##### Table of Contents





UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
 Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For 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 RegisteredCommon Stock, no par value

The NASDAQ Stock Market LLC
    (NASDAQ Global Select Market)   Securities registered pursuant to Section 12(g) of the
    Act:
    None
  þ o
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  Large accelerated filer
    þ

Accelerated filer
    o

Non-accelerated filer
    o

Smaller reporting company
    o(Do not check if a smaller reporting company)   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K Form 10-K.




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##### 





NOVELLUS
    SYSTEMS, INC.
  2007
    ANNUAL REPORT ON
    FORM 10-K
  TABLE OF
    CONTENTS
   
 PagePART IItem 1:


Business


2Item 1A:


Risk Factors


11Item 1B:


Unresolved Staff Comments


19Item 2:


Properties


19Item 3:


Legal Proceedings


20Item 4:


Submission of Matters to a Vote of Security
    Holders


20PART IIItem 5:


Market for Registrants Common Equity,
    Related Shareholder Matters and Issuer Purchases of Equity
    Securities


21Item 6:


Selected Financial Data


23Item 7:


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


25Item 7A:


Quantitative and Qualitative Disclosures about
    Market Risk


43Item 8:


Financial Statements and Supplementary Data


46Item 9:


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


82Item 9A:


Controls and Procedures


82Item 9B:


Other Information


85PART IIIItem 10:


Directors, Executive Officers and Corporate
    Governance


85Item 11:


Executive Compensation


85Item 12:


Security Ownership of Certain Beneficial Owners
    and Management and Related Shareholder Matters


85Item 13:


Certain Relationships and Related Transactions,
    and Director Independence


86Item 14:


Principal Accountant Fees and Services


86PART IVItem 15:


Exhibits and Financial Statement Schedules


86Signatures


90EXHIBIT 10.9EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I  Form 10-K.
  Item 1.
    Business  The
    Company
      tm
    (408) 943-9700.
 2




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##### Table of Contents



www.novellus.com. Form 10-K, Form 10-Q, Form 8-K, Form 10-K
  Semiconductor
    Industry Background
             3




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Semiconductor
    Business Strategy
    Emphasize High-Productivity Systems
  Be Recognized for our Technology in our Served Available
    Markets
  Focus on Reducing Customer Costs
  Broaden our Interconnect Offerings
  Differentiate our Service 24-hour
  Expand Operational and Customer Support Presence in
    Asia
  Leverage our Low-Cost Manufacturing Structure
  Semiconductor
    Manufacturing Products
  Deposition
    Technologies
   4




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® ® ®
  CVD
    Products
    HDP
    CVD Products
  Concept Two
    SPEED®
  Concept Three SPEED
  SPEED
    NExT tm
  W-CVD
    Products
  Concept Two
    ALTUS®
  Concept Three ALTUS
  ALTUS tm
  PECVD
    Products
  Concept Two
    SEQUEL®
    Express tm ® micron-and-smaller
  VECTOR®  tm tm
 5




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UVTP
    Products
  SOLA ®
  PVD
    Products
    INOVA® ®
  INOVA®
    xT tm
  INOVA®
    NExT tm
  INOVA NExT HCM
    IONX tm
  ECD
    Products
    SABRE®
  SABRE xT
  SABRE
    NExT tm
  SABRE
    Extreme tm
 6




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##### Table of Contents



Surface
    Preparation Technologies
    GAMMA ® 2100
  GAMMA®
    2130
  GAMMA®
    Express
  CMP
    Technologies
    MOMENTUM tm
  XCEDA tm
  Industrial
    Applications Group Products
   7




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Marketing,
    Sales and Service
      Customers
      Backlog
    Research
    and Development
     8




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Manufacturing
      Competition
     9




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Patents
    and Proprietary Rights
          Employees
     10




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Environmental
    Matters
    Item 1A.
    Risk
    Factors  Form 10-K,
  Rapid
    technological change in the semiconductor industry requires
    substantial research and development expenditures and
    responsiveness to customer needs.
       11




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Cyclical
    downturns in the semiconductor industry negatively impact demand
    for our equipment.
    The
    competitive and capital-intensive nature of the semiconductor
    industry increases the difficulty of maintaining gross margin
    and maintaining and capturing market share.
    We are
    exposed to risks associated with outsourcing activities, which
    could result in supply shortages that could affect our ability
    to meet customer demands.
   12




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The
    loss of key employees could harm our business and
    operations.
    We
    face risks related to concentration of net sales.
    We are
    exposed to the risks of global operations.
    
    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




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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.
      We
    face risks related to intellectual property.
   14




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We are
    subject to litigation proceedings that could adversely affect
    our business.
  Intellectual
    Property Litigation
    Other
    Litigation
   15




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Changes
    in tax rates, tax assets or liabilities could negatively impact
    our future results.
    
    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.
    We are
    exposed to risks related to our indemnification of third
    parties.
   16




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We
    face risks associated with acquisitions, divestitures, and other
    transactions.
  and/or
  
    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.      Our
    financial results may fall short of anticipated levels;
    forecasting revenues and profitability is complex and our
    forecasts may be inaccurate.
   17




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Our
    quarterly operating results and stock price are
    unpredictable.
    
    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.   18




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##### Table of Contents



Compliance
    with current and future environmental regulations may be
    costly.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties     # of



Operating





SquareBuildings

Location

Segment

Use

Ownership

Footage7


San Jose, CA

Semiconductor Group

Corporate Headquarters, Manufacturing, Research and Development,
    Engineering, Applications Demonstration Lab, Customer Support,
    Administration and Warehousing

Owned


491,0004


Tualatin, OR

Semiconductor Group

Manufacturing, Research and Development, Engineering, Customer
    Support, Administration and Warehousing

Owned


442,0001


Phoenix, AZ

Semiconductor Group

Manufacturing, Research and Development, Engineering, Customer
    Support, Administration and Warehousing

Leased


32,0001


Des Plaines, IL

Industrial Applications Group

Manufacturing, Research and Development, Engineering, Customer
    Support, Administration and Warehousing

Owned


41,0001


Plainville, MA

Industrial Applications Group

Customer Support and Warehousing

Owned


25,0001


Leicestershire, UK

Industrial Applications Group

Manufacturing, Customer Support, Administration and Warehousing

Owned


9,000 19




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##### Table of Contents



# of



Operating





SquareBuildings

Location

Segment

Use

Ownership

Footage1


Rendsburg, Germany

Industrial Applications Group

Manufacturing, Research and Development, Engineering, Customer
    Support, Administration and Warehousing

Owned


189,0001


Hauterive, Switzerland

Industrial Applications Group

Manufacturing, Research and Development, Customer Support and
    Administration

Owned


128,000Total

Owned


1,325,000


Sq. Ft.Leased


32,000


Sq. Ft.         Item 3.
    Legal
    Proceedings  Linear
    Technology Corporation
    Other
    Litigation
    Item 4.
    Submission
    of Matters to a Vote of Security Holders   20




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##### Table of Contents



PART II  Item 5.
    Market
    for Registrants Common Equity, Related Shareholder Matters
    and Issuer Purchases of Equity Securities  Stock
    Information
    2007High


LowFirst Quarter

$
34.82


$
29.96Second Quarter


33.85



28.37Third Quarter


33.03



25.90Fourth Quarter


28.72



25.65   2006High


LowFirst Quarter

$
30.62


$
23.85Second Quarter


26.57



22.28Third Quarter


28.91



22.55Fourth Quarter


35.00



26.13       Total Number of


Approximate DollarShares Purchased as


Value of SharesPart of Publicly


that May yet beTotal Number of


Average Price Paid


Announced Plans or


Purchased Under thePeriod

Shares Purchased


Per Share


Programs


Plans or ProgramsSeptember 30, 2007 through November 3, 2007


2,883,762


$
27.84



2,883,762


$
1.3 billionNovember 4, 2007 through December 1, 2007


6,176,907


$
26.19



6,176,907


$
1.1 billionDecember 2, 2007 through December 31, 2007


4,681,008


$
26.62



4,681,008


$
1.0 billionTotal


13,741,677


$
26.68



13,741,677


$
1.0 billion      21




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##### Table of Contents



5-year
  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.  ©
  December 31,2002

2003

2004

2005

2006

2007Novellus Systems, Inc.

$
100.00


$
149.75


$
99.32


$
85.90


$
122.58


$
98.18S & P 500

$
100.00


$
128.68


$
142.69


$
149.70


$
173.34


$
182.87RDG Technology Composite

$
100.00


$
150.27


$
153.63


$
158.57


$
173.85


$
204.38      22




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##### Table of Contents



Item 6.
    Selected
    Financial Data    Selected
    Consolidated Financial Data
    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


$
925,070Gross 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
    principleBasic

$
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 taxBasic

$



$
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



150,680Shares used in diluted per share calculations


121,915



126,483



138,423



147,937



150,680   23




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##### Table of Contents



December 31,

2007


2006


2005


2004


2003Consolidated Balance Sheet Data:Cash, cash equivalents and short-term investments

$
596,766


$
853,328


$
654,983


$
592,187


$
1,009,312Working capital

$
894,749


$
1,151,458


$
1,019,168


$
1,045,294


$
1,350,906Total assets

$
2,076,943


$
2,362,492


$
2,290,249


$
2,401,832


$
2,338,900Long-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. 24




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Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Cautionary
    Note Regarding Forward-Looking Statements
  Form 10-K Form 10-K,
  Form 10-K
  
    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; 25




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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; 26




---



##### Table of Contents




    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; 27




---



##### Table of Contents




    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; 28




---



##### Table of Contents




    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
    
    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. 29




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##### Table of Contents



Overview
    of Our Business and Industry
           30




---



##### Table of Contents



Quarterly Financial DataFirst


Second


Third


Fourth


Year EndedQuarter


Quarter


Quarter


Quarter


December 31,2007:Net sales

$
396,974


$
416,335


$
393,277


$
363,463


$
1,570,049Gross profit

$
194,909


$
208,110


$
194,307


$
171,863


$
769,189Net income

$
53,783


$
57,345


$
49,711


$
52,861


$
213,700Diluted net income per share

$
0.42


$
0.45


$
0.41


$
0.47


$
1.75Shipments

$
389,052


$
436,382


$
387,817


$
363,055


$
1,576,306Increase (decrease) in shipments from prior period


(0
)%


12
%


(11
)%


(6
)%


(2
)%Net orders

$
412,219


$
332,201


$
305,329


$
343,086


$
1,392,835Increase (decrease) in net orders from prior period


(7
)%


(19
)%


(8
)%


12
%


(22
)%2006:Net sales

$
365,906


$
410,073


$
444,032


$
438,505


$
1,658,516Gross profit

$
167,540


$
204,764


$
226,525


$
225,520


$
824,349Income before cumulative effect of a change in accounting
    principle

$
23,769


$
52,705


$
70,020


$
42,574


$
189,068Net income

$
24,717


$
52,705


$
70,020


$
42,574


$
190,016Diluted net income per share before cumulative effect of a
    change in accounting principle

$
0.18


$
0.42


$
0.57


$
0.34


$
1.49Diluted net income per share

$
0.19


$
0.42


$
0.57


$
0.34


$
1.50Shipments

$
354,160


$
457,320


$
414,213


$
390,151


$
1,615,844Increase (decrease) in shipments from prior period


12
%


29
%


(9
)%


(6
)%


20
%Net orders

$
416,770


$
457,545


$
470,322


$
441,620


$
1,786,257Increase (decrease) in net orders from prior period


19
%


10
%


3
%


(6
)%


43
%2005:Net sales

$
339,740


$
329,585


$
338,878


$
332,268


$
1,340,471Gross profit

$
153,869


$
157,562


$
147,194


$
140,501


$
599,126Net income

$
30,471


$
33,231


$
23,415


$
22,990


$
110,107Diluted net income per share

$
0.22


$
0.24


$
0.17


$
0.17


$
0.80Shipments

$
360,663


$
347,595


$
316,423


$
316,574


$
1,341,255Increase (decrease) in shipments from prior period


8
%


(4
)%


(9
)%


0
%


(4
)%Net orders

$
301,594


$
309,214


$
286,929


$
351,018


$
1,248,755Increase (decrease) in net orders from prior period


(9
)%


3
%


(7
)%


22
%


(17
)%  31




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##### Table of Contents



Financial
    Performance Overview
    
    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


% Change2007


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
%    32




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##### Table of Contents



Years Ended December 31,2007


2006


2005Asia


66
%


63
%


62
%North America


26
%


28
%


27
%Europe


8
%


9
%


11
%     Gross
    Profit
  Years Ended December 31,

% Change

% Change2007

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
%         Selling,
    General and Administrative (SG&A)
  Years Ended December 31,

% Change

% Change2007

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
%    33




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##### Table of Contents



Research
    and Development (R&D)
  Years Ended December 31,

% Change

% Change2007

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
%         Legal
    Settlement
  Years Ended December 31,2007

2006

2005(Dollars in thousands)Legal settlement

$



$
3,250


$
% of net sales


0
%


less than 1
%


0
%    34




---



##### Table of Contents



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
%               Interest
    and Other Income, net
  Years Ended December 31,

% Change

% Change2007

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
%        35




---



##### Table of Contents



Income
    Taxes
        Critical
    Accounting Policies
    Revenue
    Recognition
     36




---



##### Table of Contents



Inventory
    Valuation
  work-in-process,
  Goodwill
    and Other Intangible Assets
    Income
    Taxes
    Warranty
    Obligations
   37




---



##### Table of Contents



Restructuring
    and Impairment Charges
    Hedge
    Accounting for Derivatives
    Stock-Based
    Compensation Expense
    Litigation
    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


$
58,463Short-term investments


421,695



794,865Total cash, cash equivalents and short-term investments

$
596,766


$
853,328  38




---



##### Table of Contents



Cash
    Flow Summary
  Years Ended December 312007


2006


2005(Dollars in thousands)Net cash provided by (used in):Operating activities

$
305,689


$
447,153


$
273,556Investing 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



741Net increase in cash and cash equivalents

$
116,608


$
18,060


$
(65,714
)   Operating
       39




---



##### Table of Contents



Investing
        Financing
        Liquidity
         40




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
  Standby
    Letters of Credit
    Guarantee
    Arrangements
    Contractual
    Obligations
      Years Ending December 31,

Sublease

Net2008

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     Years Ending December 31,2009

2010

2011

2012

Thereafter(In thousands)Long-term debt obligations

$
142,014


$
43


$
43


$
43


$
1,124    41




---



##### Table of Contents



Purchase
    Commitments
    Recent
    Accounting Pronouncements
  No. 06-2, (EITF 06-2), EITF 06-2.
     42




---



##### Table of Contents



item-by-item case-by-case instrument-by-instrument
      Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk  Interest
    Rate Risk
       43




---



##### Table of Contents



Periods of MaturityLess than


1 to 3


3 to 5


5 to 10


Over 10December 31, 2007

1 Year


Years


Years


Years


Years


Total(In thousands)Assets:Cash and cash equivalents

$
175,071


$



$



$



$



$
175,071Average interest rate


2.84
%


















2.84
%Short-term investments

$
74,573


$
15,739


$
2,000


$
16,800


$
308,900


$
418,012Average interest rate


4.95
%


6.66
%


5.23
%


7.23
%


6.14
%


5.99
%Restricted cash and cash equivalents

$
161,050


$



$



$



$



$
161,050Average interest rate


4.80
%


















4.80
%Liabilities:Short-term borrowings

$
1,509


$



$



$



$



$
1,509Average interest rate


1.33
%


















1.33
%Long-term borrowings

$



$
142,057


$
86


$
215


$
909


$
143,267Average interest rate






4.97
%


4.00
%


4.00
%


4.00
%


4.96
%   Periods of MaturityLess than


1 to 3


3 to 5


5 to 10


Over 10December 31, 2006

1 Year


Years


Years


Years


Years


Total(In thousands)Assets:Cash and cash equivalents

$
58,463


$



$



$



$



$
58,463Average interest rate


5.30
%


















5.30
%Short-term investments

$
199,980


$
49,016


$
4,845


$
12,875


$
522,998


$
789,714Average interest rate


4.89
%


5.06
%


5.82
%


5.71
%


5.76
%


5.51
%Restricted cash and cash equivalents

$
143,769


$



$



$



$



$
143,769Average interest rate


5.33
%


















5.33
%Liabilities:Short-term borrowings

$
19,480


$



$



$



$



$
19,480Average interest rate


2.34
%


















2.34
%Long-term borrowings

$



$
126,665


$
76


$
190


$
931


$
127,862Average interest rate






3.83
%


4.00
%


4.00
%


4.00
%


3.83
%    44




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##### Table of Contents



Foreign
    Currency Risk
    December 31, 2007Notional


Average


Estimated FairSell (Buy)


Contract Rate


Value-Gain (Loss)(In thousands, except for average contract rate)Foreign currency forward exchange contracts:Japanese yen

$
127,602



113.40


$
1,554Israeli shekel


1,460



3.94



0Swiss franc


1,226



1.15



0Euro


173



0.68



(7
)Other


(4
)






(4
)$
130,457






$
1,543   December 31, 2006Notional


Average


Estimated FairSell (Buy)


Contract Rate


Value-Gain (Loss)(In thousands, except for average contract rate)Foreign currency forward exchange contracts:Japanese yen

$
142,963



106.23


$
3,047Swiss franc


1,966



1.21



0Singapore dollar


(6,443
)


1.53



1Other


(7
)






(16
)$
138,479






$
3,032  45




---



##### Table of Contents



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


$
1,340,471Cost of sales


800,860



834,167



741,345Gross profit


769,189



824,349



599,126Operating expenses:Selling, general and administrative


266,018



261,389



206,939Research and development


241,025



244,201



247,315Legal settlement






3,250



Restructuring and other charges (benefits)


(8,013
)


10,735



9,175Total operating expenses


499,030



519,575



463,429Operating income


270,159



304,774



135,697Interest income


38,414



27,782



20,738Interest expense


(6,376
)


(4,290
)


(3,510
)Other income, net


12,592



10,653



5,688Interest and other income, net


44,630



34,145



22,916Income before provision for income taxes and cumulative effect
    of a change in accounting principle


314,789



338,919



158,613Provision for income taxes


101,089



149,851



48,506Income before cumulative effect of a change in accounting
    principle


213,700



189,068



110,107Cumulative effect of a change in accounting principle, net of
    tax of $594






948



Net income

$
213,700


$
190,016


$
110,107Net income per share:Basic:Income before cumulative effect of a change in accounting
    principle

$
1.78


$
1.51


$
0.80Cumulative effect of a change in accounting principle






0.01



Basic net income per share

$
1.78


$
1.52


$
0.80Diluted:Income before cumulative effect of a change in accounting
    principle

$
1.75


$
1.49


$
0.80Cumulative effect of a change in accounting principle






0.01



Diluted net income per share

$
1.75


$
1.50


$
0.80Shares used in basic per share calculations


119,782



125,286



137,447Shares used in diluted per share calculations


121,915



126,483



138,423    46




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2007


2006(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
175,071


$
58,463Short-term investments


421,695



794,865Accounts receivable, net of allowance for doubtful accounts of
    $1,988 in 2007 and $1,753 in 2006


346,866



310,888Inventories


212,995



198,571Deferred tax assets, net


48,965



102,266Assets held for sale






21,966Prepaid and other current assets


18,366



18,274Total current assets


1,223,958



1,505,293Property and equipment, net


320,009



364,599Restricted cash and cash equivalents


161,050



143,769Goodwill


238,944



225,431Intangibles and other assets


132,982



123,400Total assets

$
2,076,943


$
2,362,492LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
97,135


$
76,406Accrued payroll and related expenses


73,273



81,836Accrued warranty


54,857



55,349Other accrued liabilities


48,172



40,534Income taxes payable


2,011



38,879Deferred profit


52,252



41,351Current obligations under lines of credit


1,509



19,480Total current liabilities


329,209



353,835Long-term debt


143,267



127,862Long-term income taxes payable


27,408



Other non-current liabilities


47,972



46,090Total liabilities


547,856



527,787Commitments 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



1,393,914Retained earnings


304,278



438,196Accumulated other comprehensive income


5,276



2,595Total shareholders equity


1,529,087



1,834,705Total liabilities and shareholders equity

$
2,076,943


$
2,362,492    47




---



##### Table of Contents



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


$
110,107Adjustments to reconcile net income to net cash provided by
    operating activities:Loss (gain) on disposal of property and equipment


(9,168
)


1,699



2,182Non-cash portion of restructuring and other charges






10,199



14,337Depreciation and amortization


66,924



69,729



82,776Deferred income taxes


31,855



20,790



22,858Stock-based compensation


28,118



34,941



4,209Tax benefit from stock-based compensation


4,464



29,656



4,132Excess 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
)


52,884Prepaid and other assets


(266
)


27,085



(10,421
)Accounts payable


3,904



(7,764
)


1,580Accrued payroll and related expenses


(6,490
)


27,306



(3,541
)Accrued warranty


(846
)


501



8,795Other 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



273,556Cash flows from investing activities:Proceeds from sales of short-term investments


1,203,486



672,263



329,434Proceeds from maturities of short-term investments


206,665



197,464



395,806Purchases 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



2,676Decrease (increase) in restricted cash and cash equivalents


(17,281
)


(3,557
)


36,496Purchase of Voumard Machine, Co. SA and Voumard GmbH, net of
    cash acquired


(339
)


(765
)


(5,384
)Other investing activities






(16,603
)


3,003Net 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



29,864Proceeds from (repayments of) lines of credit, net


(18,117
)


4,193



12,726Payments 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



741Net change in cash and cash equivalents


116,608



18,060



(65,714
)Cash and cash equivalents at beginning of period


58,463



40,403



106,117Cash and cash equivalents at end of period

$
175,071


$
58,463


$
40,403Supplemental disclosures:Cash paid during the year for:Interest

$
7,070


$
3,850


$
4,136Income taxes, net

$
72,488


$
65,238


$
14,263    48




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY
  AccumulatedOtherComprehensive


TotalCommon 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


$
1,861,834Components of comprehensive income:Net income














110,107







110,107Net 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






















102,325Issuance of common stock under employee compensation plans, net


1,901



33,658







(223
)






33,435Income tax benefits realized from activity in employee stock
    plans






4,132















4,132Issuance of restricted common stock, net


538



11,992



(11,992
)










Amortization of deferred compensation










4,209











4,209Repurchases 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
)


1,779,283Components of comprehensive income:Net income














190,016







190,016Net change in unrealized loss on short-term investments


















2,114



2,114Foreign currency translation adjustments, net of tax of $123


















4,225



4,225Net 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






















195,148Reclassification 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
)






46,322Income tax benefits realized from activity in employee stock
    plans






29,656















29,656Stock based compensation






34,160















34,160Repurchases 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



1,834,705Adoption 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







213,700Net 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



4,486Net 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



681Comprehensive income






















216,381Issuance of common stock under employee compensation plans, net


1,626



44,946















44,946Income tax benefits realized from activity in employee stock
    plans






2,158















2,158Stock based compensation






28,299















28,299Repurchases 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    49




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  Note 1.
    Description
    of the Business      Note 2.  Significant Accounting Policies
  Principles
    of Consolidation and Basis of Presentation
      Net
    Income per Share
     50




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2007


2006


2005(In thousands, except per share amounts)Numerator:Net income

$
213,700


$
190,016


$
110,107Denominator:Basic weighted-average shares outstanding


119,782



125,286



137,447Dilutive potential common shares


2,133



1,197



976Diluted weighted-average shares outstanding


121,915



126,483



138,423Basic net income per share

$
1.78


$
1.52


$
0.80Diluted net income per share

$
1.75


$
1.50


$
0.80     Revenue
    Recognition
         51




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Cash,
    Cash Equivalents and Short-Term Investments
    Restricted
    Cash and Cash Equivalents
    Allowance
    for Doubtful Accounts
    Inventories
    and Inventory Valuation
  (first-in, work-in-process,
  Income
    Taxes
    Property
    and Equipment
    Machinery and equipment

3  10 yearsFurniture and fixtures

3  7 yearsBuildings

30  40 yearsBuilding and leasehold improvements

Shorter of useful life or remaining lease term  52




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Goodwill
    and Other Intangible Assets
    Warranty
    Restructuring
    and Impairment Charges
    Contingencies
    and Litigation
    Foreign
    Currency Translation
  non-U.S. functional
 53




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Derivatives
    Cash Flow
    Hedging
      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



1,806Reclassification to net sales


1,434



Accumulated losses, end of period

$
(2,578
)

$
(329
)    54




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Net
    Investment Hedging
    Non-Designated
    Hedges
    Shipping
    and Handling Costs
    Advertising
    Expenses
    Concentrations
    and Other Risks
     55




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Stock-Based
    Compensation Expense
    Recent
    Accounting Pronouncements
  No. 06-2, (EITF 06-2), EITF 06-2 EITF 06-2.
   56




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    item-by-item case-by-case instrument-by-instrument
     57




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 3.
    Financial
    Instruments  Short-term
    investments
    December 31, 2007Gross


GrossUnrealized


Unrealized


Estimated FairCost


Gains


Losses


Value(In thousands)Tax-exempt securities

$
404,008


$
58


$
(9
)

$
404,057Other


14,102







(147
)


13,955Total

$
418,110


$
58


$
(156
)

$
418,012   December 31, 2006Gross


GrossUnrealized


Unrealized


Estimated FairCost


Gains


Losses


Value(In thousands)Tax-exempt securities

$
775,540


$
9


$
(676
)

$
774,873Other


13,950



891







14,841Total

$
789,490


$
900


$
(676
)

$
789,714       Amount(In thousands)Due in less than one year

$
235,623Due in 1 to 3 years


15,739Due in 3 to 5 years


2,000Due in 5 to 10 years


16,800Due in greater than 10 years


308,900Total

$
579,062    58




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    In Loss Position for Less

In Loss Position forThan 12 Months

12 Months or Greater

TotalFair

Unrealized

Fair

Unrealized

Fair

UnrealizedValue

Losses

Value

Losses

Value

Losses(In thousands)Tax-exempt securities

$



$



$
21,653


$
(9
)

$
21,653


$
(9
)Other

$
589


$
(147
)

$



$



$
589


$
(147
)     Fair
    Value of Other Financial Instruments
    December 31,2007


2006Carrying


Estimated Fair


Carrying


Estimated FairValue


Value


Value


Value(In thousands)Restricted cash and cash equivalents  non-current

$
161,050


$
161,050


$
143,769


$
143,769Current obligations under lines of credit

$
1,509


$
1,509


$
19,480


$
19,480Long-term debt

$
143,267


$
143,267


$
127,862


$
127,862       December 31,2007

2006Notional



Estimated

Notional



EstimatedAmount

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    59




---



##### Table of Contents



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


$
152,727Work-in-process


39,105



30,524Finished goods


26,415



15,320Total inventories

$
212,995


$
198,571   Property
    and equipment, net
  December 31,2007


2006(In thousands)Machinery and equipment

$
612,839


$
608,690Buildings and land


198,983



192,568Building and leasehold improvements


65,672



79,133Furniture and fixtures


25,465



22,517902,959



902,908Less accumulated depreciation


(582,950
)


(538,309
)Total property and equipment

$
320,009


$
364,599     Accrued
    warranty
    Years Ended December 31,2007


2006


2005(In thousands)Balance, beginning of period

$
55,349


$
54,553


$
45,526Warranties issued


80,899



84,860



79,146Settlements


(74,618
)


(82,799
)


(84,632
)Acquired liability










610Changes in liability for pre-existing warranties, including
    expirations


(6,773
)


(1,265
)


13,903Balance, end of period

$
54,857


$
55,349


$
54,553  60




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 5.
    Goodwill
    and Other Intangible Assets  Goodwill
    Years Ended December 31,2007


2006(In thousands)Balance, beginning of period

$
225,431


$
255,584Deferred tax liability adjustment


(1,954
)


(41,606
)Foreign currency translation and other


15,467



11,453Balance, end of period

$
238,944


$
225,431     Intangible
    Assets
    WeightedAverageAmortization





AccumulatedDecember 31, 2007

Period


Gross


Amortization


Net(Years)





(In thousands)Patents and other intangibles


12.0


$
16,661


$
(1,679
)

$
14,982Developed technology


6.0



30,270



(22,169
)


8,101Trademark


10.0



7,473



(2,616
)


4,857Total


8.4


$
54,404


$
(26,464
)

$
27,940   WeightedAverageAmortization





AccumulatedDecember 31, 2006

Period


Gross


Amortization


Net(Years)





(In thousands)Patents and other intangibles


10.8


$
20,707


$
(2,164
)

$
18,543Developed technology


6.0



28,995



(16,555
)


12,440Trademark


10.0



6,663



(1,666
)


4,997Total


8.2


$
56,365


$
(20,385
)

$
35,980    61




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 6.
    Business
    Combinations  Voumard
    Machine Co. SA
        (In thousands)Cash consideration

$
7,134Transaction costs


486Total purchase price

$
7,620Assets acquired

$
18,548Liabilities assumed


(8,131
)Total net assets acquired

$
10,417Gain

$
2,797     Note 7.
    Restructuring
    and Other Charges (Benefits)   62




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Facility


Asset





Restructuring


InventoryExit 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



5,250Non-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
          Inventory
    Write-downs
   63




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 8.
    Borrowing
    Arrangements  Current
    Obligations Under Lines of Credit
    Long-Term
    Debt
            Years Ending December 31,2009

2010

2011

2012

Thereafter(In thousands)Long-term debt obligations

$
142,014


$
43


$
43


$
43


$
1,124  64




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 9.
    Other
    Income, net    Years Ended December 31,2007


2006


2005(In thousands)Other income

$
10,024


$
4,820


$
810Other expense


(184
)


(1,772
)


(578
)Foreign currency gain, net


4,515



4,808



5,456Other-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
    Guarantee
    Arrangements
    Lease
    Commitments
      Years Ending December 31,

Sublease

Net2008

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  65




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Purchase
    Commitments
    Note 11.
    Litigation  Linear
    Technology Corporation
    Other
    Litigation
      Note 12.
    Income
    Taxes    Years Ended December 31,2007


2006


2005(In thousands)Domestic

$
221,329


$
433,658


$
126,099Foreign


93,460



(94,739
)


32,514Total

$
314,789


$
338,919


$
158,613    66




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2007


2006


2005(In thousands)FederalCurrent

$
30,350


$
77,401


$
4,139Deferred


35,910



45,090



21,85166,260



122,491



25,990StateCurrent


2,518



8,482



441Deferred


4,226



4,431



8,7376,744



12,913



9,178ForeignCurrent


32,656



19,662



17,211Deferred


(4,571
)


(5,215
)


(3,873
)28,085



14,447



13,338Total provision for income taxes

$
101,089


$
149,851


$
48,506       Years Ended December 31,2007


2006


2005(In thousands)Expected provision at 35%

$
110,176


$
118,622


$
55,515State tax, net of federal benefit


6,743



8,374



5,966Tax-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  67




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2007


2006(In thousands)Deferred tax assets:Reserves and accruals

$
67,456


$
86,933Capitalized in-process research and development


26,438



31,344Deferred profit


6,015



25,369Net operating loss carryforwards


36,860



41,216Credits


6,333



14,570Other


9,218



11,493Total deferred tax assets


152,320



210,925Valuation allowance






(3,770
)Deferred tax assets, net of valuation allowance


152,320



207,155Deferred tax liabilities:Depreciation


(53,707
)


(69,148
)Acquisition related items


(129
)


(8,023
)Total net deferred tax assets

$
98,484


$
129,984            68




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Liability for UnrecognizedTax Benefits(In thousands)Balance at January 1, 2007

$
11,298Additions for tax positions of prior years


3,710Additions for tax positions of current year


14,542Reductions for tax positions of prior years


(2,915
)Balance at December 31, 2007

$
26,635     Note 13.
    Shareholders
    Equity  Other
    Comprehensive Income (Loss)
    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


$
3,578Unrealized gain (loss) on short-term investments, net of tax of
    $85 in 2007


(13
)


224Unrealized 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
   69




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 14.
    Stock-Based
    Compensation and Employee Benefit Plans  Stock-Based
    Compensation
          Years Ended December 31,2007


2006


2005(In thousands)(1)


(2)


(3)Cost of sales

$
1,869


$
1,425


$
736Selling, general and administrative


17,583



22,337



2,168Research and development


8,666



11,179



1,305Stock-based compensation expense before income taxes


28,118



34,941



4,209Income 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. 70




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (3)
    
    Amounts include amortization expense related to restricted stock
    awards of $4.2 million.            Year EndedDecember 31, 2005Net income as reported

$
110,107Add:Intrinsic value method expense included in reported net income,
    net of related tax effects


2,589Less:Fair value method expense, net of related tax effects


(49,145
)Pro-forma net income

$
63,551Pro-forma basic net income per share

$
0.46Pro-forma diluted net income per share

$
0.46Basic net income per share as reported

$
0.80Diluted net income per share as reported

$
0.80   Valuation
    and Other Assumptions for Stock Options
  Valuation and Amortization Method.
 71




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Expected Term.
  Expected Volatility.
  Risk-Free Interest Rate.
  Dividends.
  Forfeitures.
    2007


2006


2005Risk-free interest rate


3.8
%


4.7
%


4.1
%Expected volatility


49
%


49
%


54
%Expected term


4.4 years



4.4 years



3.9 yearsExpected dividends


None



None



NoneWeighted-average fair value at grant date

$
12.13


$
14.30


$
11.25  72




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Stock
    Options
    Weighted-AverageRemainingNumber of


Weighted-Average


Contractual


AggregateShares


Exercise Price


Term (in Years)


Intrinsic Value(In thousands)








(In thousands)Outstanding at December 31, 2004


26,705


$
32.40



7.11


$
40,601Grants


2,911



24.99Exercises


(1,327
)


16.21Forfeitures or expirations


(4,152
)


35.96Outstanding at December 31, 2005


24,137


$
31.79



6.67


$
13,383Grants


2,855



31.39Exercises


(1,603
)


22.41Forfeitures or expirations


(2,490
)


34.00Outstanding at December 31, 2006


22,899


$
32.16



6.23


$
102,527Grants


1,696



27.44Exercises


(1,247
)


24.51Forfeitures or expirations


(1,574
)


35.52Outstanding at December 31, 2007


21,774


$
31.99



5.62


$
17,187Vested and expected to vest at December 31, 2007


20,860


$
32.14



5.47


$
16,192Exercisable at December 31, 2007


16,678


$
33.10



4.67


$
11,425        73




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Restricted
    Stock Awards
    Weighted-AverageNumber of


Grant DateShares


Fair Value(In thousands)Unvested restricted stock awards at December 31, 2004


688


$
31.73Granted


655



24.21Vested


(29
)


24.90Forfeited


(117
)

$
32.04Unvested restricted stock awards at December 31, 2005


1,197



27.57Granted


832



32.14Vested


(77
)


30.39Forfeited


(108
)

$
27.12Unvested restricted stock awards at December 31, 2006


1,844



29.56Granted


1,236



26.81Vested


(142
)


27.47Forfeited


(173
)


29.61Unvested restricted stock awards at December 31, 2007


2,765


$
28.45        74




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ESPP
    2007


2006


2005Risk-free interest rate


4.9
%


5.0
%


3.3
%Expected volatility


34
%


33
%


32
%Expected term


6 months



6 months



6 monthsExpected dividends


None



None



NoneWeighted-average fair value at grant date

$
7.49


$
6.47


$
5.56     Employee
    Savings and Retirement Plan
    Deferred
    Compensation Plan
    Defined
    Benefit Pension Plans
   75




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Postretirement
    Healthcare Plan
    Note 15.
    Operating
    Segments        IndustrialSemiconductor


ApplicationsGroup


Group


Total(In thousands)2007Sales to unaffiliated customers

$
1,395,703


$
174,346


$
1,570,049Total net sales

$
1,395,703


$
174,346


$
1,570,049Operating income

$
246,361


$
23,798


$
270,159Long-lived assets

$
296,778


$
23,231


$
320,009All other identifiable assets


1,495,665



261,269



1,756,934Total assets

$
1,792,443


$
284,500


$
2,076,943   76




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  IndustrialSemiconductor


ApplicationsGroup


Group


Total(In thousands)2006Sales to unaffiliated customers

$
1,547,540


$
110,976


$
1,658,516Total net sales

$
1,547,540


$
110,976


$
1,658,516Operating income

$
296,281


$
8,493


$
304,774Long-lived assets

$
345,403


$
19,196


$
364,599All other identifiable assets


1,807,248



190,645



1,997,893Total assets

$
2,152,651


$
209,841


$
2,362,492   IndustrialSemiconductor


ApplicationsGroup


Group


Total(In thousands)2005Sales to unaffiliated customers

$
1,236,515


$
103,956


$
1,340,471Total net sales

$
1,236,515


$
103,956


$
1,340,471Operating income

$
122,231


$
13,466


$
135,697Long-lived assets

$
406,786


$
16,963


$
423,749All other identifiable assets


1,689,160



177,340



1,866,500Total assets

$
2,095,946


$
194,303


$
2,290,249      77




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    North America


Europe


Asia


Elimination


Consolidated(In thousands)2007Sales to unaffiliated customers

$
488,438


$
151,439


$
930,172


$



$
1,570,049Transfers between geographic locations


344,033



37,130



232,389



(613,552
)

$
Total net sales

$
832,471


$
188,569


$
1,162,561


$
(613,552
)

$
1,570,049Operating income (loss)

$
174,030


$
24,992


$
71,137


$



$
270,159Long-lived assets

$
295,806


$
21,262


$
2,941


$



$
320,009All other identifiable assets


1,042,670



258,786



455,478







1,756,934Total assets

$
1,338,476


$
280,048


$
458,419


$



$
2,076,943   North America


Europe


Asia


Elimination


Consolidated(In thousands)2006Sales to unaffiliated customers

$
1,245,003


$
97,834


$
315,679


$



$
1,658,516Transfers between geographic locations


312,230



27,902



53,753



(393,885
)

$
Total net sales

$
1,557,233


$
125,736


$
369,432


$
(393,885
)

$
1,658,516Operating income (loss)

$
394,414


$
11,461


$
(101,101
)

$



$
304,774Long-lived assets

$
344,868


$
16,951


$
2,780


$



$
364,599All other identifiable assets


1,711,893



188,202



97,798







1,997,893Total assets

$
2,056,761


$
205,153


$
100,578


$



$
2,362,492   North America


Europe


Asia


Elimination


Consolidated(In thousands)2005Sales to unaffiliated customers

$
986,409


$
92,307


$
261,755


$



$
1,340,471Transfers between geographic locations


157,659



27,035



42,814



(227,508
)

$
Total net sales

$
1,144,068


$
119,342


$
304,569


$
(227,508
)

$
1,340,471Operating income

$
99,961


$
16,148


$
19,588


$



$
135,697Long-lived assets

$
406,570


$
14,542


$
2,637


$



$
423,749All other identifiable assets


1,481,647



170,640



214,213







1,866,500Total assets

$
1,888,217


$
185,182


$
216,850


$



$
2,290,249  78




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##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 16.
    Related
    Party Transactions            Note 17.
    Quarterly
    Financial Data (Unaudited)  Quarter EndedMarch 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


$
363,463Gross profit

$
194,909


$
208,110


$
194,307


$
171,863Net income

$
53,783


$
57,345


$
49,711


$
52,861Basic net income per share

$
0.43


$
0.46


$
0.41


$
0.48Diluted net income per share

$
0.42


$
0.45


$
0.41


$
0.47Shares used in basic per share calculations


123,979



123,788



120,414



111,160Shares used in diluted per share calculations


127,137



126,630



121,902



112,395   79




---



##### Table of Contents



NOVELLUS
    SYSTEMS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Quarter EndedApril 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


$
438,505Gross profit

$
167,540


$
204,764


$
226,525


$
225,520Net income

$
24,717


$
52,705


$
70,020


$
42,574Basic net income per share

$
0.19


$
0.42


$
0.57


$
0.35Diluted net income per share

$
0.19


$
0.42


$
0.57


$
0.34Shares used in basic per share calculations


131,102



125,124



122,150



122,766Shares 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




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  81




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Form 10-K Rule 13a-14 Form 10-K Form 10-K
  Evaluation
    of Disclosure Controls and Procedures
  Form 10-K. Form 10-K,
  Form 10-K. Form 10-Q Form 10-K.
  Form 10-K,
 82




---



##### Table of Contents



Management
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f). Internal Control 
    Integrated Framework
 83




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                    84




---



##### Table of Contents



Limitations
    on Effectiveness of Controls
    Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Shareholder Matters   85




---



##### Table of Contents



Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules    Financial Statements and Reports of Independent
    Registered Public Accounting Firm
    Financial Statement Schedules
  Form 10-K
      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




---



##### Table of Contents



*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




---



##### Table of Contents



(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




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##### Table of Contents



(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. 89




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##### Table of Contents



SIGNATURES  Form 10-K
    By:
    /s/  Richard
    S. Hill   Chairman of the Board of Directors and
 Chief Executive Officer
  POWER OF
    ATTORNEY
  Form 10-K
  Form 10-K
  Signature

Title

Date/s/  Richard
    S. HillRichard
    S. Hill

Chairman of the Board of Directors and Chief Executive Officer
    (Principal Executive Officer)

February 27, 2008/s/  William
    H. KurtzWilliam
    H. Kurtz

Executive Vice President and Chief Financial Officer (Principal
    Financial Officer)

February 27, 2008/s/  John
    D. HertzJohn
    D. Hertz

Vice President and Corporate Controller (Principal Accounting
    Officer)

February 27, 2008/s/  Neil
    R. BonkeNeil
    R. Bonke

Director

February 27, 2008/s/  Youssef
    A. El-MansyYoussef
    A. El-Mansy

Director

February 27, 2008/s/  J.
    David LitsterJ.
    David Litster

Director

February 27, 2008/s/  Yoshio
    NishiYoshio
    Nishi

Director

February 27, 2008 90




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##### Table of Contents



Signature

Title

Date/s/  Glen
    G. PossleyGlen
    G. Possley

Director

February 27, 2008/s/  Ann
    D. RhoadsAnn
    D. Rhoads

Director

February 27, 2008/s/  William
    R. SpiveyWilliam
    R. Spivey

Director

February 27, 2008/s/  Delbert
    A. WhitakerDelbert
    A. Whitaker

Director

February 27, 2008  91




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##### Table of Contents



SCHEDULE II
  VALUATION
    AND QUALIFYING ACCOUNTS
 December 31, 2007, 2006 and 2005
  Balance atBeginning of








Balance atYear


Additions


Deductions


End of Year(In thousands)Allowance for doubtful accounts(1) 2007

$
1,753


$
879


$
(644
)

$
1,9882006

$
987


$
1,119


$
(353
)

$
1,7532005

$
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. 92




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



(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. 95