settlement of these examinations is uncertain. We have not been notified of any additional examinations, however, given the number of remaining years subject to examination it is reasonably possible that the total unrecognized tax benefits could increase over the next twelve months. In addition, we do not anticipate a reduction of our unrecognized tax benefits as a result of a lapse of the applicable statutes of limitations.

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,
	2007			2006
	(In thousands)
Foreign currency translation adjustments, net of tax of $1,734 and $1,575 in 2007 and 2006, respectively	$	8,064		$	3,578
Unrealized gain (loss) on short-term investments, net of tax of $85 in 2007		(13	)		224
Unrealized loss on derivative instruments		(2,578	)		(329	)
Unrealized loss on minimum pension liability adjustment, net of tax of $162 and $369 in 2007 and 2006, respectively		(197	)		(878	)
Accumulated other comprehensive income (loss)	$	5,276		$	2,595

Common Stock Repurchase Program

At various times, the Board of Directors has authorized us to repurchase our outstanding common stock, including approvals of $1.0 billion on September 14, 2004 and another $1.0 billion on October 26, 2007. As of December 31, 2007, we had a remaining authorization of $1.0 billion available for stock repurchases. For the years ended December 31, 2007 and 2006, 21.7 million and 10.4 million shares were repurchased, respectively, under this plan at a weighted average purchase price of $27.31 and $24.13, respectively. Certain share repurchases that occurred in 2007 were not settled at December 31, 2007 resulting in $15.1 million of outstanding payables in the Consolidated Balance Sheet.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 14.   Stock-Based Compensation and Employee Benefit Plans

Stock-Based Compensation

Prior to 2007, we had several stock plans that provided for grants of equity instruments to our employees and non-employee directors. In February and May 2007, the Board of Directors and shareholders, respectively, approved the amended and restated 2001 Stock Incentive Plan (the “Plan”) to increase the number of shares available for grant and to consolidate all stock plans into a single plan. Awards under the Plan include incentive stock options, non-statutory stock options and restricted stock awards. Restricted stock awards include restricted stock and restricted stock units that are settled in common stock. 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 three, four, or five-year periods, excluding certain awards that vest upon the achievement of specific performance targets. There are 24.3 million shares authorized for grant under the Plan. At December 31, 2007, there were 6.0 million shares available for future grant under the Plan, of which 1.3 million are available for restricted stock awards.

We also have an Employee Stock Purchase Plan (ESPP) that allows qualified employees to purchase shares of common stock at 85% of the fair market value on specified dates. There are 6.9 million shares authorized for purchase under the ESPP. At December 31, 2007 there were 1.0 million shares available for future purchase under the ESPP.

Effective January 1, 2006, we adopted SFAS 123R using the modified prospective transition method. Under this transition method, stock-based compensation expense includes: (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 SFAS No. 123, “Accounting for Stock-Based Compensation (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 SFAS 123R. Compensation expense is recognized only for those awards that are expected to vest. 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.

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,
	2007			2006			2005
	(In thousands)
	(1)			(2)			(3)
Cost of sales	$	1,869		$	1,425		$	736
Selling, general and administrative		17,583			22,337			2,168
Research and development		8,666			11,179			1,305
Stock-based compensation expense before income taxes		28,118			34,941			4,209
Income tax benefit		(7,657	)		(11,531	)		(1,620	)
Total stock-based compensation expense after income taxes	$	20,461		$	23,410		$	2,589

(1)	Amounts include amortization expense related to stock options of $20.3 million, employee stock purchase plan of $2.9 million, and restricted stock awards of $4.9 million.
(2)	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.

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(3) Amounts include amortization expense related to restricted stock awards of $4.2 million.

In the fourth quarter of 2007 we determined that certain performance conditions, primarily related to restricted stock awards, were no longer probable of being met. As a result, we reversed $2.4 million of expense previously recognized in 2006. Approximately $0.1 million was reversed from cost of sales, $1.8 million from selling, general and administrative and $0.5 million from research and development.

Total stock-based compensation cost capitalized in inventory, was $0.2 million and $0.3 million at December 31, 2007 and 2006, respectively

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, we reclassified the balance in deferred compensation to common stock on the balance sheet on January 1, 2006.

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 Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.”

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

	Year Ended
	December 31, 2005
Net income as reported	$	110,107
Add:
Intrinsic value method expense included in reported net income, net of related tax effects		2,589
Less:
Fair value method expense, net of related tax effects		(49,145	)
Pro-forma net income	$	63,551
Pro-forma basic net income per share	$	0.46
Pro-forma diluted net income per share	$	0.46
Basic net income per share as reported	$	0.80
Diluted net income per share as reported	$	0.80

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.

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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 exercises including post-vesting exercises and termination. 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.

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 years ended December 31, 2007 and 2006, the estimated annual forfeiture rate was 10.9% and 8.9%, respectively.

We used the following weighted-average valuation assumptions to estimate the fair value of options granted for the years ended December 31, 2007, 2006 and 2005, respectively:

	2007			2006			2005
Risk-free interest rate		3.8	%		4.7	%		4.1	%
Expected volatility		49	%		49	%		54	%
Expected term		4.4 years			4.4 years			3.9 years
Expected dividends		None			None			None
Weighted-average fair value at grant date	$	12.13		$	14.30		$	11.25

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 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
Grants		1,696			27.44
Exercises		(1,247	)		24.51
Forfeitures or expirations		(1,574	)		35.52
Outstanding at December 31, 2007		21,774		$	31.99		5.62	$	17,187
Vested and expected to vest at December 31, 2007		20,860		$	32.14		5.47	$	16,192
Exercisable at December 31, 2007		16,678		$	33.10		4.67	$	11,425

The aggregate intrinsic value of options outstanding at December 31, 2007 is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 7.2 million shares that had exercise prices that were lower than the market price of our common stock on December 31, 2007. The total intrinsic value of the options exercised during the years ended December 31, 2007, 2006, and 2005 was $9.2 million, $14.0 million and $14.0 million, respectively, determined as of the date of exercise. The total cash received from employees as a result of stock option exercises during the year ended December 31, 2007, 2006 and 2005 was $32.3 million, $34.2 million and $21.3 million, respectively. In connection with these exercises and the disqualification of incentive stock options, we realized a tax benefit of $2.6 million and $4.3 million for the years ended December 31, 2007 and 2006, respectively. We settle employee stock option exercises with newly issued common shares.

As of December 31, 2007 there was $41.9 million of unrecognized compensation cost related to unvested stock options, of which $18.2 million, $12.4 million, $8.8 million and $2.5 million is expected to be recognized in 2008, 2009, 2010, and 2011, respectively.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 awards at December 31, 2004		688		$	31.73
Granted		655			24.21
Vested		(29	)		24.90
Forfeited		(117	)	$	32.04
Unvested restricted stock awards at December 31, 2005		1,197			27.57
Granted		832			32.14
Vested		(77	)		30.39
Forfeited		(108	)	$	27.12
Unvested restricted stock awards at December 31, 2006		1,844			29.56
Granted		1,236			26.81
Vested		(142	)		27.47
Forfeited		(173	)		29.61
Unvested restricted stock awards at December 31, 2007		2,765		$	28.45

The unvested restricted stock awards at December 31, 2007 include 1.1 million restricted stock units. Restricted stock units in prior years are not significant.

As of December 31, 2007, there were a total of 0.7 million restricted stock awards and 0.2 million restricted stock units subject to performance conditions that will result in forfeiture if the conditions are not realized. The restricted stock units have performance conditions that could result in the vesting of a maximum of 0.6 million restricted stock units. The performance conditions are based on our revenue, revenue growth and revenue growth relative to our peers.

As of December 31, 2007 there was $30.6 million of unrecognized compensation cost related to restricted stock awards, including performance awards that are expected to vest, of which $12.6 million, $9.0 million, $5.3 million and $3.7 million is expected to be recognized in 2008, 2009, 2010 and 2011, respectively. The total fair value of restricted stock awards vested during the years ended December 31, 2007, 2006 and 2005 was $4.0 million, $2.0 million and $0.7 million, respectively. In connection with the issuance of restricted stock awards, we realized a tax benefit of $1.5 million and $0.7 million for the years ended December 31, 2007 and 2006, respectively.

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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, 2007, 2006 and 2005, ESPP awards were valued using the following weighted-average assumptions:

	2007			2006			2005
Risk-free interest rate		4.9	%		5.0	%		3.3	%
Expected volatility		34	%		33	%		32	%
Expected term		6 months			6 months			6 months
Expected dividends		None			None			None
Weighted-average fair value at grant date	$	7.49		$	6.47		$	5.56

As of December 31, 2007, there was $1.1 million of total unrecognized compensation costs related to the ESPP, which is expected to be recognized during the next four months. In connection with the issuance of shares under our ESPP, we realized a tax benefit attributed to disqualifying dispositions of $0.4 million and $0.6 million for the years ended December 31, 2007 and 2006, respectively.

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 eligible 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 $4.1 million, $3.9 million and $3.6 million of expense in connection with matching contributions under the 401(k) plan for the years ended December 31, 2007, 2006 and 2005, 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 $10.4 million and $9.3 million at December 31, 2007 and 2006, 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 $23.8 million and $22.4 million as of December 31, 2007 and 2006, respectively. The related fair value of plan assets was $19.0 million and $17.5 million as of December 31, 2007 and 2006, respectively. Our practice is to fund the pension plans in amounts at least sufficient to meet the minimum requirements of local laws and regulations. The assets of the plans are primarily invested in high quality fixed income investments. Our contributions were approximately $0.6 million, $0.5 million and $0.5 million in each of the years 2007, 2006 and 2005, respectively. The net liability recognized related to the funded status of the plans was approximately $4.8 million and $4.9 million as of December 31, 2007 and 2006, respectively. Our estimated benefit payments for each of the next ten years will be approximately $1.9 million per year in 2008 through 2012, and an aggregate of $19.5 million for years 2013 through 2017.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 $2.1 million and $2.0 million as of December 31, 2007 and 2006, 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 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. Since this time we have been organized into two segments. We refer to this second segment as the Industrial Applications Group.

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.

A summary of financial data by segment is as follows:

			Industrial
	Semiconductor		Applications
	Group		Group		Total
	(In thousands)
2007
Sales to unaffiliated customers	$	1,395,703	$	174,346	$	1,570,049
Total net sales	$	1,395,703	$	174,346	$	1,570,049
Operating income	$	246,361	$	23,798	$	270,159
Long-lived assets	$	296,778	$	23,231	$	320,009
All other identifiable assets		1,495,665		261,269		1,756,934
Total assets	$	1,792,443	$	284,500	$	2,076,943

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

			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

			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

Two customers each accounted for 11%, 13% and 17% of our net sales for the years ended December 31, 2007, 2006 and 2005, respectively. 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)
2007
Sales to unaffiliated customers	$	488,438	$	151,439	$	930,172	$	—		$	1,570,049
Transfers between geographic locations		344,033		37,130		232,389		(613,552	)	$	—
Total net sales	$	832,471	$	188,569	$	1,162,561	$	(613,552	)	$	1,570,049
Operating income (loss)	$	174,030	$	24,992	$	71,137	$	—		$	270,159
Long-lived assets	$	295,806	$	21,262	$	2,941	$	—		$	320,009
All other identifiable assets		1,042,670		258,786		455,478		—			1,756,934
Total assets	$	1,338,476	$	280,048	$	458,419	$	—		$	2,076,943

	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

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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 our revenue recognition policy. Transfers and commission arrangements between geographic areas are at prices sufficient to recover a reasonable profit. Due to the establishment of our international headquarters in Singapore, a significant portion of North America net sales shifted to Asia in 2007.

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 $0.7 million, $0.8 million and $0.6 million for the years ended December 31, 2007, 2006 and 2005, 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 the year ended December 31, 2005. No grants were provided during the years ended December 31, 2007 and 2006.

During the year ended December 31, 2005, 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 the year ended December 31, 2005. 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, 2007, 2006 and 2005, 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, 2007, 2006 and 2005 were $0.8 million, $2.1 million and $0.4 million, respectively.

Current regulations prohibit company loans to “executive officers,” as defined by the SEC. We have outstanding loans to non-executive vice presidents and other key personnel. As of December 31, 2007 and 2006, the total outstanding balance of such loans was $1.0 million and $1.5 million, respectively. As of December 31, 2007, nearly all of the outstanding balance was secured by collateral. Loans typically bear interest, except for those made for employee relocation purposes. Bad debt expense related to loans to personnel has not historically been significant.

Note 17.   Quarterly Financial Data (Unaudited)

	Quarter Ended
	March 31,		June 30,		September 29,		December 31,
	2007		2007		2007		2007(1,2)
	(In thousands, except per share amounts)
Net sales	$	396,974	$	416,335	$	393,277	$	363,463
Gross profit	$	194,909	$	208,110	$	194,307	$	171,863
Net income	$	53,783	$	57,345	$	49,711	$	52,861
Basic net income per share	$	0.43	$	0.46	$	0.41	$	0.48
Diluted net income per share	$	0.42	$	0.45	$	0.41	$	0.47
Shares used in basic per share calculations		123,979		123,788		120,414		111,160
Shares used in diluted per share calculations		127,137		126,630		121,902		112,395

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Quarter Ended
	April 1,		July 1,		September 30,		December 31,
	2006		2006		2006		2006(3)
	(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

(1)	The fourth quarter of 2007 results include a net restructuring and other benefit of $8.0 million, primarily resulting from a gain on sale of property and buildings in San Jose, California.
(2)	In the fourth quarter of 2007, we determined that certain performance conditions impacting the vesting of a portion of our share-based compensation to employees were no longer probable of being met. As a result, we reversed $8.4 million of previously recognized share-based compensation expense, of which $2.4 million was initially recognized in 2006.
(3)	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.

80

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, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, 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), Novellus Systems, Inc.’s internal control over financial reporting as of December 31, 2007, 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, 2008

81

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 management’s assessment of our internal control over financial reporting and the controls evaluation referenced in the certifications. The report of Ernst & Young LLP, our independent registered public accounting firm, is also included below. Ernst & Young LLP’s report addresses their audit of our internal control over financial reporting. 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.

82

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, 2007 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 our internal control over financial reporting was effective as of December 31, 2007 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.

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Report of Independent Registered Public Accounting Firm

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

We have audited Novellus Systems, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Novellus Systems, Inc.’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 included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Novellus Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, 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, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 of Novellus Systems, Inc. and our report dated February 27, 2008 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

San Jose, California

February 27, 2008

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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 2008 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 2008 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 2008 Annual Meeting of Shareholders, and is incorporated herein by reference.

85

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 2008 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 2008 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, 2007, 2006, and 2005. Consolidated Balance Sheets at December 31, 2007 and 2006. Consolidated Statements of Cash Flows — Years Ended December 31, 2007, 2006, and 2005. Consolidated Statement of Shareholders’ Equity — Years Ended December 31, 2007, 2006, and 2005. 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	Novellus 2001 Stock Incentive Plan, as amended, together with forms of agreement thereunder.
*10	.10(11)	SpeedFam-IPEC, Inc. Amended and Restated 1995 Stock Plan, as assumed by Novellus.

86

*10	.11(12)	SpeedFam-IPEC, Inc. 2001 Nonstatutory Stock Option Plan, together with forms of agreements thereunder, as assumed by Novellus.
*10	.12(13)	Integrated Process Equipment Corporation 1992 Stock Option Plan, as assumed by Novellus.
10	.13(14)	Lease Agreement between Seldin Properties and Integrated Process Equipment Corp. dated December 26, 1996.
10	.14(15)	Lease Guaranty between Novellus and Phoenix Industrial Investment Partners, L.P. dated January 21, 2003.
*10	.15(16)	Restricted Stock Purchase Agreement between Novellus and Richard S. Hill dated December 13, 2002.
10	.16(17)	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	.17(18)	Guarantee and Collateral Agreement made by Novellus Systems, Inc. in favor of JPMorgan Chase Bank, as Administrative Agent dated June 25, 2004.
10	.18(19)	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	.19(20)	Amended and Restated Employment Agreement between Novellus and Richard S. Hill effective as of March 11, 2005.
10	.20(21)	Form of Non-Employee Director Restricted Stock Bonus Agreement, as amended.
10	.21(22)	Form of Resale Restriction Agreement.
10	.22(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	.23(24)	Offer Letter of Employment to William H. Kurtz dated August 24, 2005.
*10	.24(25)	Executive Employment Agreement between Novellus Systems, Inc. and Dr. Thomas Caulfield dated October 12, 2005.
*10	.25(26)	Offer Letter of Employment to Ginetto Addiego dated February 2, 2005.
*10	.26(27)	Letter Agreement by and between Novellus Systems, Inc. and Sasson Somekh dated December 20, 2006.
21	.1	Subsidiaries of Novellus.
23	.1	Consent of Independent Registered Public Accounting Firm.
24	.1	Power of Attorney (see page 90).
31	.1	Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated February 27, 2008 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 27, 2008 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 27, 2008 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 27, 2008 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

87

(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 10.4 filed with Novellus’ Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2007.
(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 10.30 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(12)	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.
(13)	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.
(14)	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.
(15)	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.
(16)	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.
(17)	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.
(18)	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.
(19)	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.
(20)	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.
(21)	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.
(22)	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.
(23)	Incorporated by reference to Exhibit 10.23 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.

88

(24)	Incorporated by reference to Exhibit 10.24 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.
(25)	Incorporated by reference to Exhibit 10.25 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.
(26)	Incorporated by reference to Exhibit 10.26 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.
(27)	Incorporated by reference to Exhibit 10.27 to Novellus’ Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2007.
*	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 27th day of February, 2008.

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 27, 2008
/s/  William H. Kurtz William H. Kurtz	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	February 27, 2008
/s/  John D. Hertz John D. Hertz	Vice President and Corporate Controller (Principal Accounting Officer)	February 27, 2008
/s/  Neil R. Bonke Neil R. Bonke	Director	February 27, 2008
/s/  Youssef A. El-Mansy Youssef A. El-Mansy	Director	February 27, 2008
/s/  J. David Litster J. David Litster	Director	February 27, 2008
/s/  Yoshio Nishi Yoshio Nishi	Director	February 27, 2008

90

Signature	Title	Date
/s/  Glen G. Possley Glen G. Possley	Director	February 27, 2008
/s/  Ann D. Rhoads Ann D. Rhoads	Director	February 27, 2008
/s/  William R. Spivey William R. Spivey	Director	February 27, 2008
/s/  Delbert A. Whitaker Delbert A. Whitaker	Director	February 27, 2008

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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

December 31, 2007, 2006 and 2005

	Balance at
	Beginning of							Balance at
	Year		Additions		Deductions			End of Year
	(In thousands)
Allowance for doubtful accounts(1) 2007	$	1,753	$	879	$	(644	)	$	1,988
2006	$	987	$	1,119	$	(353	)	$	1,753
2005	$	8,247	$	243	$	(7,503	)	$	987

(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.

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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	Novellus 2001 Stock Incentive Plan, as amended, together with forms of agreement thereunder.
*10	.10(11)	SpeedFam-IPEC, Inc. Amended and Restated 1995 Stock Plan, as assumed by Novellus.
*10	.11(12)	SpeedFam-IPEC, Inc. 2001 Nonstatutory Stock Option Plan, together with forms of agreements thereunder, as assumed by Novellus.
*10	.12(13)	Integrated Process Equipment Corporation 1992 Stock Option Plan, as assumed by Novellus.
10	.13(14)	Lease Agreement between Seldin Properties and Integrated Process Equipment Corp. dated December 26, 1996.
10	.14(15)	Lease Guaranty between Novellus and Phoenix Industrial Investment Partners, L.P. dated January 21, 2003.
*10	.15(16)	Restricted Stock Purchase Agreement between Novellus and Richard S. Hill dated December 13, 2002.
10	.16(17)	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	.17(18)	Guarantee and Collateral Agreement made by Novellus Systems, Inc. in favor of JPMorgan Chase Bank, as Administrative Agent dated June 25, 2004.
10	.18(19)	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	.19(20)	Amended and Restated Employment Agreement between Novellus and Richard S. Hill effective as of March 11, 2005.
10	.20(21)	Form of Non-Employee Director Restricted Stock Bonus Agreement, as amended.
10	.21(22)	Form of Resale Restriction Agreement.
10	.22(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	.23(24)	Offer Letter of Employment to William H. Kurtz dated August 24, 2005.
*10	.24(25)	Executive Employment Agreement between Novellus Systems, Inc. and Dr. Thomas Caulfield dated October 12, 2005.
*10	.25(26)	Offer Letter of Employment to Ginetto Addiego dated February 2, 2005.
*10	.26(27)	Letter Agreement by and between Novellus Systems, Inc. and Sasson Somekh dated December 20, 2006.
21	.1	Subsidiaries of Novellus.

93

23	.1	Consent of Independent Registered Public Accounting Firm.
24	.1	Power of Attorney (see page 90).
31	.1	Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated February 27, 2008 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 27, 2008 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 27, 2008 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 27, 2008 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 10.4 filed with Novellus’ Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2007.
(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 10.30 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2003.
(12)	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.
(13)	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.
(14)	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.
(15)	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.
(16)	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.

94

(17)	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.
(18)	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.
(19)	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.
(20)	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.
(21)	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.
(22)	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.
(23)	Incorporated by reference to Exhibit 10.23 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.
(24)	Incorporated by reference to Exhibit 10.24 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.
(25)	Incorporated by reference to Exhibit 10.25 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.
(26)	Incorporated by reference to Exhibit 10.26 to Novellus’ Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.
(27)	Incorporated by reference to Exhibit 10.27 to Novellus’ Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2007.
*	Management contracts or compensatory plans or arrangements.

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EX-10.9

Exhibit 10.9

NOVELLUS SYSTEMS, INC.
2001 STOCK INCENTIVE PLAN

(Amended and Restated February 15, 2007)

     1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to attract and retain the best available personnel, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company’s business.

     2. Definitions. As used herein, the following definitions shall apply:

          (a) “Administrator” means the Board or any of the Committees appointed to administer the Plan.

          (b) “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.

          (c) “Applicable Laws” means the legal requirements relating to the administration of stock incentive plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Awards granted to residents therein.

          (d) “Award” means the grant of an Option, Restricted Stock or Restricted Stock Unit under the Plan.

          (e) “Award Agreement” means the written agreement evidencing the grant of an Award executed by the Company and the Grantee, including any amendments thereto.

          (f) “Board” means the Board of Directors of the Company.

          (g) “Code” means the Internal Revenue Code of 1986, as amended.

          (h) “Committee” means any committee appointed by the Board to administer the Plan.

          (i) “Common Stock” means the common stock of the Company.

          (j) “Company” means Novellus Systems, Inc., a California corporation.

          (k) “Consultant” means any person (other than an Employee or a Director, solely with respect to rendering services in such person’s capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity.

          (l) “Continuous Service” means that the provision of services to the Company or a Related Entity in any capacity of Employee, Director or Consultant is not interrupted or terminated. In jurisdictions requiring notice in advance of an effective termination as an Employee, Director or Consultant, Continuous Service shall be deemed terminated upon the actual cessation of providing services to the Company or a Related Entity notwithstanding any required notice period that must be fulfilled before a termination as an Employee, Director or Consultant can be effective under Applicable Laws. A Grantee’s Continuous Service shall be deemed to have terminated either upon an actual termination of Continuous Service or upon the entity for which the Grantee provides services ceasing to be a Related Entity. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement). An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave. For purposes of each Incentive Stock Option granted under the Plan, if such leave exceeds three (3) months, and reemployment

upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option shall be treated as a Nonstatutory Stock Option on the day three (3) months and one (1) day following the expiration of such three (3) month period.

          (m) “Corporate Transaction” means any of the following transactions:

               (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;

               (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company’s subsidiary corporations);

               (iii) approval by the Company’s shareholders of any plan or proposal for the complete liquidation or dissolution of the Company;

               (iv) any reverse merger or series of related transactions culminating in a reverse merger (including, but not limited to, a tender offer followed by a reverse merger) in which the Company is the surviving entity but (A) the shares of Common Stock outstanding immediately prior to such merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (B) in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger or the initial transaction culminating in such merger; or

               (v) acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities but excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction.

          (n) “Covered Employee” means an Employee who is a “covered employee” under Section 162(m)(3) of the Code.

          (o) “Director” means a member of the Board or the board of directors of any Related Entity.

          (p) “Disability” means a Grantee would qualify for benefit payments under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy. If the Company or the Related Entity to which the Grantee provides service does not have a long-term disability plan in place, “Disability” means that a Grantee is permanently unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment. A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion.

          (q) “Employee” means any person, including an Officer or Director, who is an employee of the Company or any Related Entity. The payment of a director’s fee by the Company or a Related Entity shall not be sufficient to constitute “employment” by the Company.

          (r) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (s) “Fair Market Value” means, that as of any date, the value of Common Stock determined as follows:

               (i) If the Common Stock is listed on one or more established stock exchanges or national market systems, including without limitation The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market of The NASDAQ Stock Market LLC, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on the principal exchange or system on which the Common Stock is listed (as determined by the Administrator) on the date of

determination (or, if no closing sales price or closing bid was reported on that date, as applicable, on the last trading date such closing sales price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

               (ii) If the Common Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a recognized securities dealer, its Fair Market Value shall be the

closing sales price for such stock as quoted on such system or by such securities dealer on the date of determination, but if selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination (or, if no such prices were reported on that date, on the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

               (iii) In the absence of an established market for the Common Stock of the type described in (i) and (ii), above, the Fair Market Value thereof shall be determined by the Administrator in good faith.

          (t) “Grantee” means an Employee, Director or Consultant who receives an Award pursuant to an Award Agreement under the Plan.

          (u) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

          (v) “Nonstatutory Stock Option” means an Option not intended to qualify as an Incentive Stock Option.

          (w) “Officer” means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

          (x) “Option” means an option to purchase Shares pursuant to an Award Agreement granted under the Plan.

          (y) “Outside Director” means a Director who is not an Employee.

          (z) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

          (aa) “Performance — Based Compensation” means compensation qualifying as “performance-based compensation” under Section 162(m) of the Code.

          (bb) “Plan” means this 2001 Stock Incentive Plan.

          (cc) “Related Entity” means any Parent, Subsidiary and any business, corporation, partnership, limited liability company or other entity in which the Company, a Parent or a Subsidiary holds a substantial ownership interest, directly or indirectly.

          (dd) “Related Entity Disposition” means the sale, distribution or other disposition by the Company, a Parent or a Subsidiary of all or substantially all of the interests of the Company, a Parent or a Subsidiary in any Related Entity effected by a sale, merger or consolidation or other transaction involving that Related Entity or the sale of all or substantially all of the assets of that Related Entity, other than any Related Entity Disposition to the Company, a Parent or a Subsidiary.

          (ee) “Restricted Stock” means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator.

          (ff) “Restricted Stock Units” means an Award which may be earned in whole or in part upon the passage of time or the attainment of performance criteria established by the Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares or other securities as established by the Administrator.

          (gg) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor thereto.

          (hh) “Share” means a share of the Common Stock.

          (ii) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

     3. Stock Subject to the Plan.

          (a) Subject to the provisions of Section 10, below, the maximum aggregate number of Shares which may be issued pursuant to all Awards is 14,860,000 Shares, plus the number of Shares that remain

available for grants of awards under the Company’s 2001 Non-Qualified Stock Option Plan (the 2001 NQ Plan) as of May 11, 2007, plus any Shares that would otherwise return to the 2001 NQ Plan as a result of forfeiture, termination or expiration of awards previously granted under the 2001 NQ Plan; provided, however, that the maximum aggregate number of Shares which may be issued pursuant to all Awards of Restricted Stock and Restricted Stock Units is 4,636,000 and that the maximum aggregate number of Shares which may be issued pursuant to all Awards of Incentive Stock Options is 14,000,000 Shares (with all such Share amounts and limits subject to the provisions of Section 10, below). The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock.

          (b) Any Shares covered by an Award (or portion of an Award) which is forfeited or canceled, expires or is settled in cash, shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan. Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at the lower of their original purchase price or their Fair Market Value at the time of repurchase, such Shares shall become available for future grant under the Plan. Notwithstanding anything to the contrary contained herein: (i) Shares tendered or withheld in payment of an Option exercise price shall not be returned to the Plan and shall not become available for future issuance under the Plan; and (ii) Shares withheld by the Company to satisfy any tax withholding obligation shall not be returned to the Plan and shall not become available for future issuance under the Plan.

     4. Administration of the Plan.

          (a) Plan Administrator.

               (i) Administration with Respect to Directors and Officers. With respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

               (ii) Administration With Respect to Consultants and Other Employees. With respect to grants of Awards to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

               (iii) Administration With Respect to Covered Employees. Notwithstanding the foregoing, grants of Awards to any Covered Employee intended to qualify as Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more Directors eligible to serve on a committee making Awards qualifying as Performance-Based Compensation. In the case of such Awards granted to Covered Employees, references to the “Administrator” or to a “Committee” shall be deemed to be references to such Committee or subcommittee.

               (iv) Administration Errors. In the event an Award is granted in a manner inconsistent with the provisions of this subsection (a), such Award shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws.

          (b) Powers of the Administrator. Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion:

               (i) to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder;

               (ii) to determine whether and to what extent Awards are granted hereunder;

               (iii) to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder;

               (iv) to approve forms of Award Agreements for use under the Plan;

               (v) to determine the terms and conditions of any Award granted hereunder;

               (vi) to amend the terms of any outstanding Award granted under the Plan, provided that (A) any amendment that would adversely affect the Grantee’s rights under an outstanding Award shall not be made without the Grantee’s written consent, provided, however, that an amendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option shall not be treated as adversely affecting the rights of the Grantee, (B) the reduction of the exercise price of any Option awarded under the Plan shall be subject to shareholder approval and (C) canceling an Option at a time when its exercise price exceeds the Fair Market Value of the underlying Shares, in exchange for another Option, Restricted Stock or other Award shall be subject to shareholder approval, unless the cancellation and exchange occurs in connection with a Corporate Transaction;

               (vii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan, including without limitation, any notice of Award or Award Agreement, granted pursuant to the Plan;

               (viii) to grant Awards to Employees, Directors and Consultants employed outside the United States on such terms and conditions different from those specified in the Plan as may, in the judgment of the Administrator, be necessary or desirable to further the purpose of the Plan; and

               (ix) to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate.

     The express grant in the Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator; provided that the Administrator may not exercise any right or power reserved to the Board. Any decision made, or action taken, by the Administrator or in connection with the administration of this Plan shall be final, conclusive and binding on all persons having an interest in the Plan.

     5. Eligibility. Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees of the Company, a Parent or a Subsidiary. An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors or Consultants who are residing in foreign jurisdictions as the Administrator may determine from time to time.

     6. Terms and Conditions of Awards.

          (a) Type of Awards. The Administrator is authorized under the Plan to award Options, Restricted Stock and Restricted Stock Units with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions.

          (b) Designation of Award. Each Award shall be designated in the Award Agreement. In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, an Option will qualify as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded. The $100,000 limitation of Section 422(d) of the Code is calculated based on the aggregate Fair Market Value of the Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company). For purposes of this calculation, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the grant date of the relevant Option.

          (c) Conditions of Award. Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria. The performance criteria established by the Administrator may be based on any one of, or combination of, the following: (i) increase in share price, (ii) earnings per share, (iii) total shareholder return, (iv) operating margin, (v) gross margin, (vi) return on equity, (vii) return on assets, (viii) return on investment, (ix) operating income, (x) net operating income, (xi) pre-tax profit, (xii) cash flow, (xiii) revenue, (xiv) expenses, (xv) earnings before interest, taxes and depreciation, (xvi) economic value added and (xvii) market share. For Awards that are not intended to qualify as Performance-Based Compensation, the performance criteria established by the Administrator may be based on personal management objectives, or other measures of performance selected by the Administrator. The performance criteria may be applicable to the Company, Related Entities and/or any individual business units of the Company or any Related Entity. Partial achievement of the specified criteria may result in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement.

          (d) Acquisitions and Other Transactions. The Administrator may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction.

          (e) Deferral of Award Payment. The Administrator may establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award. The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program.

          (f) Separate Programs. The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time.

          (g) Individual Limitations on Awards.

               (i) Individual Limit for Options. The maximum number of Shares with respect to which Options may be granted to any Grantee in any fiscal year of the Company shall be 600,000 Shares. In connection with a Grantee’s commencement of Continuous Service, a Grantee may be granted Options for up to an additional 1,200,000 Shares which shall not count against the limit set forth in the previous sentence. The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below. To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitations with respect to a Grantee, if any Option is

canceled, the canceled Option shall continue to count against the maximum number of Shares with respect to which Options may be granted to the Grantee. For this purpose, the repricing of an Option shall be treated as the cancellation of the existing Option and the grant of a new Option (if approved by shareholders).

               (ii) Individual Limit for Restricted Stock and Restricted Stock Units. For awards of Restricted Stock and Restricted Stock Units that are intended to be Performance-Based Compensation, the maximum number of Shares with respect to which such Awards may be granted to any Grantee in any fiscal year of the Company shall be 600,000 Shares. The foregoing limitation shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below.

               (iii) Deferral. If the vesting or receipt of Shares under an Award is deferred to a later date, any amount (whether denominated in Shares or cash) paid in addition to the original number of Shares subject to such Award will not be treated as an increase in the number of Shares subject to the Award if the additional amount is based either on a reasonable rate of interest or on one or more predetermined actual investments such that the amount payable by the Company at the later date will be based on the actual rate of return of a specific investment (including any decrease as well as any increase in the value of an investment).

          (h) Early Exercise. The Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate.

          (i) Term of Award. The term of each Award shall be the term stated in the Award Agreement provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement. Notwithstanding the foregoing, the specified term of any Award shall not include any period for which the Grantee has elected to defer the receipt of the Shares or cash issuable pursuant to the Award.

          (j) Transferability of Awards. Incentive Stock Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee. Other Awards shall be transferable (i) by will and by the laws of descent and distribution and (ii) during the lifetime of the Grantee, to the extent and in the manner authorized by the Administrator, but only to the extent such transfers are made to family members, to family trusts, to family controlled entities, to charitable organizations, and pursuant to domestic relations orders or agreements, in all cases without payment for such transfers to the Grantee. Notwithstanding the foregoing, the Grantee may designate one or more beneficiaries of the Grantee’s Award in the event of the Grantee’s death on a beneficiary designation form provided by the Administrator.

          (k) Time of Granting Awards. The date of grant of an Award shall for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other date as is determined by the Administrator. Notice of the grant determination shall be given to each Employee, Director or Consultant to whom an Award is so granted within a reasonable time after the date of such grant.

     7. Award Exercise or Purchase Price, Consideration and Taxes.

          (a) Exercise or Purchase Price. The exercise or purchase price, if any, for an Award shall be as follows:

               (i) In the case of an Incentive Stock Option granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting

power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant.

               (ii) In cases other than the case described in the preceding paragraph, the per Share exercise price of an Option shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

               (iii) In the case of Awards intended to qualify as Performance-Based Compensation, the exercise or purchase price, if any, shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

               (iv) In the case of a Restricted Stock or Restricted Stock Units grant, such price, if any, shall be determined by the Administrator.

               (v) Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(d), above, the exercise or purchase price for the Award shall be determined in accordance with the provisions of the relevant instrument evidencing the agreement to issue such Award.

          (b) Consideration. Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following:

               (i) cash;

               (ii) check;

               (iii) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Award) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised (but only to the extent that such exercise of the Award would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Administrator);

               (iv) with respect to Options, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction;

               (v) with respect to Options, payment through a “net exercise” such that, without the payment of any funds, the Grantee may exercise the Option and receive the net number of Shares equal to (i) the number of Shares as to which the Option is being exercised, multiplied by (ii) a fraction, the numerator of which is the Fair Market Value per Share (on such date as is determined by the Administrator) less the Exercise Price per Share, and the denominator of which is such Fair Market Value per Share (the number of net Shares to be received shall be rounded down to the nearest whole number of Shares); or

               (vi) any combination of the foregoing methods of payment.

     The Administrator may at any time or from time to time, by adoption of or by amendment to the standard forms of Award Agreement described in Section 4(b)(iv), or by other means, grant Awards which do not permit all of the foregoing forms of consideration to be used in payment for the Shares or which otherwise restrict one or more forms of consideration.

          (c) Taxes. No Shares shall be delivered under the Plan to any Grantee or other person until such Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of any foreign, federal, state, or local income and employment tax withholding obligations, including, without

limitation, obligations incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option. Upon exercise of an Award, the Company shall withhold or collect from Grantee an amount sufficient to satisfy such tax obligations.

     8. Exercise of Award.

          (a) Procedure for Exercise; Rights as a Shareholder.

               (i) Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Award Agreement.

               (ii) An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(v).

          (b) Exercise of Award Following Termination of Continuous Service.

               (i) An Award may not be exercised after the termination date of such Award set forth in the Award Agreement and may be exercised following the termination of a Grantee’s Continuous Service only to the extent provided in the Award Agreement.

               (ii) Where the Award Agreement permits a Grantee to exercise an Award following the termination of the Grantee’s Continuous Service for a specified period, the Award shall terminate to the extent not exercised on the last day of the specified period or the last day of the original term of the Award, whichever occurs first.

               (iii) Any Award designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of a Grantee’s Continuous Service shall convert automatically to a Nonstatutory Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Award Agreement.

     9. Conditions Upon Issuance of Shares.

          (a) If at any time the Administrator determines that the delivery of Shares pursuant to the exercise, vesting or any other provision of an Award is or may be unlawful under Applicable Laws, the vesting or right to exercise an Award or to otherwise receive Shares pursuant to the terms of an Award shall be suspended until the Administrator determines that such delivery is lawful and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Company shall have no obligation to effect any registration or qualification of the Shares under federal or state laws.

          (b) As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws.

     10. Adjustments Upon Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, the maximum number of Shares with respect to which Awards may be granted to any Grantee in any fiscal year of the Company, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Shares, or similar event affecting the Shares, (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company, or (iii) any other transaction with respect to Common Stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or other distribution of stock or property), reorganization, liquidation (whether partial or complete) or any similar transaction; provided, however that conversion of any convertible securities of the Company shall not be

deemed to have been “effected without receipt of consideration.” In connection with the foregoing adjustments, the Administrator may, in its discretion, prohibit the exercise of Awards or other issuance of Shares, cash or other consideration

pursuant to Awards during certain periods of time. Except as the Administrator determines, no issuance by the Company of shares of any class, or securities convertible into shares of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award.

     11. Corporate Transactions and Related Entity Dispositions. Except as may be provided in an Award Agreement:

          (a) The Administrator shall have the authority, exercisable either in advance of any actual or anticipated Corporate Transaction or Related Entity Disposition or at the time of an actual Corporate Transaction or Related Entity Disposition and exercisable at the time of the grant of an Award under the Plan or any time while an Award remains outstanding, to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested Awards under the Plan and the full or partial release from restrictions on transfer and repurchase or forfeiture rights of such Awards in connection with a Corporate Transaction or Related Entity Disposition, on such terms and conditions as the Administrator may specify. The Administrator also shall have the authority to condition any such Award vesting and exercisability or release from such limitations upon the subsequent termination of the Continuous Service of the Grantee within a specified period following the effective date of the Corporate Transaction or Related Entity Disposition. The Administrator may provide that any Awards so vested or released from such limitations in connection with a Related Entity Disposition, shall remain fully exercisable until the expiration or sooner termination of the Award. Effective upon the consummation of a Corporate Transaction, all outstanding Awards under the Plan shall terminate unless assumed by the successor company or its parent.

          (b) The portion of any Incentive Stock Option accelerated under this Section 11 in connection with a Corporate Transaction or Related Entity Disposition shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded. To the extent such dollar limitation is exceeded, the accelerated excess portion of such Option shall be exercisable as a Nonstatutory Stock Option.

     12. Effective Date and Term of Plan. The Plan became effective in 2001. It shall continue in effect for a term of ten (10) years unless sooner terminated. Subject to Applicable Laws, Awards may be granted under the Plan upon its becoming effective.

     13. Amendment, Suspension or Termination of the Plan.

          (a) The Board may at any time amend, suspend or terminate the Plan; provided, however, that no such amendment shall be made without the approval of the Company’s shareholders to the extent such approval is required by Applicable Laws, or if such amendment would:

               (i) lessen the shareholder approval requirements of Section 4(b)(vi) or this Section 13(a);

               (ii) increase the benefits accrued to participants under the Plan;

               (iii) increase the number of securities which may be issued under the Plan; or

               (iv) modify the requirements for participation in the Plan.

          (b) No Award may be granted during any suspension of the Plan or after termination of the Plan.

          (c) No suspension or termination of the Plan (including termination of the Plan under Section 11 above) shall adversely affect any rights under Awards already granted to a Grantee.

     14. Reservation of Shares.

          (a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

          (b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

     15. No Effect on Terms of Employment/Consulting Relationship. The Plan shall not confer upon any Grantee any right with respect to the Grantee’s Continuous Service, nor shall it interfere in any way with his or her right or the Company’s right to terminate the Grantee’s Continuous Service at any time, with or without cause.

     16. No Effect on Retirement and Other Benefit Plans. Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a “Retirement Plan” or “Welfare Plan” under the Employee Retirement Income Security Act of 1974, as amended.

     17. Plan History. The Plan was initially approved by the Board and shareholders of the Company in 2001. In February 2003, the Board approved an amendment to the Plan to increase the automatic option grant to Outside Directors under Section 6(e) of the Plan from 10,000 shares to 18,000 shares, which amendment was not subject to shareholder approval. In March 2005, subject to shareholder approval, the Board approved an amendment to the Plan in order to (i) increase the number of shares available for issuance thereunder by 4,500,000 shares from 6,360,000 shares to 10,860,00 shares, (ii) provide that the maximum number of Shares which may be issued pursuant to all Awards of Restricted Stock is 2,136,000 Shares, (iii) remove the automatic option grant program for Outside Directors under Section 6(e) in order to permit greater flexibility in the granting of awards to Outside Directors under the Plan and (iv) amend certain other administrative provisions of the Plan. On July 20, 2006, the Board approved an amendment to the Plan to permit the grant of Restricted Stock Units and to make such other changes to reflect current Applicable Laws. On February 15, 2007, the Board approved an amendment and restatement of the Plan, subject to the approval of the Company’s shareholders, (i) to increase the maximum number of Shares available under the Plan; (ii) to impose a per person limit on the number of Shares subject to Awards of Restricted Stock and Restricted Stock Units intended to qualify as Performance-Based Compensation in any fiscal year of the Company; and (iii) to expand the definition of Corporate Transaction, which shall take effect only for Awards granted on and after the date on which the Company’s shareholders approve the amendment and restatement of the Plan.

     18. Unfunded Obligation. Grantees shall have the status of general unsecured creditors of the Company. Any amounts payable to Grantees pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974, as amended. Neither the Company nor any Related Entity shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Grantee account shall not create or constitute a trust or fiduciary relationship between the Administrator, the Company or any Related Entity and a Grantee, or otherwise create any vested or beneficial interest in any Grantee or the Grantee’s creditors in any assets of the Company or a Related Entity. The Grantees shall have no claim against the Company or any Related Entity for any changes in the value of any assets that may be invested or reinvested by the Company with respect to the Plan.

     19. Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

NOVELLUS SYSTEMS, INC. 2001 STOCK INCENTIVE PLAN

STOCK OPTION AWARD AGREEMENT

     1. Grant of Option. Novellus Systems, Inc., a California corporation (the “Company”), hereby grants to the Grantee (the “Grantee”) named in the Notice of Stock Option Award (the “Notice”), an option (the “Option”) to purchase the number of Shares of Common Stock subject to the Option (the “Shares”) set forth in the Notice, at the exercise price per Share set forth in the Notice (the “Exercise Price”) subject to the terms and provisions of the Notice, this Stock Option Award Agreement (the “Option Agreement”) and the Company’s 2001 Stock Incentive Plan, as amended from time to time (the “Plan”), which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement.

     If designated in the Notice as an Incentive Stock Option, the Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by the Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Nonstatutory Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is awarded.

     2. Exercise of Option.

          (a) Right to Exercise. The Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Option Agreement. The Option shall be subject to the provisions of Section 11 of the Plan relating to the exercisability or termination of the Option in the event of a Corporate Transaction or Related Entity Disposition. The Grantee shall be subject to reasonable limitations on the number of requested exercises during any monthly or weekly period as determined by the Administrator. In no event shall the Company issue fractional Shares.

          (b) Vesting. THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). NOTHING IN THE NOTICE, THIS OPTION AGREEMENT, OR THE PLAN SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO FUTURE AWARDS OR CONTINUATION OF THE GRANTEE’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE’S RIGHT OR THE RIGHT OF THE GRANTEE’S EMPLOYER TO TERMINATE THE GRANTEE’S CONTINUOUS SERVICE, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEE’S STATUS IS AT WILL. IN THE EVENT OF THE TERMINATION OF THE GRANTEE’S

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CONTINUOUS SERVICE WITH THE COMPANY OR ANY RELATED ENTITY FOR ANY REASON, THE COMPANY SHALL NOT BE LIABLE FOR THE LOSS OF EXISTING OR POTENTIAL PROFIT FROM THIS OPTION OR ANY OTHER OPTION GRANTED UNDER THE PLAN OR OTHERWISE. THE GRANTEE SHALL HAVE NO CLAIM TO BE GRANTED ANY OPTION UNDER THE PLAN EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, AND THERE IS NO OBLIGATION ON THE PART OF THE COMPANY AND ANY RELATED ENTITY FOR UNIFORMITY OF TREATMENT OF THE GRANTEE WITH OTHER EMPLOYEES OF THE COMPANY AND ANY RELATED ENTITY OR OTHER PARTICIPANTS UNDER THE PLAN.

          (c) Post-Termination Exercise Period. The Post-Termination Exercise Period shall be three (3) months except in the event of death or Disability. In such cases, the Post-Termination Exercise Period shall be extended to twelve (12) months provided in Section 6 and Section 7 below.

          (d) Leave of Absence. During any authorized leave of absence, the continued vesting of the Shares shall be determined in accordance with the Company’s leave of absence policy as may be amended from time to time.

          (e) Change in Status. In the event of the Grantee’s change in status from Employee to Consultant or from an Employee whose customary employment is 20 hours or more per week to an Employee whose customary employment is fewer than 20 hours per week, the Option shall continue to vest unless affirmatively determined otherwise by the Administrator.

          (f) Method of Exercise. The Option shall be exercisable only by delivery of an Exercise Notice in such form as determined by the Administrator (including an Exercise Notice in electronic form) which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, such other representations and agreements as to the holder’s investment intent with respect to such Shares and such other provisions as may be required by the Administrator. The Exercise Notice shall be delivered in person, by certified mail, or by such other method (including electronic transmission) as determined from time to time by the Administrator to the Company accompanied by payment of the Exercise Price. The Option shall be deemed to be exercised upon receipt by the Company of such notice accompanied by the Exercise Price, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d), below.

          (g) Taxes. No Shares will be delivered to the Grantee or other person pursuant to the exercise of the Option until the Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of applicable income tax, employment tax, and social security tax withholding obligations, including, without limitation, such other tax obligations of the Grantee incident to the receipt of Shares. Upon exercise of the Option, the Company or the Grantee’s employer may offset or withhold (from any amount owed by the Company or the Grantee’s employer to the Grantee) or collect from the Grantee or other person an amount sufficient to satisfy such tax obligations and/or the employer’s withholding obligations.

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     3. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Grantee; provided, however, that such exercise method does not then violate any Applicable Law:

          (a) cash;

          (b) check;

          (c) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require which have a Fair Market Value on the date of surrender or attestation equal to the aggregate Exercise Price of the Shares as to which the Option is being exercised, provided, however, that Shares acquired under the Plan or any other equity compensation plan or agreement of the Company must have been held by the Grantee for a period of more than six (6) months (and not used for another option exercise by attestation during such period); or

          (d) payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (i) shall provide written instructions to a Company-designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (ii) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction.

     4. Restrictions on Exercise. The Option may not be exercised if the issuance of the Shares subject to the Option upon such exercise would constitute a violation of any Applicable Laws.

     5. Termination of Continuous Service. In the event the Grantee’s Continuous Service terminates, the Grantee may, but only during the Post-Termination Exercise Period, exercise the portion of the Option that was vested at the date of such termination (the “Termination Date”). In no event shall the Option be exercised later than the Expiration Date set forth in the Notice. Except as provided in Sections 6 and 7 below, to the extent that the Option was unvested on the Termination Date, or if the Grantee does not exercise the vested portion of the Option within the Post-Termination Exercise Period, the Option shall terminate.

     6. Disability of Grantee. In the event the Grantee’s Continuous Service terminates as a result of his or her Disability, the Grantee may, but only within twelve (12) months from the Termination Date (and in no event later than the Expiration Date), exercise the portion of the Option that was vested on the Termination Date; provided, however, that if such Disability is not a “disability” as such term is defined in Section 22(e)(3) of the Code and the Option is an Incentive Stock Option, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Nonstatutory Stock Option on the day three (3) months and one (1) day following the Termination Date. To the extent that the Option was unvested on the Termination Date, or if the Grantee does not exercise the vested portion of the Option within the time specified herein, the Option shall terminate. Section 22(e)(3) of the Code provides that an individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which

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can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months.

     7. Death of Grantee. In the event of the termination of the Grantee’s Continuous Service as a result of his or her death, or in the event of the Grantee’s death during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee’s termination of Continuous Service as a result of his or her Disability, the person who acquired the right to exercise the Option pursuant to Section 8 may exercise the portion of the Option that was vested at the date of termination within twelve (12) months from the date of death (but in no event later than the Expiration Date). To the extent that the Option was unvested on the date of death, or if the vested portion of the Option is not exercised within the time specified herein, the Option shall terminate.

     8. Transferability of Option. The Option, if an Incentive Stock Option, may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the Grantee only by the Grantee. The Option, if a Nonstatutory Stock Option, may not be transferred in any manner other than by will or by the laws of descent and distribution, provided, however, that a Nonstatutory Stock Option may be transferred during the lifetime of the Grantee by gift and pursuant to a domestic relations order to members of the Grantee’s Immediate Family to the extent and in the manner determined by the Administrator. Notwithstanding the foregoing, the Grantee may designate a beneficiary of the Grantee’s Incentive Stock Option or Nonstatutory Stock Option in the event of the Grantee’s death on a beneficiary designation form provided by the Administrator. Following the death of the Grantee, the Option, to the extent provided in Section 7, may be exercised (a) by the person or persons designated under the deceased Grantee’s beneficiary designation or (b) in the absence of an effectively designated beneficiary, by the Grantee’s legal representative or by any person empowered to do so under the deceased Grantee’s will or under the then applicable laws of descent and distribution. The terms of the Option shall be binding upon the executors, administrators, heirs, successors and transferees of the Grantee.

     9. Term of Option. The Option must be exercised no later than the Expiration Date set forth in the Notice or such earlier date as otherwise provided herein. After the Expiration Date or such earlier date, the Option shall be of no further force or effect and may not be exercised.

     10. Tax Consequences. The Grantee may incur tax liability as a result of the Grantee’s purchase or disposition of the Shares. THE GRANTEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

     11. Entire Agreement: Governing Law. The Notice, the Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee’s interest except by means of a writing signed by the Company and the Grantee. Nothing in the Notice, the Plan and this Option Agreement (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. The Notice, the Plan and this Option Agreement are to be construed in accordance with and governed

4

by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice, the Plan or this Option Agreement be determined to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable.

     12. Headings. The captions used in the Notice and this Option Agreement are inserted for convenience and shall not be deemed a part of the Option for construction or interpretation.

     13. Administration and Interpretation. Any question or dispute regarding the administration or interpretation of the Notice, the Plan or this Option Agreement shall be submitted by the Grantee or by the Company to the Administrator. The resolution of such question or dispute by the Administrator shall be final and binding on all persons.

     14. Venue. The Company, the Grantee, and the Grantee’s assignees pursuant to Section 8 (the “parties”) agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Option Agreement shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of Santa Clara) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Section 14 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

     15. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if the parties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to such other address as such party may designate in writing from time to time to the other party.

END OF AGREEMENT

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NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

NOTICE OF STOCK OPTION AWARD

Grantee’s Name and Address	%%FIRST_NAME%-%
	%%LAST_NAME%%
	%%ADDRESS_LINE1%-%
	%%ADDRESS_LINE2%-%
	%%ADDRESS_LINE3%-%
	%%CITY%-% %%STATE%-%
	%%ZIPCODE%-%
	%%COUNTRY%-%

     You (the “Grantee”) have been granted an option to purchase shares of Common Stock, subject to the terms and conditions of this Notice of Stock Option Award (the “Notice”), the Novellus Systems, Inc. 2001 Stock Incentive Plan, as amended from time to time (the “Plan”) and the Stock Option Award Agreement (the “Option Agreement”) attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice.

Option Number	%%OPTION_NUMBER%-%
Date of Grant	%%OPTION_DATE,’MM/DD/YYYY’%-%
Vesting Commencement Date	%%VEST_BASE_DATE, ‘MM/DD/YYYY’%-%
Exercise Price per Share	%%OPTION_PRICE,’$999,999,999.99’%-%
Total Number of Shares Subject to the Option (the “Shares”)	%%TOTAL_SHARES_GRANTED,’999,999,999’%-%
Total Exercise Price	%%TOTAL_OPTION_PRICE’$999,999,999.99’%-%
Type of Option:	Incentive Stock Option
	Non-Qualified Stock Option

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Expiration Date: %%EXPIRE_DATE_PERIOD1’MM/DD/YYYY’%-%

Vesting Schedule:

     Subject to the Grantee’s Continuous Service and other limitations set forth in this Notice, the Plan and the Option Agreement, the Option may be exercised, in whole or in part, in accordance with the following schedule:

Shares	Vest Type	Vest Date
%%SHARES_PERIOD1,’999,999,999’%-%	%%VEST_TYPE_PERIOD1%-%	%%VEST_DATE_PERIOD1’MM/DD/YYYY’%-%
%%SHARES_PERIOD2,’999,999,999’%-%	%%VEST_TYPE_PERIOD2%-%	%%VEST_DATE_PERIOD2’MM/DD/YYYY’%-%
%%SHARES_PERIOD3,’999,999,999’%-%	%%VEST_TYPE_PERIOD3%-%	%%VEST_DATE_PERIOD3’MM/DD/YYYY’%-%
%%SHARES_PERIOD4,’999,999,999’%-%	%%VEST_TYPE_PERIOD4%-%	%%VEST_DATE_PERIOD4’MM/DD/YYYY’%-%
%%SHARES_PERIOD5,’999,999,999’%-%	%%VEST_TYPE_PERIOD5%-%	%%VEST_DATE_PERIOD5’MM/DD/YYYY’%-%

     By the Grantee’s electronic acceptance of this Option and by the acceptance of the Company’s representative below, the Company and the Grantee have executed this Notice and agree that the Option is to be governed by the terms and conditions of this Notice, the Plan, and the Option Agreement.

Novellus Systems, Inc., a California corporation
By:	Martin J. Collins
	Title:	Senior Vice President, General Counsel and Corporate Secretary

THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS AWARD OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES

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THAT NOTHING IN THIS NOTICE, IN THE AGREEMENT OR IN THE PLAN SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF THE GRANTEE’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE’S RIGHT OR THE RIGHT OF THE COMPANY OR ANY RELATED ENTITY TO WHICH THE GRANTEE PROVIDES SERVICES TO TERMINATE THE GRANTEE’S CONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEE’S EMPLOYMENT STATUS IS AT WILL. IN THE EVENT OF THE TERMINATION OF THE GRANTEE’S CONTINUOUS SERVICE FOR ANY REASON, THE COMPANY SHALL NOT BE LIABLE FOR THE LOSS OF EXISTING OR POTENTIAL PROFIT FROM THIS AWARD OR ANY OTHER AWARD GRANTED UNDER THE PLAN OR OTHERWISE. THE GRANTEE SHALL HAVE NO CLAIM TO BE GRANTED ANY AWARD UNDER THE PLAN EXCEPT AS EXPRESSLY SET FORTH IN THIS NOTICE AND THE AGREEMENT, AND THERE IS NO OBLIGATION ON THE PART OF THE COMPANY OR ANY RELATED ENTITY FOR UNIFORMITY OF TREATMENT OF THE GRANTEE WITH OTHER EMPLOYEES OF THE COMPANY AND ANY RELATED ENTITY OR OTHER PARTICIPANTS UNDER THE PLAN.

     The Grantee understands that the Option is subject to the Grantee’s consent to access, and acknowledgement of having accessed, the Plan prospectus in connection with the Form S-8 registration statement for the Plan, any updates thereto, the Plan, the Option Agreement and this Notice (collectively, the “Plan Documents”) in electronic form through the E*Trade Financial web page at the following address: www.etrade.com or such other address as is provided by notification from time to time. By accepting the grant of the Option, the Grantee hereby: (i) consents to access electronic copies (instead of receiving paper copies) of the Plan Documents via the E*Trade Financial web page or such other web page as is provided by notification from time to time, (ii) represents that the Grantee has access to the internet generally; (iii) acknowledges receipt of electronic copies, or that the Grantee is already in possession of paper copies, of the Plan Documents and the Company’s most recent annual report to shareholders; and (iv) represents that the Grantee is familiar with the terms and provisions of the Plan Documents and accepts the Option subject to all of the terms and provisions of the Plan Documents.

     The Grantee may receive, without charge, upon written or oral request, paper copies of any or all of the Plan Documents, documents incorporated by reference in the Form S-8 registration statement for the Plan, and the Company’s most recent annual report to shareholders by requesting them from Stock Administration at Novellus Systems, Incorporated, 4000 North First Street, San Jose, CA 95134, Attn. Stock Administration M/S 90-2B. Telephone (408) 570-6336, email: stock.administration@novellus.com.

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     The Grantee has reviewed this Notice, the Plan, and the Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Option Agreement. The Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Option Agreement shall be resolved by the Administrator in accordance with Section 13 of the Option Agreement. The Grantee further agrees to the venue selection in accordance with Section 14 of the Option Agreement. The Grantee further agrees to notify the Company upon any change in the residence address indicated in this Notice.

* * *

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NOVELLUS SYSTEMS, INC. 2001 STOCK INCENTIVE PLAN

NOTICE OF RESTRICTED STOCK BONUS AWARD

Grantee’s Name and Address:

     You (the “Grantee”) have been granted shares of Common Stock of the Company (the “Award”), subject to the terms and conditions of this Notice of Restricted Stock Bonus Award (the “Notice”), the Novellus Systems, Inc. 2001 Stock Incentive Plan, as amended from time to time (the “Plan”) and the Restricted Stock Bonus Award Agreement (the “Agreement”) attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice.

Award Number
Date of Award
Total Number of Shares of Common Stock Awarded
Fair Market Value per Share	$

     Vesting Schedule:

     Subject to the Grantee’s Continuous Service and other limitations set forth in this Notice, the Agreement and the Plan, the Shares will “vest” in accordance with the following conditions:

     [INSERT VESTING SCHEDULE]

     Notwithstanding the foregoing, 50% of the Total Number of Shares of Common Stock Awarded shall vest if the Grantee’s Continuous Service is terminated as a result of the Grantee’s death or Disability.

     In the event of the Grantee’s change in status from Employee to Consultant or Director or from an Employee whose customary employment is 20 hours or more per week to an Employee whose customary employment is fewer than 20 hours per week, vesting of the Shares shall continue in accordance with the Vesting Schedule set forth above and terms of this Notice, the Agreement and the Plan, unless affirmatively determined otherwise by the Administrator.

     For purposes of this Notice and the Agreement, the term “vest” shall mean, with respect to any Shares, that such Shares are no longer subject to forfeiture to the Company. Shares that have not vested are deemed “Restricted Shares.” If the Grantee would become vested in a fraction of a Restricted Share, such Restricted Share shall not vest until the Grantee becomes vested in the entire Share.

     Vesting shall cease upon the date of termination of the Grantee’s Continuous Service for any reason, other than death or Disability. If the Grantee’s Continuous Service is terminated as a

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result of the Grantee’s death or Disability, 50% of the Total Number of Shares of Common Stock Awarded shall vest upon the Grantee’s termination of Continuous Service. In the event the Grantee’s Continuous Service is terminated for any reason, including death or Disability, any Restricted Shares held by the Grantee immediately following such termination of Continuous Service shall be deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of the Restricted Shares and shall have all rights and interest in or related thereto without further action by the Grantee. The foregoing forfeiture provisions set forth in this Notice as to Restricted Shares shall apply to the new capital stock or other property (including cash paid other than as a regular cash dividend) received in exchange for the Shares in consummation of any transaction described in Section 10 or 11 of the Plan and such stock or property shall be deemed Additional Securities (as defined in the Agreement) for purposes of the Agreement, but only to the extent the Shares are at the time covered by such forfeiture provisions.

     By the Grantee’s electronic acceptance of this Award and by the acceptance of the Company’s representative below, the Company and the Grantee have executed this Notice and agree that the Award is to be governed by the terms and conditions of this Notice, the Plan, and the Agreement.

Novellus Systems, Inc.,
a California corporation
 

By:  

Title: 

Date: 

THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS AWARD OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE AGREEMENT, NOR IN THE PLAN, SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF THE GRANTEE’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE GRANTEE’S CONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEE’S STATUS IS AT WILL.

     IN THE EVENT OF THE TERMINATION OF THE GRANTEE’S CONTINUOUS SERVICE FOR ANY REASON, THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE COMPANY SHALL NOT BE LIABLE TO THE GRANTEE FOR THE LOSS OF ANY EXISTING OR POTENTIAL GAIN FROM THIS AWARD OR ANY OTHER AWARD GRANTED UNDER THE PLAN OR OTHERWISE. THE GRANTEE FURTHER

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ACKNOWLEDGES AND AGREES THAT GRANTEE SHALL HAVE NO RIGHT OR CLAIM TO ANY AWARDS UNDER THE PLAN EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR OTHER AGREEMENT WITH THE COMPANY. THERE IS NO OBLIGATION ON THE PART OF THE COMPANY OR ANY RELATED ENTITY FOR UNIFORMITY OF TREATMENT OF THE GRANTEE WITH OTHER PARTICIPANTS IN THE PLAN OR WITH OTHER EMPLOYEES OF THE COMPANY OR ANY RELATED ENTITY.

     The Grantee understands that the Award is subject to the Grantee’s consent to access, and acknowledgement of having accessed: the Plan, the Agreement and this Notice (collectively, the “Plan Documents”) in electronic form through the E*Trade Financial web page at the following address: [www.etrade.com] or such other address as is provided by notification from time to time. By accepting the grant of the Award, the Grantee hereby: (i) consents to access electronic copies of the Plan Documents via the E*Trade Financial web page or such other web page as is provided by notification from time to time, (ii) represents that the Grantee has access to the internet generally; (iii) acknowledges receipt of electronic copies of the Plan Documents; and (iv) represents that the Grantee is familiar with the terms and provisions of the Plan Documents and accepts the Award subject to all of the terms and provisions of the Plan Documents.

     The Grantee may receive, without charge, upon written or oral request, paper copies of any or all of the Plan Documents by requesting them from Stock Administration at Novellus Systems, Incorporated, 4000 North First Street, San Jose, CA 95134, Attn. Stock Administration M/S 90-2B. Telephone (408) 943-9700, email: stock.administration@novellus.com.

     The Grantee has reviewed this Notice, the Plan, and the Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Agreement. The Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Agreement shall be resolved by the Administrator in accordance with Section 12 of the Agreement. The Grantee further agrees to the venue selection in accordance with Section 13 of the Agreement. The Grantee further agrees to notify the Company upon any change in the residence address indicated in this Notice.

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NOVELLUS SYSTEMS, INC. 2001 STOCK INCENTIVE PLAN

RESTRICTED STOCK BONUS AWARD AGREEMENT

     1. Issuance of Shares. Novellus Systems, Inc., a California corporation (the “Company”), hereby issues to the Grantee (the “Grantee”) named in the Notice of Restricted Stock Bonus Award (the “Notice”), the Total Number of Shares of Common Stock Awarded set forth in the Notice (the “Shares”), subject to the Notice, this Restricted Stock Bonus Award Agreement (the “Agreement”) and the terms and provisions of the Company’s 2001 Stock Incentive Plan, as amended from time to time (the “Plan”), which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement. All Shares issued hereunder will be deemed issued to the Grantee as fully paid and nonassessable shares, and the Grantee will have the right to vote the Shares at meetings of the Company’s shareholders. The Company shall pay any applicable stock transfer taxes imposed upon the issuance of the Shares to the Grantee hereunder.

     2. Transfer Restrictions. The Shares issued to the Grantee hereunder may not be sold, transferred by gift, pledged, hypothecated, or otherwise transferred or disposed of by the Grantee prior to the date when the Shares become vested pursuant to the Vesting Schedule set forth in the Notice. Any attempt to transfer Restricted Shares in violation of this Section 2 will be null and void and will be disregarded.

     3. Escrow of Stock. For purposes of facilitating the enforcement of the provisions of this Agreement and the payment of withholding taxes (if any) pursuant to Section 5 of this Agreement, the Grantee agrees, immediately upon receipt of the certificate(s) for the Restricted Shares, to deliver such certificate(s), together with an Assignment Separate from Certificate in the form attached hereto as Exhibit A, executed in blank by the Grantee with respect to each such stock certificate, to the Secretary or Assistant Secretary of the Company, or their designee, to hold in escrow for so long as such Restricted Shares have not vested pursuant to the Vesting Schedule set forth in the Notice, with the authority to take all such actions and to effectuate all such transfers and/or releases as may be necessary or appropriate to accomplish the objectives of this Agreement in accordance with the terms hereof. The Grantee hereby acknowledges that the appointment of the Secretary or Assistant Secretary of the Company (or their designee) as the escrow holder hereunder with the stated authorities is a material inducement to the Company to make this Agreement and that such appointment is coupled with an interest and is accordingly irrevocable. The Grantee agrees that such escrow holder shall not be liable to any party hereto (or to any other party) for any actions or omissions unless such escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Upon the vesting of the Restricted Shares, the escrow holder will, without further order or instruction, transmit to the Grantee the certificate evidencing such Shares, subject, however, to satisfaction of any withholding obligations provided in Section 5 below.

     4. Distributions. The Company shall disburse to the Grantee all regular cash dividends with respect to the Shares and Additional Securities (whether vested or not), less any applicable withholding obligations.

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     5. Withholding of Taxes.

          (a) General. The Grantee is ultimately liable and responsible for all taxes owed by the Grantee in connection with the Award, regardless of any action the Company or any Related Entity takes with respect to any tax withholding obligations that arise in connection with the Award. Neither the Company nor any Related Entity makes any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of the Award or the subsequent sale of Shares subject to the Award. The Company and its Related Entities do not commit and are under no obligation to structure the Award to reduce or eliminate the Grantee’s tax liability.

          (b) Payment of Withholding Taxes. Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any tax withholding obligation, whether United States federal, state, local or non-U.S., including any employment tax obligation (the “Tax Withholding Obligation”), the Grantee must arrange for the satisfaction of the minimum amount of such Tax Withholding Obligation in a manner acceptable to the Company.

               (i) By Share Withholding. To the extent the vesting of any Shares occurs during a “blackout period” of the Company wherein certain Employees are precluded from selling Shares and unless the Grantee determines to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, the Grantee authorizes the Company to withhold from those Shares issuable to the Grantee the whole number of Shares sufficient to satisfy the minimum applicable Tax Withholding Obligation. The Grantee acknowledges that the withheld Shares may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of Shares described above.

               (ii) By Sale of Shares. Unless the Grantee determines to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, the Grantee’s acceptance of this Award constitutes the Grantee’s instruction and authorization to the Company and any brokerage firm determined acceptable to the Company for such purpose to sell on the Grantee’s behalf a whole number of Shares from those Shares issuable to the Grantee as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the minimum applicable Tax Withholding Obligation. Such Shares will be sold on the day such Tax Withholding Obligation arises (e.g., a vesting date) or as soon thereafter as practicable. The Grantee will be responsible for all broker’s fees and other costs of sale, and the Grantee agrees to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed the Grantee’s minimum Tax Withholding Obligation, the Company agrees to pay such excess in cash to the Grantee. The Grantee acknowledges that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the sale of Shares described above.

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               (iii) By Check, Wire Transfer or Other Means. At any time not less than five (5) business days before any Tax Withholding Obligation arises (e.g., a vesting date), the Grantee may elect to satisfy the Grantee’s Tax Withholding Obligation by delivering to the Company an amount that the Company determines is sufficient to satisfy the Tax Withholding Obligation by (x) wire transfer to such account as the Company may direct, (y) delivery of a certified check payable to the Company, or (z) such other means as specified from time to time by the Administrator.

     6. Additional Securities. Any securities or cash received (other than a regular cash dividend) as the result of ownership of the Restricted Shares (the “Additional Securities”), including, but not by way of limitation, warrants, options and securities received as a stock dividend or stock split, or as a result of a recapitalization or reorganization or other similar change in the Company’s capital structure, shall be retained in escrow in the same manner and subject to the same conditions and restrictions as the Restricted Shares with respect to which they were issued, including, without limitation, the Vesting Schedule set forth in the Notice. The Grantee shall be entitled to direct the Company to exercise any warrant or option received as Additional Securities upon supplying the funds necessary to do so, in which event the securities so purchased shall constitute Additional Securities, but the Grantee may not direct the Company to sell any such warrant or option. If Additional Securities consist of a convertible security, the Grantee may exercise any conversion right, and any securities so acquired shall constitute Additional Securities. In the event of any change in certificates evidencing the Shares or the Additional Securities by reason of any recapitalization, reorganization or other transaction that results in the creation of Additional Securities, the escrow holder is authorized to deliver to the issuer the certificates evidencing the Shares or the Additional Securities in exchange for the certificates of the replacement securities.

     7. Stop-Transfer Notices. In order to ensure compliance with the restrictions on transfer set forth in this Agreement, the Notice or the Plan, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

     8. Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

     9. Restrictive Legends. The Grantee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws:

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
RESTRICTED BY THE TERMS OF THAT CERTAIN
RESTRICTED STOCK BONUS AWARD AGREEMENT
BETWEEN THE COMPANY AND THE NAMED
SHAREHOLDER. THE SHARES REPRESENTED BY THIS

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CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH SUCH AGREEMENT, A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.

     10. Entire Agreement: Governing Law. The Notice, the Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee’s interest except by means of a writing signed by the Company and the Grantee. These agreements are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice or this Agreement be determined to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

     11. Headings. The captions used in this Agreement are inserted for convenience and shall not be deemed a part of this Agreement for construction or interpretation.

     12. Administration and Interpretation. Any question or dispute regarding the administration or interpretation of the Notice, the Plan or this Agreement shall be submitted by the Grantee or by the Company to the Administrator. The resolution of such question or dispute by the Administrator shall be final and binding on all persons.

     13. Venue. The parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Agreement shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of San Mateo) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Section 13 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

     14. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if the parties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to such other address as such party may designate in writing from time to time to the other party.

END OF AGREEMENT

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EXHIBIT A

STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE

[Please print out and sign this document but do not date it. The date and information of the transferee will be completed if and when the shares are assigned.]

          FOR VALUE RECEIVED,                                         hereby sells, assigns and transfers unto                                         ,                                          (          ) shares of the Common Stock of Novellus Systems, Inc., a California Company (the “Company”), standing in his name on the books of, the Company represented by Certificate No.                                          herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company attorney to transfer the said stock in the books of the Company with full power of substitution.

DATED:                                        

By:  

Award Number 

Grantee's Name and Address 

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NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

NOTICE OF RESTRICTED STOCK BONUS AWARD

 Grantee’s Name and Address:

     You (the “Grantee”) have been granted shares of Common Stock of the Company (the “Award”), subject to the terms and conditions of this Notice of Restricted Stock Bonus Award (the “Notice”), the Novellus Systems, Inc. 2001 Stock Incentive Plan, as amended from time to time (the “Plan”) and the Restricted Stock Bonus Award Agreement (the “Agreement”) attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice.

Award Number
Date of Award
Total Number of Shares of Common Stock Awarded
Aggregate Fair Market Value of the Shares	$

Vesting Schedule:

     Subject to the Grantee’s Continuous Service and other limitations set forth in this Notice, the Agreement and the Plan, the Shares will “vest” in accordance with the following schedule:

     [INSERT VESTING SCHEDULE]

     In the event of a Corporate Transaction, one hundred percent (100%) of the Shares shall become vested immediately prior to the effective date of such Corporate Transaction.

     At the time of the termination of the Grantee’s Continuous Service, the Board of Directors may, in the exercise of its sole discretion, accelerate the vesting of all or some portion of the remaining unvested Shares as the Board of Directors determines is appropriate taking into account the circumstances of such termination.

     For purposes of this Notice and the Agreement, the term “vest” shall mean, with respect to any Shares, that such Shares are no longer subject to forfeiture to the Company. Shares that have not vested are deemed “Restricted Shares.” If the Grantee would become vested in a fraction of a Restricted Share, such Restricted Share shall not vest until the Grantee becomes vested in the entire Share.

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     Except as set forth above, vesting shall cease upon the date of termination of the Grantee’s Continuous Service for any reason, including death or Disability. Except as set forth above, in the event the Grantee’s Continuous Service is terminated for any reason, including death or Disability, any Restricted Shares held by the Grantee immediately following such termination of Continuous Service shall be deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of the Restricted Shares and shall have all rights and interest in or related thereto without further action by the Grantee. The foregoing forfeiture provisions set forth in this Notice as to Restricted Shares shall apply to the new capital stock or other property (including cash paid other than as a regular cash dividend) received in exchange for the Shares in consummation of any transaction described in Section 10 of the Plan and such stock or property shall be deemed Additional Securities (as defined in the Agreement) for purposes of the Agreement, but only to the extent the Shares are at the time covered by such forfeiture provisions.

     By the Grantee’s electronic acceptance of this Award and by the acceptance of the Company’s representative below, the Company and the Grantee have executed this Notice and agree that the Award is to be governed by the terms and conditions of this Notice, the Plan, and the Agreement.

Novellus Systems, Inc., a California corporation
By:
	Title:
	Date:

THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE.

     The Grantee understands that the Award is subject to the Grantee’s consent to access, and acknowledgement of having accessed, the Plan prospectus in connection with the Form S-8 registration statement for the Plan, any updates thereto, the Plan, the Agreement and this Notice (collectively, the “Plan Documents”) in electronic form through the E*Trade Financial web page at the following address: [www.etrade.com] or such other address as is provided by notification from time to time. By accepting the grant of the Award, the Grantee hereby: (i) consents to access electronic copies (instead of receiving paper copies) of the Plan Documents via the E*Trade Financial web page or such other web page as is provided by notification from time to time, (ii) represents that the Grantee has access to the internet generally; (iii) acknowledges receipt of electronic copies, or that the Grantee is already in possession of paper copies, of the Plan Documents and the Company’s most recent annual report to shareholders; and (iv) represents that the Grantee is familiar with the terms and provisions of the Plan Documents and accepts the Award subject to all of the terms and provisions of the Plan Documents.

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     The Grantee may receive, without charge, upon written or oral request, paper copies of any or all of the Plan Documents, documents incorporated by reference in the Form S-8 registration statement for the Plan, and the Company’s most recent annual report to shareholders by requesting them from Stock Administration at Novellus Systems, Incorporated, 4000 North First Street, San Jose, CA 95134, Attn. Stock Administration M/S 90-2B. Telephone (408) 943-9700, email: stock.administration@novellus.com.

     The Grantee has reviewed this Notice, the Plan, and the Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Agreement. The Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Agreement shall be resolved by the Administrator in accordance with Section 12 of the Agreement. The Grantee further agrees to the venue selection in accordance with Section 13 of the Agreement. The Grantee further agrees to notify the Company upon any change in the residence address indicated in this Notice.

Dated: Signed:

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NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

RESTRICTED STOCK BONUS AWARD AGREEMENT

     1. Issuance of Shares. Novellus Systems, Inc., a California corporation (the “Company”), hereby issues to the Grantee (the “Grantee”) named in the Notice of Restricted Stock Bonus Award (the “Notice”), the Total Number of Shares of Common Stock Awarded set forth in the Notice (the “Shares”), subject to the Notice, this Restricted Stock Bonus Award Agreement (the “Agreement”) and the terms and provisions of the Company’s 2001 Stock Incentive Plan, as amended from time to time (the “Plan”), which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement. All Shares issued hereunder will be deemed issued to the Grantee as fully paid and nonassessable shares, and the Grantee will have the right to vote the Shares at meetings of the Company’s shareholders. The Company shall pay any applicable stock transfer taxes imposed upon the issuance of the Shares to the Grantee hereunder.

     2. Transfer Restrictions. The Shares issued to the Grantee hereunder may not be sold, transferred by gift, pledged, hypothecated, or otherwise transferred or disposed of by the Grantee prior to the date when the Shares become vested pursuant to the Vesting Schedule set forth in the Notice. Any attempt to transfer Restricted Shares in violation of this Section 2 will be null and void and will be disregarded.

     3. Escrow of Stock. For purposes of facilitating the enforcement of the provisions of this Agreement and the payment of withholding taxes (if any) pursuant to Section 5 of this Agreement, the Grantee agrees, immediately upon receipt of the certificate(s) for the Restricted Shares, to deliver such certificate(s), together with an Assignment Separate from Certificate in the form attached hereto as Exhibit A, executed in blank by the Grantee with respect to each such stock certificate, to the Secretary or Assistant Secretary of the Company, or their designee, to hold in escrow for so long as such Restricted Shares have not vested pursuant to the Vesting Schedule set forth in the Notice, with the authority to take all such actions and to effectuate all such transfers and/or releases as may be necessary or appropriate to accomplish the objectives of this Agreement in accordance with the terms hereof. The Grantee hereby acknowledges that the appointment of the Secretary or Assistant Secretary of the Company (or their designee) as the escrow holder hereunder with the stated authorities is a material inducement to the Company to make this Agreement and that such appointment is coupled with an interest and is accordingly irrevocable. The Grantee agrees that such escrow holder shall not be liable to any party hereto (or to any other party) for any actions or omissions unless such escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Upon the vesting of the Restricted Shares, the escrow holder will, without further order or instruction, transmit to the Grantee the certificate evidencing such Shares, subject, however, to satisfaction of any withholding obligations provided in Section 5 below.

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     4. Distributions. The Company shall disburse to the Grantee all regular cash dividends with respect to the Shares and Additional Securities (whether vested or not), less any applicable withholding obligations.

     5. Withholding of Taxes.

          (a) General. The Grantee is ultimately liable and responsible for all taxes owed by the Grantee in connection with the Award, regardless of any action the Company or any Related Entity takes with respect to any tax withholding obligations that arise in connection with the Award. Neither the Company nor any Related Entity makes any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of the Award or the subsequent sale of Shares subject to the Award. The Company and its Related Entities do not commit and are under no obligation to structure the Award to reduce or eliminate the Grantee’s tax liability.

          (b) Payment of Withholding Taxes. Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any tax withholding obligation, whether United States federal, state, local or non-U.S., including any employment tax obligation (the “Tax Withholding Obligation”), the Grantee must arrange for the satisfaction of the minimum amount of such Tax Withholding Obligation in a manner acceptable to the Company.

               (i) By Share Withholding. To the extent the vesting of any Shares occurs during a “blackout period” of the Company wherein certain Employees are precluded from selling Shares and unless the Grantee determines to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, the Grantee authorizes the Company to withhold from those Shares issuable to the Grantee the whole number of Shares sufficient to satisfy the minimum applicable Tax Withholding Obligation. The Grantee acknowledges that the withheld Shares may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of Shares described above.

               (ii) By Sale of Shares. Unless the Grantee determines to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, the Grantee’s acceptance of this Award constitutes the Grantee’s instruction and authorization to the Company and any brokerage firm determined acceptable to the Company for such purpose to sell on the Grantee’s behalf a whole number of Shares from those Shares issuable to the Grantee as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the minimum applicable Tax Withholding Obligation. Such Shares will be sold on the day such Tax Withholding Obligation arises (e.g., a vesting date) or as soon thereafter as practicable. The Grantee will be responsible for all broker’s fees and other costs of sale, and the Grantee agrees to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed the Grantee’s minimum Tax Withholding Obligation, the Company agrees to pay such excess in cash to the Grantee. The Grantee acknowledges that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to

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pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the sale of Shares described above.

               (iii) By Check, Wire Transfer or Other Means. At any time not less than five (5) business days before any Tax Withholding Obligation arises (e.g., a vesting date), the Grantee may elect to satisfy the Grantee’s Tax Withholding Obligation by delivering to the Company an amount that the Company determines is sufficient to satisfy the Tax Withholding Obligation by (x) wire transfer to such account as the Company may direct, (y) delivery of a certified check payable to the Company, or (z) such other means as specified from time to time by the Administrator.

     6. Additional Securities. Any securities or cash received (other than a regular cash dividend) as the result of ownership of the Restricted Shares (the “Additional Securities”), including, but not by way of limitation, warrants, options and securities received as a stock dividend or stock split, or as a result of a recapitalization or reorganization or other similar change in the Company’s capital structure, shall be retained in escrow in the same manner and subject to the same conditions and restrictions as the Restricted Shares with respect to which they were issued, including, without limitation, the Vesting Schedule set forth in the Notice. The Grantee shall be entitled to direct the Company to exercise any warrant or option received as Additional Securities upon supplying the funds necessary to do so, in which event the securities so purchased shall constitute Additional Securities, but the Grantee may not direct the Company to sell any such warrant or option. If Additional Securities consist of a convertible security, the Grantee may exercise any conversion right, and any securities so acquired shall constitute Additional Securities. In the event of any change in certificates evidencing the Shares or the Additional Securities by reason of any recapitalization, reorganization or other transaction that results in the creation of Additional Securities, the escrow holder is authorized to deliver to the issuer the certificates evidencing the Shares or the Additional Securities in exchange for the certificates of the replacement securities.

     7. Stop-Transfer Notices. In order to ensure compliance with the restrictions on transfer set forth in this Agreement, the Notice or the Plan, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

     8. Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

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     9. Restrictive Legends. The Grantee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws:

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THAT CERTAIN RESTRICTED STOCK BONUS AWARD AGREEMENT BETWEEN THE COMPANY AND THE NAMED SHAREHOLDER. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH SUCH AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

     10. Entire Agreement: Governing Law. The Notice, the Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee’s interest except by means of a writing signed by the Company and the Grantee. These agreements are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice or this Agreement be determined to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

     11. Headings. The captions used in this Agreement are inserted for convenience and shall not be deemed a part of this Agreement for construction or interpretation.

     12. Administration and Interpretation. Any question or dispute regarding the administration or interpretation of the Notice, the Plan or this Agreement shall be submitted by the Grantee or by the Company to the Administrator. The resolution of such question or dispute by the Administrator shall be final and binding on all persons.

     13. Venue. The parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Agreement shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of San Mateo) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Section 13 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

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     14. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if the parties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to such other address as such party may designate in writing from time to time to the other party.

END OF AGREEMENT

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EXHIBIT A

STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE

[Please print out and sign this document but do not date it. The date and information of the transferee will be completed if and when the shares are assigned.]

          FOR VALUE RECEIVED, _______________hereby sells, assigns and transfers unto __________________, _________(______) shares of the Common Stock of Novellus Systems, Inc., a California Company (the “Company”), standing in his name on the books of, the Company represented by Certificate No. _________ _________ herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company attorney to transfer the said stock in the books of the Company with full power of substitution.

DATED: ____________________

By 

Award Number 

Grantee’s Name and Address 

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NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

NOTICE OF RESTRICTED STOCK UNIT AWARD

Grantee’s Name and Address:

     You (the “Grantee”) have been granted an award of Restricted Stock Units (the “Award”), subject to the terms and conditions of this Notice of Restricted Stock Unit Award (the “Notice”), the Novellus Systems, Inc. 2001 Stock Incentive Plan, as amended from time to time (the “Plan”) and the Restricted Stock Unit Agreement (the “Agreement”) attached hereto, as follows. Unless otherwise provided herein, the terms in this Notice shall have the same meaning as those defined in the Plan.

Award Number

Date of Award

Vesting Commencement Date

Total Number of Restricted Stock
Units Awarded (the “Units”)

     Vesting Schedule:

     Subject to the Grantee’s Continuous Service and other limitations set forth in this Notice, the Agreement and the Plan, the Units will “vest” in accordance with the following schedule (the “Vesting Schedule”):

     [INSERT VESTING SCHEDULE]

     In the event the Grantee’s Continuous Service terminates due to death or Disability, fifty percent (50%) of the total number of Units awarded will accelerate and vest immediately prior to such termination of Continuous Service.

     In the event of the Grantee’s change in status from Employee to Consultant or Director, or from an Employee whose customary employment is 20 hours or more per week to an Employee whose customary employment is fewer than 20 hours per week, vesting of the Units shall continue in accordance with the Vesting Schedule set forth above and terms of this Notice, the Agreement and the Plan, unless affirmatively determined otherwise by the Administrator; provided, however, that the determination of whether such change in status results in a termination of Continuous Service (resulting in forfeiture of unvested Units) will be determined in accordance with Section 409A of the Code.

     During any authorized leave of absence, the vesting of the Units as provided in this schedule shall be suspended (to the extent permitted under Section 409A of the Code) after the leave of absence exceeds a period of three (3) months. The Vesting Schedule of the Units shall be extended by the length of the suspension. Vesting of the Units shall resume upon the

Grantee’s termination of the leave of absence and return to service to the Company or a Related Entity; provided, however, that if the leave of absence exceeds six (6) months, and a return to service upon expiration of such leave is not guaranteed by statute or contract, then (a) the Grantee’s Continuous Service shall be deemed to terminate on the first date following such six-month period and (b) the Grantee will forfeit the Units that are unvested on the date of the Grantee’s termination of Continuous Service. An authorized leave of absence shall include sick leave, military leave, or other bona fide leave of absence (such as temporary employment by the government).

     For purposes of this Notice and the Agreement, the term “vest” shall mean, with respect to any Units, that such Units are no longer subject to forfeiture to the Company. If the Grantee would become vested in a fraction of a Unit, such Unit shall not vest until the Grantee becomes vested in the entire Unit.

     Vesting shall cease upon the date the Grantee terminates Continuous Service for any reason, excluding death or Disability. In the event the Grantee terminates Continuous Service for any reason, excluding death or Disability, any unvested Units held by the Grantee immediately following such termination of the Grantee’s Continuous Service shall be forfeited and deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of such reconveyed Units and shall have all rights and interest in or related thereto without further action by the Grantee. In the event the Grantee terminates Continuous Service due to death or Disability, fifty percent (50%) of the total number of Units awarded will accelerate and vest immediately prior to such termination and all remaining unvested Units, if any, shall be forfeited and deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of such reconveyed Units and shall have all rights and interest in or related thereto without further action by the Grantee.

     IN WITNESS WHEREOF, the Company and the Grantee have executed this Notice and agree that the Award is to be governed by the terms and conditions of this Notice, the Plan, and the Agreement.

Novellus Systems, Inc., a California corporation
By:
	Title:
	Date:

THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE UNITS SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE OR AS OTHERWISE SPECIFICALLY PROVIDED HEREIN (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS AWARD OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE AGREEMENT, NOR IN THE PLAN, SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF THE GRANTEE’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH

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THE GRANTEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE GRANTEE’S CONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEE’S STATUS IS AT WILL.

Grantee Acknowledges and Agrees:

     The Grantee acknowledges receipt of a copy of the Plan and the Agreement and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Award subject to all of the terms and provisions hereof and thereof. The Grantee has reviewed this Notice, the Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice and fully understands all provisions of this Notice, the Agreement and the Plan. The Grantee further agrees and acknowledges that this Award is a non-elective arrangement pursuant to Section 409A of the Code.

     The Grantee further acknowledges that, from time to time, the Company may be in a “blackout period” and/or subject to applicable federal securities laws that could subject the Grantee to liability for engaging in any transaction involving the sale of the Company’s Shares. The Grantee further acknowledges and agrees that, prior to the sale of any Shares acquired under this Award, it is the Grantee’s responsibility to determine whether or not such sale of Shares will subject the Grantee to liability under insider trading rules or other applicable federal securities laws.

     The Grantee understands that the Award is subject to the Grantee’s consent to access, and acknowledgement of having accessed, the Plan prospectus in connection with the Form S-8 registration statement for the Plan, any updates thereto, the Plan, the Agreement and this Notice (collectively, the “Plan Documents”) in electronic form through the E*Trade Financial web page at the following address: [www.etrade.com] or such other address as is provided by notification from time to time. By accepting the grant of the Award, the Grantee hereby: (i) consents to access electronic copies (instead of receiving paper copies) of the Plan Documents via the E*Trade Financial web page or such other web page as is provided by notification from time to time, (ii) represents that the Grantee has access to the internet generally; (iii) acknowledges receipt of electronic copies, or that the Grantee is already in possession of paper copies, of the Plan Documents and the Company’s most recent annual report to shareholders; and (iv) represents that the Grantee is familiar with the terms and provisions of the Plan Documents and accepts the Award subject to all of the terms and provisions of the Plan Documents.

     The Grantee may receive, without charge, upon written or oral request, paper copies of any or all of the Plan Documents, documents incorporated by reference in the Form S-8 registration statement for the Plan, and the Company’s most recent annual report to shareholders by requesting them from Stock Administration at Novellus Systems, Incorporated, 4000 North First Street, San Jose, CA 95134, Attn. Stock Administration M/S 90-2B. Telephone (408) 943-9700, email: stock.administration@novellus.com.

     The Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Agreement shall be resolved by the Administrator in accordance

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with Section 8 of the Agreement. The Grantee further agrees to the venue and jurisdiction selection in accordance with Section 9 of the Agreement. The Grantee further agrees to notify the Company upon any change in his or her residence address indicated in this Notice.

Date:
	Grantee’s Signature
	Grantee’s Printed Name
	Address

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Award Number:                                          

NOVELLUS SYSTEMS, INC.
2001 STOCK INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

     1. Issuance of Units. Novellus Systems, Inc., a California corporation (the “Company”), hereby issues to the Grantee (the “Grantee”) named in the Notice of Restricted Stock Unit Award (the “Notice”) an award (the “Award”) of the Total Number of Restricted Stock Units Awarded set forth in the Notice (the “Units”), subject to the Notice, this Restricted Stock Unit Agreement (the “Agreement”) and the terms and provisions of the Novellus Systems, Inc. 2001 Stock Incentive Plan, as amended from time to time (the “Plan”), which is incorporated herein by reference. Unless otherwise provided herein, the terms in this Agreement shall have the same meaning as those defined in the Plan.

     2. Transfer Restrictions. The Units may not be transferred in any manner other than by will or by the laws of descent and distribution.

     3. Conversion of Units and Issuance of Shares.

          (a) General. Subject to Section 3(b), one share of Common Stock shall be issuable for each Unit subject to the Award (the “Shares”) upon the earlier of: (i) vesting; or (ii) immediately prior to the specified effective date of a Change in Control or a Corporate Transaction (each as defined in the Plan) which also constitutes a “change in the ownership or effective control, or in the ownership of a substantial portion of the assets” (as defined in Section 409A of the Code) of the Company. Immediately thereafter, or as soon as administratively feasible, the Company will transfer the appropriate number of Shares to the Grantee after satisfaction of any required tax or other withholding obligations. Any fractional Unit remaining after the Award is fully vested shall be discarded and shall not be converted into a fractional Share. Effective upon the consummation of a Corporation Transaction, the Award shall terminate unless it is Assumed in connection with the Corporate Transaction.

          (b) Delay of Conversion. The conversion of the Units into the Shares under Section 3(a), above, shall be delayed in the event the Company reasonably anticipates that the issuance of the Shares would constitute a violation of federal securities laws or other Applicable Law. If the conversion of the Units into the Shares is delayed by the provisions of this Section 3(b), the conversion of the Units into the Shares shall occur at the earliest date at which the Company reasonably anticipates issuing the Shares will not cause a violation of federal securities laws or other Applicable Law. For purposes of this Section 3(b), the issuance of Shares that would cause inclusion in gross income or the application of any penalty provision or other provision of the Code is not considered a violation of Applicable Law.

          (c) Delay of Issuance of Shares. The Company shall have the authority to delay the issuance of any Shares under this Section 3 to the extent it deems necessary or

appropriate to comply with Section 409A(a)(2)(B)(i) of the Code (relating to payments made to certain “key employees” of certain publicly-traded companies); in such event, any Shares to which the Grantee would otherwise be entitled during the six (6) month period following the date of the Grantee’s termination of Continuous Service will be issuable on the first business day following the expiration of such six (6) month period.

     4. Right to Shares. The Grantee shall not have any right in, to or with respect to any of the Shares (including any voting rights or rights with respect to dividends paid on the Common Stock) issuable under the Award until the Award is settled by the issuance of such Shares to the Grantee.

     5. Taxes.

          (a) Tax Liability. The Grantee is ultimately liable and responsible for all taxes owed by the Grantee in connection with the Award, regardless of any action the Company or any Related Entity takes with respect to any tax withholding obligations that arise in connection with the Award. Neither the Company nor any Related Entity makes any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of the Award or the subsequent sale of Shares issuable pursuant to the Award. The Company does not commit and is under no obligation to structure the Award to reduce or eliminate the Grantee’s tax liability.

          (b) Payment of Withholding Taxes. Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any tax withholding obligation, whether United States federal, state, local or non-U.S., including any employment tax obligation (the “Tax Withholding Obligation”), the Grantee must arrange for the satisfaction of the minimum amount of such Tax Withholding Obligation in a manner acceptable to the Company.

               (i) By Share Withholding. The Grantee authorizes the Company to, upon the exercise of its sole discretion, withhold from those Shares issuable to the Grantee the whole number of Shares sufficient to satisfy the minimum applicable Tax Withholding Obligation. The Grantee acknowledges that the withheld Shares may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of Shares described above.

               (ii) By Sale of Shares. Unless the Grantee determines to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, the Grantee’s acceptance of this Award constitutes the Grantee’s instruction and authorization to the Company and any brokerage firm determined acceptable to the Company for such purpose to, upon the exercise of Company’s sole discretion, sell on the Grantee’s behalf a whole number of Shares from those Shares issuable to the Grantee as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the minimum applicable Tax Withholding Obligation. Such Shares will be sold on the day such Tax Withholding Obligation arises (e.g., a vesting date) or as soon thereafter as practicable. The Grantee will be responsible for all broker’s fees and other costs of sale, and the Grantee agrees to indemnify and hold the Company harmless from

2

any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed the Grantee’s minimum Tax Withholding Obligation, the Company agrees to pay such excess in cash to the Grantee. The Grantee acknowledges that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the sale of Shares described above.

               (iii) By Check, Wire Transfer or Other Means. At any time not less than five (5) business days (or such fewer number of business days as determined by the Administrator) before any Tax Withholding Obligation arises (e.g., a vesting date), the Grantee may elect to satisfy the Grantee’s Tax Withholding Obligation by delivering to the Company an amount that the Company determines is sufficient to satisfy the Tax Withholding Obligation by (x) wire transfer to such account as the Company may direct, (y) delivery of a certified check payable to the Company, or (z) such other means as specified from time to time by the Administrator.

Notwithstanding the foregoing, the Company or a Related Entity also may satisfy any Tax Withholding Obligation by offsetting any amounts (including, but not limited to, salary, bonus and severance payments) payable to the Grantee by the Company and/or a Related Entity.

     6. Entire Agreement; Governing Law. The Notice, the Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee’s interest except by means of a writing signed by the Company and the Grantee. These agreements are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice or this Agreement be determined to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

     7. Construction. The captions used in the Notice and this Agreement are inserted for convenience and shall not be deemed a part of the Award for construction or interpretation. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

     8. Administration and Interpretation. Any question or dispute regarding the administration or interpretation of the Notice, the Plan or this Agreement shall be submitted by the Grantee or by the Company to the Administrator. The resolution of such question or dispute by the Administrator shall be final and binding on all persons.

     9. Venue and Jurisdiction. The parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Agreement shall be brought exclusively in the

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United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of San Mateo) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Section 9 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

     10. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if the parties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to such other address as such party may designate in writing from time to time to the other party.

     11. Data Privacy. The Grantee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Grantee’s personal data as described in this Agreement by and among, as applicable, the Grantee’s employer, the Company, and any Related Entity for the exclusive purpose of implementing, administering and managing the Grantee’s participation in the Plan. The Grantee understands that the Company or any Related Entity may hold certain personal information about the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, date of birth, social security/insurance number or other identification number, salary, nationality, job title, any shares of Common Stock or directorships held in the Company, details of all awards or any other entitlement to shares awarded, canceled, vested, unvested or outstanding in the Grantee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). The Grantee understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Grantee’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Grantee’s country. The Grantee understands that the Grantee may request a list with the names and addresses of any potential recipients of the Data by contacting the Grantee’s local human resources representative. The Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker, escrow agent or other third party with whom the Shares received upon vesting of the Units may be deposited. The Grantee understands that Data will be held pursuant to this Section 11 only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan. The Grantee understands that the Grantee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Grantee’s local human resources representative. The Grantee understands that refusal or withdrawal of consent may affect the Grantee’s ability to participate in the Plan. For more information on the consequences of the Grantee’s refusal to consent or withdrawal of consent, the Grantee understands that the Grantee may contact the Grantee’s local human resources representative.

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     12. Amendment and Delay to Meet the Requirements of Section 409A. The Grantee acknowledges that the Company, in the exercise of its sole discretion and without the consent of the Grantee, may amend or modify this Agreement in any manner and delay the issuance of any Shares issuable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Treasury regulations or guidance from the Internal Revenue Service as the Company deems appropriate or advisable.

END OF AGREEMENT

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EX-21.1 3 f37393exv21w1.htm EXHIBIT 21.1

EXHIBIT 21.1

SUBSIDIARIES OF NOVELLUS SYSTEMS, INC. (a California corporation)

Name	Jurisdiction of Organization
Novellus Systems Export, Inc.	Barbados
GaSonics World Trade Inc.	Barbados
Novellus Systems International, LLC	California, United States
Angstron Systems, Inc.	California, United States
Gamma Precision Technology	California, United States
Simation	Canada
Novellus Systems International Holdings Ltd.	Cayman Islands
Novellus Systems Semiconductor Equipment Shanghai Co. Ltd.	China
Novellus Systems International Trading (Shanghai) Co. Ltd.	China
Novellus Systems International Holdco, Inc.	Delaware, United States
SpeedFam-IPEC International Services, LLC	Delaware, United States
Tmation Inc.	Delaware, United States
Novellus Development Company, LLC	Delaware, United States
Novellus Systems SARL	France
Novellus Systems GmbH	Germany
Peter Wolters Verwaltungs GmbH	Germany
NHL Sub GmbH	Germany
Peter Wolters GmbH	Germany
Novellus Systems (H.K.) Limited	Hong Kong
Peter Wolters of America, Inc.	Illinois, United States
Novellus Systems (India) Pvt. Ltd.	India
Novellus Systems Ireland Ltd.	Ireland
GaSonics Ireland Ltd.	Ireland
Novellus Systems Israel Ltd.	Israel
GaSonics Israel Ltd.	Israel
Novellus Systems Italy SRL	Italy
Peter Wolters Japan Co., Ltd.	Japan
Novellus Systems Japan, G.K.	Japan
SpeedFam IPEC (Malaysia) Sdn. Bhd.	Malaysia
Novellus Systems (Malaysia) Sdn. Bhd.	Malaysia
Novellus Systems BV	Netherlands
Novellus Systems International BV	Netherlands
Voumard, Inc.	New York, United States
Novellus Korea LLC	Republic of South Korea
Novellus Systems International BV, Singapore Branch	Singapore
Novellus Singapore Pte. Ltd.	Singapore
Novellus Singapore Holdings Pte. Ltd.	Singapore
Novellus Systems (Schweiz) Holding GmbH	Switzerland
Voumard Machines Co SARL	Switzerland
Novellus Systems (H.K.) Limited, Taiwan Branch	Taiwan
Voumard Limited	United Kingdom
Peter Wolters UK Ltd.	United Kingdom
Novellus Systems UK Limited	United Kingdom
Peter Wolters Project UK Limited	United Kingdom

EX-23.1 4 f37393exv23w1.htm EXHIBIT 23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements of Novellus Systems, Inc.:

(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 Statements (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 June 14, 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, 2008, with respect to the consolidated financial statements and schedule of Novellus Systems, Inc., 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, 2007.

/s/ Ernst & Young LLP

San Jose, California
February 27, 2008

EX-31.1 5 f37393exv31w1.htm EXHIBIT 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 27, 2008	By:	/s/ Richard S. Hill
		Richard S. Hill
		Chairman of the Board of Directors and Chief Executive Officer

EX-31.2 6 f37393exv31w2.htm EXHIBIT 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 27, 2008	By:	/s/ William H. Kurtz
		William H. Kurtz
		Executive Vice President and Chief Financial Officer

EX-32.1 7 f37393exv32w1.htm EXHIBIT 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, 2007 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 27, 2008	By:	/s/ Richard S. Hill
		Richard S. Hill
		Chairman of the Board of Directors and Chief Executive Officer

EX-32.2 8 f37393exv32w2.htm EXHIBIT 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, 2007 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 27, 2008	By:	/s/ William H. Kurtz
		William H. Kurtz
		Executive Vice President and Chief Financial Officer

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EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF NOVELLUS SYSTEMS, INC. (a California corporation)

Name	Jurisdiction of Organization
Novellus Systems Export, Inc.	Barbados
GaSonics World Trade Inc.	Barbados
Novellus Systems International, LLC	California, United States
Angstron Systems, Inc.	California, United States
Gamma Precision Technology	California, United States
Simation	Canada
Novellus Systems International Holdings Ltd.	Cayman Islands
Novellus Systems Semiconductor Equipment Shanghai Co. Ltd.	China
Novellus Systems International Trading (Shanghai) Co. Ltd.	China
Novellus Systems International Holdco, Inc.	Delaware, United States
SpeedFam-IPEC International Services, LLC	Delaware, United States
Tmation Inc.	Delaware, United States
Novellus Development Company, LLC	Delaware, United States
Novellus Systems SARL	France
Novellus Systems GmbH	Germany
Peter Wolters Verwaltungs GmbH	Germany
NHL Sub GmbH	Germany
Peter Wolters GmbH	Germany
Novellus Systems (H.K.) Limited	Hong Kong
Peter Wolters of America, Inc.	Illinois, United States
Novellus Systems (India) Pvt. Ltd.	India
Novellus Systems Ireland Ltd.	Ireland
GaSonics Ireland Ltd.	Ireland
Novellus Systems Israel Ltd.	Israel
GaSonics Israel Ltd.	Israel
Novellus Systems Italy SRL	Italy
Peter Wolters Japan Co., Ltd.	Japan
Novellus Systems Japan, G.K.	Japan
SpeedFam IPEC (Malaysia) Sdn. Bhd.	Malaysia
Novellus Systems (Malaysia) Sdn. Bhd.	Malaysia
Novellus Systems BV	Netherlands
Novellus Systems International BV	Netherlands
Voumard, Inc.	New York, United States
Novellus Korea LLC	Republic of South Korea
Novellus Systems International BV, Singapore Branch	Singapore
Novellus Singapore Pte. Ltd.	Singapore
Novellus Singapore Holdings Pte. Ltd.	Singapore
Novellus Systems (Schweiz) Holding GmbH	Switzerland
Voumard Machines Co SARL	Switzerland
Novellus Systems (H.K.) Limited, Taiwan Branch	Taiwan
Voumard Limited	United Kingdom
Peter Wolters UK Ltd.	United Kingdom
Novellus Systems UK Limited	United Kingdom
Peter Wolters Project UK Limited	United Kingdom

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 of Novellus Systems, Inc.:

(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 Statements (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 June 14, 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, 2008, with respect to the consolidated financial statements and schedule of Novellus Systems, Inc., 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, 2007.

/s/ Ernst & Young LLP

San Jose, California
February 27, 2008

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 27, 2008	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 27, 2008	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, 2007 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 27, 2008	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, 2007 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 27, 2008	By:	/s/ William H. Kurtz
		William H. Kurtz
		Executive Vice President and Chief Financial Officer