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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

(Mark One)



| | þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2009

OR



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------

For the transition period
from            to

Commission file number 000-17157

Novellus Systems, Inc.

(Exact name of Registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|California                                                     |  | 77-0024666                             
|(State or other jurisdiction of incorporation of organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|4000 North First Street San Jose, California                   |  | 95134                                  
|(Address of principal executive offices)                       |  | (Zip code)                             

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

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



|                           |  |                                                          
|-------------------------- |  | ---------------------------------------------------------
|Title of Each Class        |  | Name of Each Exchange on Which Registered                
|Common Stock, no par value |  | The NASDAQ Stock Market LLC (NASDAQ Global Select Market)

Securities registered pursuant
to Section 12(g) of the Act:

None

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

Indicate by
check if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ̈    No  þ

Indicate by
check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ̈

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



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

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

As of
June 27, 2009 the aggregate market value of voting and non-voting stock held by non-affiliates of the Registrant was $1,632,270,159 based on the average of the high and low price of the Common Stock as reported on the NASDAQ Global Select
Market on such date.

The number of shares of the Registrants Common Stock outstanding on February 19, 2010 was 95,874,987.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates information by reference from the Registrants Proxy Statement for its 2010 Annual Meeting of Shareholders. Except as expressly
incorporated by reference, the Registrants Proxy Statement shall not be deemed to be a part of this Annual Report on Form 10-K.









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NOVELLUS SYSTEMS, INC.

2009 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | Page
|PART I    
|Item 1:    |  | Business                                                                                                     |  | 2   
|Item 1A:   |  | Risk Factors                                                                                                 |  | 11  
|Item 1B:   |  | Unresolved Staff Comments                                                                                    |  | 22  
|Item 2:    |  | Properties                                                                                                   |  | 23  
|Item 3:    |  | Legal Proceedings                                                                                            |  | 24  
|Item 4:    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 24  
|          
|PART II   
|Item 5:    |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 25  
|Item 6:    |  | Selected Financial Data                                                                                      |  | 27  
|Item 7:    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 29  
|Item 7A:   |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 47  
|Item 8:    |  | Financial Statements and Supplementary Data                                                                  |  | 50  
|Item 9:    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 89  
|Item 9A:   |  | Controls and Procedures                                                                                      |  | 89  
|Item 9B:   |  | Other Information                                                                                            |  | 92  
|          
|PART III  
|Item 10:   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 92  
|Item 11:   |  | Executive Compensation                                                                                       |  | 92  
|Item 12:   |  | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters               |  | 92  
|Item 13:   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 93  
|Item 14:   |  | Principal Accountant Fees and Services                                                                       |  | 93  
|          
|PART IV   
|Item 15:   |  | Exhibits and Financial Statement Schedules                                                                   |  | 93  
|Signatures |  | 97                                                                                                          



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PART I

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



|Item 1. | Business
|------- | --------

The Company

Novellus Systems, Inc. is a California corporation organized in 1984. Together with its subsidiaries, Novellus develops, manufactures,
sells and supports equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. Customers for this equipment manufacture chips for sale or for incorporation in their own products, or provide chip-manufacturing
services to third parties. Novellus also develops, manufactures, sells and supports grinding, lapping and polishing equipment for a broad spectrum of industrial applications.

Novellus operates in two reportable segments, the Semiconductor Group and the Industrial Applications Group. A summary of financial information for each operating segment is found in Note 18 to our
Consolidated Financial Statements.

Semiconductor Group

The Semiconductor Group is a manufacturer and supplier of thin-film deposition and surface preparation systems used in the fabrication of integrated circuits. Net sales for the Semiconductor Group
operating segment constituted 89%, 83% and 89% of consolidated net sales for the years ended December 31, 2009, 2008 and 2007, respectively.

For more than twenty years the semiconductor industry has grown rapidly as a result of increasing demand for personal computers, the expansion of the Internet and the telecommunications industry, and the emergence of new high-technology
products for the consumer. From 2001 to 2008, revenue growth in the semiconductor industry compared to the 1990s had moderated, but unit growth remained strong as semiconductors continued to be incorporated into a wide variety of products. In late
2008 and early 2009, the economic downturn had an adverse impact on the overall electronics industry. Unit demand for semiconductors fell for the first time since 2001, leading to an overall decline in semiconductor revenues and an increase in
semiconductor inventories. This revenue decline increased the pressure on semiconductor manufacturers to match capacity with demand, which resulted in reduced spending on capital equipment in 2009. However, the semiconductor recovery, which began in
the second quarter of 2009, has been strong. As of the end of 2009, semiconductor inventory levels began returning to normalized levels throughout key segments of the electronics industry supply chain. Unit growth rates for chip sales are generally
expected to resume in 2010 at historical rates, and if this happens, we expect that increases in spending on semiconductor equipment will follow.

The semiconductor industry has historically been cyclical, with periods of rapid capacity expansion followed by periods of over-capacity. Recent macroeconomic conditions, combined with excess manufacturing capacity, have caused downward
pressure on the average selling price of chips. Chip manufacturers have responded to these conditions with increased efforts to reduce manufacturing costs and, at the same time, increase the performance of their products. Because it is a major
component of semiconductor production costs, our customers investment in semiconductor equipment is affected by these cost reduction efforts, leading to even more pronounced cyclicality in the semiconductor equipment industry.

Several technological trends characterize integrated circuit manufacturing. Perhaps the most prominent of those trends is the increasing density of the
integrated circuit. Moores Law, first postulated in the mid-1960s and still substantially accurate more than 40 years later, states that the density of the circuitry on an individual



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semiconductor chip doubles every 18 months. Todays advanced devices are being manufactured with line widths as small as 32 nanometers, with up to eleven layers of interconnected
circuitry. By increasing circuit density, manufacturers can layer more electronic components on a given surface area, and thereby provide higher performance at about the same cost.

Another trend is the transition to copper from aluminum wiring as the primary conductive material in semiconductor devices. Copper has a lower electrical resistance value than aluminum, and provides a
number of performance advantages. Because of the superior properties of copper, a device made with copper typically requires fewer metal layers than one made with aluminum, providing a considerable reduction in manufacturing cost. In comparison to
aluminum, copper wiring also allows a substantial improvement in device speed and a significant reduction in device power consumption. Full implementation of copper interconnects in logic devices occurred early in the decade, but adoption of copper
as the interconnect metal in memory devices is currently under way. We believe this change will lead to substantial purchases of copper deposition equipment.

The transition to copper interconnects in logic chips occurred hand-in-hand with a transition from traditional insulating films made of silicon oxide to insulators with a low dielectric
constant, or low-k. Low-k dielectrics reduce the capacitance between metal lines in a device, increasing speed and lowering power consumption. As of today, a new generation of low-k materials, termed ultra-low-k, is being
adopted by logic chipmakers, posing a new set of challenges to the industry in integrating the new materials into existing manufacturing processes.

In recent years, the focus has shifted back to the transistor and the storage element, the so-called front-end of the device. This focus has been driven by considerations of power consumption, speed and form factor, which have
become important as chips are increasingly designed for mobile applications. Spending on lithography and associated patterning technologies has increased due to this shift. We expect that deposition and surface preparation technologies will play an
important role in these new patterning schemes.

Another trend in the industry has been a continued increase in wafer size. Semiconductor
device manufacturers have migrated to 300mm wafers because of the manufacturing cost advantages in comparison to 200mm wafers. The 300mm wafers provide more than 2.25 times as many chips per wafer and significant economies of scale in the
manufacturing process. Approximately 98% of our 2009 net orders for wafer fabrication equipment were for 300mm wafer manufacturing.

These
trends shape the equipment and process demands of our device-manufacturing customers. These customers generally measure the cost and performance of their production equipment in terms of cost per wafer, a ratio determined by factoring in
the costs for acquisition and installation of a system, its operating costs, and net throughput rate. In a fixed period of time, a system with higher net throughput allows a manufacturer to recover the purchase price over a greater number of wafers,
thereby reducing the cost of ownership of the system on a per-wafer basis. Yield and film qualities are also significant factors in selecting processing equipment. The increased cost of larger and more complex semiconductor wafers has made high
yields extremely important to our customers. To achieve higher yields, systems must be able to deposit high quality films repeatably, consistently and reliably.

Semiconductor Business Strategy

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

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



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

Focus on Reducing Customer Costs  Cost is an
important component when measuring overall productivity. We strive to provide products and technologies that reduce our customers overall cost of ownership by continuing to increase our systems throughput, improving our deposition quality and
improving the reliability of our products.

Broaden our Offerings for Front-End and Interconnect Processing 
Transistor, storage element, and interconnect structures all play a critical role in determining the overall performance of a semiconductor device. In 2001, we expanded beyond deposition technology and into dry photoresist removal. In 2005, we
introduced our ultraviolet thermal processing (UVTP) system for post-deposition treatment of films to control stress and improve mechanical integrity. Our development of tungsten-nitride barriers and PECVD ashable hard mask layers have enabled us to
address needs in both front-end and interconnect processing. We continue to develop new products which broaden our market opportunity in the semiconductor manufacturing line.

Differentiate our Service A vital element of success in the systems business is the service, repair and ongoing support of
those systems. We operate a global network of customer support services that provide 24-hour access to technical experts, documentation, spare parts, and product upgrades. We provide training and support programs that are custom-tailored to the
needs of individual customers, ranging from turnkey maintenance solutions to economical self-maintenance plans.

Expand
Operational and Customer Support Presence in Asia  In 2007, we established Novellus International Systems, BV in Singapore as our new international headquarters for systems sales. This change more closely aligns our operational
structure with our customer base. We have offices in the key locations necessary to compete, and are actively increasing our worldwide sourcing of materials to this region as well.

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

Semiconductor Products

The Semiconductor Groups products include equipment used in the deposition of thin dielectric (insulating) and metal (conductive) films, as well as equipment used in complementary manufacturing
steps including surface preparation (photoresist strip) and ultraviolet thermal processing (film annealing). Integrated circuits are generally built on a silicon wafer substrate, and include a large number of different components such as
transistors, capacitors and other electronic devices. These components are connected on the silicon wafer by multiple layers of wiring, called interconnects. To build an integrated circuit, transistors are first fabricated on the surface of the
silicon wafer. Wiring and insulating structures are then added as alternating thin-film layers in a series of manufacturing process steps. Typically, a first layer of dielectric material is deposited on top of the transistors. If the conductive
material used is aluminum, subsequent metal layers are deposited on top of this base layer, etched to create the conductive interconnects that carry the electricity, and then covered with dielectric material to create the necessary insulation
between the interconnects. Following each deposition step, a



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planarization or polishing process is employed to achieve a flat surface for the manufacturing steps that follow. To construct copper wires, the manufacturing process used is a mirror image of
that described for aluminum: the dielectric is etched and the copper wiring is deposited within the etched insulator. Building either copper or aluminum wiring requires these manufacturing steps to be repeated many times. Advanced chip designs may
require more than 500 process steps.

Novellus semiconductor manufacturing products are used in a number of different
process steps. Our advanced deposition systems use chemical vapor deposition (CVD), physical vapor deposition (PVD), and electrochemical deposition (ECD) processes to form transistor, capacitor, and interconnect layers in an integrated circuit. Our
High-Density Plasma CVD (HDP-CVD) and Plasma-Enhanced CVD (PECVD) systems employ chemical plasma to deposit dielectric material within the gaps formed by the etching of aluminum, or as a blanket film which can be etched with patterns for depositing
conductive materials into the etched dielectric. Our CVD Tungsten systems are used to deposit conductive contacts between transistors and interconnects, or between layers of metal interconnect wiring. Our PVD systems deposit conductive aluminum and
copper metal layers by sputtering metal atoms from the surface of a target source. Our ElectrofillECD systems deposit copper to form the conductive wiring on integrated circuits using copper interconnects. In 2009, we scaled back development associated with our chemical mechanical planarization (CMP)
technologies, which is now limited to our internal development needs.

Deposition Technologies

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

Since the introduction of our Concept One® dielectric platform in 1987, we have offered a range of processing systems for dielectric and metal deposition. In
1991, we introduced the Concept Two® platform  a modular, integrated production system capable of
depositing both dielectric and conductive metal layers by combining one or more processing chambers with a common, automated wafer handler. The Concept Two enabled semiconductor device manufacturers to increase production throughput and system
capability by adding process modules without having to replace existing equipment. In 1997, we introduced the Concept Three® platform, which built on the foundation of the Concept Two and offers greater throughput in 300mm wafer manufacturing applications.

CVD Products

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

HDP CVD Products

SPEED®NExT  The SPEED NExT system for 300mm wafers is designed specifically to address the challenges of dielectric gap fill at 65 nanometers.

SPEED Max Introduced in 2008, SPEED Max offers significant processing flexibility and productivity advantages over the SPEED NExT system,
and extends the HDP CVD application to the 45 and 32 nm technology nodes.



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W-CVD Products

ALTUS® DirectFill  The ALTUS DirectFill tungsten nitride/tungsten deposition system is designed for advanced contact and via-fill applications at 65 nanometers
and below. ALTUS DirectFill simplifies the tungsten deposition process by replacing the standard multi-tool approach with a single three-module system.

ALTUS Max Introduced in 2008, the ALTUS Max CVD tungsten deposition system delivers advanced contact and via fill technology in a high-productivity platform that delivers more than 120
wafers-per-hour throughput, an industry first.

PECVD Products

VECTOR® VECTOR is a PECVD system for depositing dielectric films on 300mm wafers. In 2007, we introduced three new versions of VECTOR: the VECTOR
Express, optimized for deposition of thin films of less than 1000 angstroms; the VECTOR Express AHM for ashable hard mask film deposition; and the VECTOR Extreme, designed for the demands of high-volume memory megafabs. In
2008, we rounded out the VECTOR product family, introducing a new model of VECTOR Extreme to deposit AHM films.

UVTP
Products

SOLA®  SOLA is a UVTP system used for the low-temperature, post-deposition treatment of dielectric films. SOLA is designed for advanced materials such as
high stress nitrides and porous low-k dielectrics that are used to deliver increased device speeds and lower power consumption in sub-90 nanometer chips.

PVD Products

PVD, also known as sputtering, is a process in which ions
of an inert gas such as argon are electrically accelerated in a high vacuum toward a target of pure metal, such as tantalum or copper. Upon impact, the argon ions sputter off the target material, which is then deposited as a thin film on the silicon
wafer. PVD processes are used to create the barrier and seed layers in copper damascene interconnect applications, as well as in relatively new front-end applications such as high-k/metal gate schemes for logic devices.

INOVA® NExT  INOVA NExT is a 300mm metallization system designed to deposit highly conformal copper barrier-seed films at 45 nanometers and beyond. On the
INOVA NExT the single target Hollow Cathode Magnetron (HCM) technology has been extended to the 45 nanometer node.

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

ECD Products

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

SABRE®NExT  The SABRE NExT offers a proprietary chemistry, a new anode cell design and other hardware
refinements to tackle the complex process requirements of 90 nanometer, 65 nanometer and 45 nanometer interconnect structures.



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SABRE Extreme  SABRE Extreme is an advanced Electrofill system that has been qualified at
45 nanometers and has demonstrated fill at 32 nanometers. The SABRE Extreme incorporates a number of technological innovations for advanced manufacturing applications, including advanced wafer entry control for thin seed layers (< 200A), tunable
profile control for improved uniformities, and the capability to plate on materials other than copper.

SABRE Excel  In October
2009 we introduced SABRE Excel, an electroplating system designed to provide industry-leading fill and defect density performance for the 22 nanometer technology node and beyond. The SABRE Excel platform features a new deposition module
incorporating our patented IRISCell technology, as well as new hardware, software, and communications upgrades to the process tools mainframe required to address advanced fill applications.

Surface Preparation Technologies

Chip manufacturers use surface preparation products to remove photoresist from a wafer before proceeding with the next deposition step in the manufacturing process.

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

G400®and GxT® 
Introduced in 2008, the G400 and GxT are based on the production-proven, market-leading GAMMA platform. Targeted for bulk strip and high-dose implant strip (HDIS) applications, the G400 is the industrys most productive ashing system, with
throughputs of over 400 wafers-per-hour. The GxT, in turn, is designed for critical logic device manufacturing process steps that demand low silicon loss and ultra-low defectivity.

Refurbished Systems

Novellus provides the market with a comprehensive suite of refurbished process equipment. The market focus of our Refurbished Systems Business (RSB) is 200mm factories manufacturing lower-cost products,
typically at device geometries that are greater than 150nm. To meet these needs, Novellus offers a number of older products, including legacy SPEED, ALTUS, SEQUEL® Express, INOVA, SABRE, GAMMA, and MOMENTUM® models. In comparison to buying a used system from an aftermarket vendor, purchasing a refurbished system from Novellus offers a number of benefits for our customers,
including committed performance specifications, systems and service knowledge and expertise, and comprehensive spare parts knowledge and support.

Industrial Applications Group

Novellus entered into market sectors beyond semiconductor manufacturing in 2004 with the
acquisition of Peter Wolters AG (Peter Wolters), a German company specializing in high-precision machines for grinding, deburring, lapping, honing and polishing the outer surfaces of parts made of metal, glass, ceramic, plastic, silicon or similar
materials. In 2005, we acquired Voumard Machine Co. SA (Voumard), a Swiss manufacturer of high-precision machine tools. The Voumard acquisition expanded our industrial applications product offerings to include specialized, high-precision grinding
equipment for precision machining of inner and outer diameter surfaces. Our customers for this segment are manufacturers in sectors such as automotive, aircraft, and electronic products, parts and components. Other customers are in the glass and
ceramics industries as well as manufacturers of products such as pumps, transmissions, compressors and bearings. In 2008, we further expanded our Industrial Applications Group through acquisition of certain assets and liabilities of Micron Machine
Tools, Inc. (Micron),



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a privately-held manufacturer of high-precision manufacturing tools based in Massachusetts. In all of these areas, the demand for close tolerances for finish quality, thickness, flatness and
parallelism is high. Net sales for the Industrial Applications Group operating segment constituted 11%, 17% and 11% of our consolidated net sales for the years ended December 31, 2009, 2008 and 2007, respectively.

Our industrial product range includes single and double-sided grinding, lapping and polishing machines; double-sided machines, which operate in batch
processing mode for flat surfaces; inner and outer diameter surface grinders for cylindrical surfaces, creep feed grinders as well as through-feed grinders and deburring systems that feature a continuous feed of parts to be processed.

Marketing, Sales and Service

We rely on a
direct sales force to sell our chip manufacturing products in the geographic regions where semiconductors are manufactured, including Europe, the United States, Korea, Japan, China, Taiwan, and Southeast Asia. Our industrial applications products
are sold through a combination of a direct sales force and manufacturers representatives.

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

Customers

Intel, TSMC and Samsung
accounted for 20%, 17% and 16%, respectively, of our consolidated net sales for the year ended December 31, 2009. Intel and Samsung each separately accounted for 15% and 11% of our consolidated net sales for the years ended December 31,
2008 and 2007, respectively. Sales to our ten largest customers in 2009, 2008, and 2007 accounted for 71%, 60%, and 59% of our net sales, respectively. We expect that sales of our products to relatively few customers, none of which has entered into
long-term agreements requiring them to purchase our products, will continue to account for a high percentage of our net sales in the foreseeable future. Information on our net sales to unaffiliated customers attributable to geographic regions is
included in Note 18 of the Notes to Consolidated Financial Statements.

Backlog

As of December 31, 2009, our backlog was $184.3 million. Subsequent to year end, we have had $0.2 million in customer cancellations in the
period from January 1, 2010 to February 19, 2010. As of December 31, 2008, our backlog was $188.3 million. Our backlog includes systems, spares and services transactions for which we have accepted purchase orders and assigned
shipment or delivery dates within twelve months. All orders are subject to cancellation or rescheduling by customers, with limited or no penalties. Some products are shipped in the same quarter in which the order was received. For this reason, and
because of possible changes in delivery schedules, cancellations of orders and delays in shipments, our backlog as of any particular date is not necessarily a reliable indicator of actual shipments for any succeeding period.

Research and Development

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



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

In the Industrial Applications Group, we focus our research and development activities on developing new products and improving existing products for the prime wafer industry (wafer lapping
and grinding, double-sided polishing, haze-free polishing) as well as for the metal and ceramic industry (grinding, lapping, deburring). Continuous improvements of existing systems and processes enable us to further
meet our customers requirements as specifications for work piece tolerances continue to tighten. With new concepts we will be able to control the process conditions in our systems more accurately and achieve better
results at lower costs. New products and processes are developed to provide solutions for further production steps besides those that are already covered by our systems. We are also investigating new technologies in high precision
machining and surface finishing to extend our existing product portfolio and maintain our technical leadership.

Expenditures for
research and development during 2009, 2008, and 2007 were $149.1 million, $219.7 million, and $241.0 million, respectively. These expenditures represented 23%, 22% and 15% of our net sales in 2009, 2008 and 2007, respectively. We
believe that research and development expenditures will continue to represent a substantial percentage of our net sales in the future.

Manufacturing

In the Semiconductor Group we manufacture our systems in clean-room environments similar to those used by
semiconductor manufacturers for semiconductor device fabrication. This helps to minimize the amount of particulates and other contaminants in the final assembled system and to improve product yields for our customers. Following assembly, we package
our completed systems in vacuum packaging to maintain clean-room standards during shipment. The Industrial Applications Group assembles its systems under enhanced cleanliness specifications when compared to conventional machine tool assembly
environments, as the precision requirements in our niche markets call for clean components with reduced particle levels, specifically for our wafer manufacturing customers.

Our manufacturing activities consist primarily of assembling and testing components and subassemblies that we acquire from third-party vendors and then integrate into a finished system. We outsource most
subassemblies, and we perform all system design, assembly and testing in-house. Our outsourcing strategy enables us to minimize fixed costs and capital expenditures, and provides us with the flexibility to scale production capacity. This strategy
also allows us to focus on product differentiation through system design and quality control. We believe that our use of outsourced product specialists enables our subsystems to incorporate the latest and most advanced technologies in robotics, gas
panel designs and power supplies without the need for in-house expertise. We strive to work as closely as possible with all of our suppliers to achieve mutual cost reduction through joint development efforts. Certain raw materials we use in the
manufacturing of our products are available from a limited number of suppliers. Shortages could occur in these essential materials due to an interruption of supply or solvency of our suppliers.

Competition

We believe that we compete
favorably in both of our operating segments because of the fundamental advantages associated with our system performance and flexibility, low cost of ownership, high wafer yields and customer support. Significant competitive factors in the
semiconductor equipment market include system performance and flexibility, cost, the size of each manufacturers installed customer base, customer support capabilities and the breadth of a companys product line. However, we face
substantial competition from both established



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competitors and potential new entrants in each of these markets. Installing and integrating capital equipment into a semiconductor production line represents a substantial investment. For this
reason, once a manufacturer chooses a particular vendors capital equipment, experience has shown that the manufacturer will generally rely upon that equipment for the useful life of the specific application. As a result, all of todays
semiconductor equipment makers typically have difficulty in selling a product to a particular customer to replace or substitute for a competitors product previously chosen or qualified by that customer.

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

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

Patents and Proprietary Rights

We intend to continue to pursue patent and trade secret protection for our technology. We currently hold more than 740 patents in the U.S. alone. We have
many pending patent applications, and we intend to file additional patent applications as appropriate. There can be no assurance that patents will be issued from any of these pending applications or future filings, or that any claims allowed from
existing or pending patents or future patent applications will be sufficiently broad to protect our technology. While we intend to vigorously protect our intellectual property rights, there can be no assurance that any patents we hold will not be
challenged, invalidated or circumvented, or that the patent rights granted will provide competitive advantages to us. See Legal Proceedings (in Part I, Item 3) for further discussion.

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

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

Employees

As of December 31, 2009, we had 2,544 full-time and temporary employees compared to 3,048 as of December 31, 2008. Certain employees outside of the United States in the Industrial
Applications Group are represented by labor unions. We have never experienced a work stoppage, slowdown or strike. We consider our employee relations to be good. The success of our future operations depends in large part on our ability to recruit
and retain senior management, engineers, sales and service professionals and other key personnel.



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Environmental Matters

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

Available Information

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

Additional information about Novellus is available on our web site at
www.novellus.com.Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (Exchange Act) are available on the web site free of charge. These reports are available as soon as reasonably practicable after we electronically file them with the Securities and Exchange Commission
(SEC). Information contained on the web site is not part of this Annual Report on Form 10-K or of our other filings with the SEC.



|Item 1A. | Risk Factors
|-------- | ------------

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

The semiconductor industry is highly cyclical and difficult
to predict.

Our Semiconductor Group depends predominantly on the capital expenditures of semiconductor manufacturers, which in turn
depend on current and anticipated market demand for integrated circuits and the products that use them. Our business has historically been cyclical due to sudden changes in our customers manufacturing capacity requirements and capital
spending, which in turn are affected by factors such as capacity utilization, consumer demand for products, inventory levels and our customers access to capital. As a result, our business has experienced periodic downturns that reduced the
demand for semiconductor processing equipment, including equipment that we manufacture and market. The timing, length and severity of these business cycles are difficult to predict. During periods of reduced and declining demand, we must be able to
quickly and effectively align our costs with prevailing market conditions, and at the same time motivate and retain key employees including a stable management team. Downturns in the industry have, at times, resulted in higher than optimal inventory
levels and lower than optimal gross margins due to lower production volumes during these periods. Because of this volatility, we cannot provide any assurance that we will not be required to make inventory valuation adjustments in future periods.
Industry downturns have historically been followed by periods of rapid growth. During periods of rapid growth, we must be able to acquire or develop sufficient manufacturing capacity and hire and assimilate a sufficient number of qualified people to
meet customer demand. Net orders, net sales and results of operations may be adversely affected if we fail to respond to changing industry and economic conditions in a timely and effective manner.

We have experienced an increase in net orders in the last three quarters of 2009 following declines in net orders during each of the five preceding
quarters. Despite these recent increases, we could again experience decreases in net orders in the future, and if so, our net sales and operating results could be adversely affected. Over the past two years, we have implemented reductions in
workforce, consolidation of our manufacturing operations and other cost reduction actions to align our business with current industry and economic conditions. Future restructurings or other cost reduction actions may be required, which may have an
adverse impact on our results of operations and our ability to capitalize on opportunities in a market recovery.



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The ongoing weakness in the global economy and related tightness of the credit markets
has affected and may continue to adversely affect our results of operations and our liquidity.

The tightening of the credit market,
turmoil in the financial markets and weakening in the global economy contributed to the downturn we experienced in 2008 and 2009. Continued economic uncertainty may lead to reduced consumer and business spending. Because our business is ultimately
driven by the global demand for electronic devices, the economic slowdown has caused our customers to delay or discontinue spending on our products. The tightening of credit markets and concerns regarding the availability of credit that accompanied
that downturn have also made it more difficult for our customers to raise capital, whether debt or equity, to finance their purchases of capital equipment, including the products we sell. Furthermore, our customers have faced and may continue to
face liquidity issues, which could result in cancellations of equipment orders and increased risk of payment delays or defaults. Reduced demand for our products and the general unavailability of financing have adversely impacted our operating
results and may continue to do so if these difficult economic conditions persist.

The severity of the current economic downturn also makes it
challenging for us to accurately forecast and plan future business activities and to identify the risks that may affect our business, financial condition and operating results. While we have seen recent signs of recovery, we cannot predict the
timing, strength or duration of any economic slowdown, subsequent recovery or the impact on the worldwide semiconductor industry. If the economy or the markets in which we operate do not continue at their present levels, we may record additional
charges related to restructuring costs, which may have an adverse impact on our business, financial condition and results of operations. The length of our sales cycle makes our results of operations particularly sensitive to changes in macroeconomic
conditions. While past downturns in our business have been followed by periods of rapid growth, that correlation may not occur in the future.

A decline in the condition of the global financial market could adversely impact the market values or liquidity of our investments. Our investment portfolio includes corporate and government securities, auction rate securities, money market
funds and other types of debt securities. Although we believe our portfolio consists of sound investments, a decline in the capital and financial markets could adversely impact their market values and liquidity. As of December 31, 2009, we held
$78.8 million of auction-rate securities, net of $10.7 million in temporary impairment. Our auction rate securities are tax-exempt with underlying assets that are either student loans substantially backed by the federal government or closed-end
municipal funds. Due to the auction failures in 2008, we will not have access to these funds until (a) future auctions are successful, (b) the securities are called by the issuer, (c) we sell the securities in a secondary market, or
(d) the underlying notes mature and are repaid. Currently, there are no active secondary markets. If current market conditions do not improve, additional temporary and other-than-temporary impairment charges could occur in future periods which
would reduce the value of our investments and could negatively impact our results of operations.

Changes in tax rates,
tax assets or liabilities have negatively impacted our results and may continue to negatively impact our future results.

We are
subject to taxation in the United States and other countries. Our effective tax rate has fluctuated in the past and may fluctuate in the future. Future effective tax rates could be affected by changes in composition of earnings in countries with
differing tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws. For example, the California Budget Act of 2008, which was signed into law on February 20, 2009, resulted in a $20.2 million charge to
reduce our previously recognized California deferred tax assets in 2009.

We are also subject to regular examination of our tax returns by the
Internal Revenue Service (IRS) and other tax authorities, including state revenue agencies and foreign governments. The IRS and other tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of
products and services and the use of intangible assets. We could face significant future challenges on these transfer pricing issues in one or more jurisdictions.



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We regularly assess the likelihood of favorable or unfavorable outcomes resulting from examinations by the
IRS and other tax authorities to determine the adequacy of our provision for income taxes. Although we believe that our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the
treatment reflected in our historical income tax provisions and accruals. Due to certain years remaining open for examination, it is reasonably possible that the total unrecognized tax benefits could increase or decrease over the next twelve months
as we may be subject to either examination by tax authorities or a lapse in statute of limitations. Factors that could materially affect our future effective tax rates include, but are not limited to:



| |  | Changes in the regulatory environment;
|- |  | --------------------------------------



| |  | Changes in accounting and tax standards or practices;
|- |  | -----------------------------------------------------



| |  | Overall business conditions in the equipment industry;
|- |  | ------------------------------------------------------



| |  | Changes in the composition of operating income by tax jurisdiction; and
|- |  | -----------------------------------------------------------------------



| |  | The Companys operating results before taxes.
|- |  | ---------------------------------------------

We have incurred and may in the future incur impairments to goodwill or long-lived assets.

We review our long-lived assets, including goodwill and other intangible assets, for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be
recoverable. We recorded an impairment charge in the fourth quarter of 2008 to reduce the carrying value of goodwill within our Industrial Applications Group (IAG) reporting unit. While the estimated fair value for this reporting unit exceeded our
book value in our annual impairment test for 2009, our impairment analysis for IAG is highly sensitive to slight changes to assumptions in our valuation model. Given the relatively low fair value of this reporting unit, we believe it is reasonably
possible that IAG could fail the first step in a future annual impairment test, which could result in additional impairment charges and negatively impact our results of operations.

Continued negative industry or economic trends, including the lack of recovery in the market price of our common stock, reduced estimates of future cash flows, disruptions to our business, slower growth
rates or lack of growth in the Semiconductor Group or IAG could lead to additional impairment charges of our long-lived assets, including goodwill and other intangible assets. If, in any period, our stock price decreases to the point where our fair
value, as determined by our market capitalization, is less than the book value of our assets, this could also indicate a potential impairment and we may be required to record an impairment charge in that period, which would adversely affect our
results of operations.

Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on
historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from results. Additionally, if
our analysis indicates potential impairment to our goodwill for the Semiconductor Group or IAG, we may be required to record additional charges to earnings in our financial statements, which may negatively impact our results of operations.

Our financial results have fallen short and may continue to fall short of anticipated levels; forecasting net sales and
profitability is complex and our financial results are difficult to forecast.

Management typically provides quarterly financial
forecasts. These forecasts, when made, are based on assumptions believed to be reasonable at the time. However, actual results may vary and have varied in the past from forecasted results for a variety of reasons, including, but not limited to,
unanticipated manufacturing costs,



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changes in the economy or mix of products sold, unanticipated write-downs of inventory, and a higher than anticipated effective tax rate. Our lengthy sales cycle, coupled with the weakening in
the global economy, makes the timing of customer orders and product acceptances difficult to predict. In addition, our backlog at the beginning of a quarter typically does not include all orders required to achieve our sales objectives for that

quarter and is not a reliable indicator of our future sales. As a result, our revenues and operating results for a quarter depend on us
shipping orders as scheduled during that quarter, receiving customer acceptance during the quarter of previously shipped products, and obtaining new orders for products to be shipped in that same quarter. Any delay in, or cancellation of, scheduled
shipments and customer acceptances or in shipments from new orders could materially and adversely affect our financial results. These factors have caused and may continue to cause our financial results to differ materially from prior periods and
from financial forecasts we have previously provided.

Although we believe that these forecasts provide investors and analysts with a better
understanding of managements expectations for the future and are useful to our shareholders and potential shareholders, such forecasts are comprised of forward-looking statements subject to the risks and uncertainties described in this report
and in our other public filings and public statements. If our operating or financial results for a particular period differ from our forecasts or the expectations of investment analysts, or if we change our forecasts for future periods, the market
price of our common stock could decline.

Our quarterly operating results and stock price are unpredictable.

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



| |  | Economic conditions in the electronics and semiconductor industry generally and the equipment industry specifically;
|- |  | --------------------------------------------------------------------------------------------------------------------



| |  | The financial condition of our customers and their ability to purchase our products;
|- |  | ------------------------------------------------------------------------------------



| |  | 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;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Failure to receive anticipated orders in time to permit shipment during the quarter;
|- |  | ------------------------------------------------------------------------------------



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



| |  | Competitive pricing pressures;
|- |  | ------------------------------



| |  | Intellectual property disputes;
|- |  | -------------------------------



| |  | The effect of revenue recognized upon acceptance with little or no associated costs;
|- |  | ------------------------------------------------------------------------------------



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



| |  | Variability in manufacturing yields;
|- |  | ------------------------------------



| |  | Fluctuation in warranty costs;
|- |  | ------------------------------



| |  | Foreign currency exchange rate fluctuations;
|- |  | --------------------------------------------



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| |  | Emergence of new industry standards; and
|- |  | ----------------------------------------



| |  | Ability to fund capital requirements.
|- |  | -------------------------------------

In addition, the market price at which our common stock trades may be influenced by many factors, including:



| |  | Our operating and financial performance and prospects;
|- |  | ------------------------------------------------------



| |  | The depth and liquidity of the market for our common stock which can impact, among other things, the volatility of our stock price;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  | Investor perception of us and the industry in which we operate;
|- |  | ---------------------------------------------------------------



| |  | The level of research coverage of our common stock;
|- |  | ---------------------------------------------------



| |  | Changes in earnings estimates or buy/sell recommendations by analysts;
|- |  | ----------------------------------------------------------------------



| |  | General financial and other market conditions; and
|- |  | --------------------------------------------------



| |  | Domestic and international economic conditions.
|- |  | -----------------------------------------------

Public stock markets have experienced, and may in the future experience, extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility has
significantly affected the market prices of securities of many technology companies for reasons partly or wholly unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our
common stock.

We face risks related to a highly concentrated customer base.

Our customer base, especially in the semiconductor industry, has historically been highly concentrated and is becoming more so in the current economic
environment. Sales have come from a limited number of customers, and we expect that sales to a small number of customers will continue to account for a high percentage of our net sales in the foreseeable future. Although the composition of the group
comprising our largest customers varies from year to year, the loss of a significant customer or any reduction in orders from a significant customer could materially and adversely affect our business, financial condition or results of operations, as
we may not be able to replace the business from that customer. Because products are configured to customer specifications, changing, rescheduling or canceling orders may result in significant non-recoverable costs.

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

We operate in intensely competitive industries that experience rapid technological developments, changes in
industry standards, changes in customer requirements and frequent new product introductions and improvements. If we are unable to respond quickly and successfully to these developments, we may lose our competitive position and our products or
technologies may become uncompetitive or obsolete. We devote a significant portion of our personnel and financial resources to R&D programs, and we seek to maintain close relationships with our customers in order to remain responsive to their
product and manufacturing process needs. Our success depends in part on our ability to accurately predict evolving industry standards, to develop innovative solutions and improve existing technologies, to win market acceptance of our new and
advanced technologies and to manufacture our products in a timely and cost-effective manner. Our products and processes must address changing customer needs in a range of materials, including copper and aluminum, at ever-smaller line widths and
feature sizes, while maintaining our focus on manufacturing efficiency and product reliability. If we do not



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continue to gain market acceptance for our new technologies and products, or develop and introduce improvements in a timely manner in response to changing market conditions or customer
requirements, or remain focused on R&D efforts that will translate into greater revenues, our business could be adversely impacted.

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

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

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

We face substantial competition in the industry, from both potential new market entrants and
established competitors. Competitors may have greater financial, marketing, technical or other resources, and greater ability to respond to pricing pressures than we do. They may also have broader product lines, the ability to reduce price through
product bundling, greater experience with high-volume manufacturing, greater customer service capabilities, or larger and more established sales organizations and customer bases. To maintain or capture a position in the market, we must develop new
and enhanced systems and introduce them at competitive prices on a timely basis, while managing our R&D, product, and warranty costs. Semiconductor manufacturers incur substantial costs to install and integrate capital equipment into their
production lines. This increases the likelihood of continuing relationships with chosen equipment vendors, including our competitors, and the difficulty of penetrating new customer accounts. In addition, sales of our systems depend in significant
part upon a prospective customers decision to increase or expand manufacturing capacity  which typically involves a significant capital commitment. From time to time, we have experienced delays in finalizing system sales following
initial system qualification. Due to these and other factors, our systems typically have a lengthy sales cycle, during which we may expend substantial funds and management effort. Heightened competition may also force price reductions that could
adversely affect our results of operations.

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

We outsource the manufacture of most
subassemblies, which enables us to focus on performing system design, assembly and testing in-house, thereby minimizing our fixed costs and capital expenditures. Although we make reasonable efforts to ensure that third party providers will perform
to our standards, our reliance on suppliers and subcontractors limits our control over quality assurance and delivery schedules. Defects in workmanship, unacceptable yields, manufacturing disruptions and difficulties in obtaining export and import
approvals may



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impair our ability to manage inventory and cause delays in shipments and cancellation of orders that may adversely affect our relationships with current and prospective customers and enable
competitors to penetrate our customer accounts. In addition, third party providers may prioritize capacity for larger competitors or increase prices to us, which may adversely affect our profitability and our ability to respond to pricing pressures
from competitors and customers.

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

We must attract, retain and motivate key employees and the failure to do so could
harm our business and operations.

In order to compete, we must attract, retain and motivate our executives and other key employees.
Hiring and retaining qualified executives, engineers, and sales representatives are critical to our business and the competition for experienced employees in the semiconductor industry can be fierce. To help attract, retain and motivate qualified
employees, we use stock-based compensation awards such as employee stock options and restricted stock awards. If we are unable to attract, retain and motivate highly qualified employees to meet our needs in the future, our business and operations
could be harmed.

We are exposed to the risks of global operations.

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



| |  | Global or regional economic downturns;
|- |  | --------------------------------------



| |  | Adverse conditions in credit markets;
|- |  | -------------------------------------



| |  | 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;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Longer payment cycles and difficulties in collecting accounts receivable outside of the United States;
|- |  | ------------------------------------------------------------------------------------------------------



| |  | 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;
|- |  | ----------------------------------------------



| |  | 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;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | Political instability, natural disasters, acts of war or terrorism.
|- |  | -------------------------------------------------------------------

We enter into foreign currency forward exchange contracts to hedge against the short-term impact of currency fluctuations, including forecasted sales transactions denominated in Japanese yen. Our hedging
programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements, and therefore fluctuations in exchange rates could negatively affect our results of operations and financial condition. Exchange rate volatility may also
increase the cost of our exported products for international customers and inhibit demand.

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

We are subject to increasingly strict environmental regulations.

Our industry is
subject to increasingly strict environmental regulations that control and restrict the use, transportation, emission, discharge, storage and disposal of certain chemicals, gases and other substances used or produced in the semiconductor
manufacturing process. Public attention on environmental controls has continued to increase. Changes in environmental regulations could require us to invest in potentially costly pollution control equipment or alter the way our products are made. In
addition, we use hazardous and other regulated materials that subject us to risks of strict liability for damages caused by accidental releases, regardless of fault. Any failure to control such materials adequately or to comply with regulatory
restrictions or contractual obligations could increase our expenses and adversely affect our results of operations. New climate change regulations could require us to change our manufacturing processes or obtain substitute materials that may cost
more or be less available for our manufacturing operations. In addition, new restrictions on carbon dioxide or other greenhouse gas emissions could result in significant costs for us. Greenhouse gas legislation has been introduced in the United
States legislature and we expect increased worldwide regulatory activity in the future. The cost of complying, or of failing to comply, with these and other climate change and emissions regulations could have an adverse effect on our business plans
and operating results.

Additionally, we may be subject to environmental and other regulations in certain states and countries where we
produce or sell our products. We also face increasing complexity in our product design and procurement operations as we adjust to new and prospective requirements relating to the materials composition of our products, including the restrictions on
lead and certain other substances in electronics that apply to specified electronics products put on the market in the European Union (EU). The EU also makes producers of electrical goods financially responsible for specified collection, recycling,
treatment and disposal of past and future covered products. Other countries, such as the United States, China and Japan, have enacted or may enact similar laws or regulations similar to the EU. These and other future environmental regulations could
require us to reengineer certain of our existing products.



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We maintain a self-insurance program with respect to our property, casualty and other
risks and are exposed to excessive costs that may not be covered by our insurance plans.

We generally maintain various types of
insurance policies which provide coverage only upon the occurrence of certain catastrophic losses. Losses not covered by insurance may be substantial and may increase our expenses, which could negatively impact our results of operations. We place
our insurance coverage with various carriers in numerous jurisdictions. The types and amounts of insurance that we obtain vary over time and by location, depending on availability, cost, and our decisions with respect to strategic risk management.
The policies are subject to deductibles and exclusions that result in what we believe is an acceptable level of risk on a self-insurance basis. Additionally, the financial condition of our insurers may be negatively impacted by the recent
weakening in the global economy, which could adversely impact such insurers financial stability and, consequently, the insurance coverage they provide.

We face risks related to intellectual property.

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

Adverse outcomes in current or future legal disputes regarding patent and intellectual property rights could result in the loss of our intellectual property rights, subject us to significant liabilities
to third parties, require us to seek licenses from third parties on terms that may not be reasonable or favorable to us, prevent us from manufacturing or selling our products, or compel us to redesign our products to avoid incorporating third
parties intellectual property. As a result, our product offerings may be delayed, and we may be unable to meet customers requirements in a timely manner. Regardless of the merit of any legal disputes, we incur and may be required to
incur in the future substantial costs to prosecute or defend our intellectual property rights. Even in the absence of infringement by our products of third parties intellectual property rights, we have elected in the past and may in the future
elect to seek licenses or enter into settlements to avoid the costs of protracted litigation and the diversion of resources and management attention. However, if the terms of settlements entered into with certain of our competitors are not observed
or enforced, we may suffer further costs. Any of these circumstances could have a material adverse effect on our business, financial condition or results of operations.

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

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

Intellectual Property Litigation

We have received certain claims of infringement of intellectual property rights and may receive other such claims in the future. In the future, such claims
may evolve into legal proceedings or litigation against us. It is inherently difficult to assess the outcome of litigation, and there can be no assurance that we will prevail in any specific proceedings. Any such litigation could result in
substantial cost to us, including diversion of the efforts of our



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technical and management personnel, and this could have an adverse effect on our business, financial condition and operating results. If we are unable to successfully defend against such claims,
we could be required to expend significant resources to develop or license alternative non-infringing technology or to obtain a license to the subject technology. There is no assurance that we will be successful with such development, or that a
license will be available on terms acceptable to us, if at all. Without such a license, we could be prohibited from future sales of the infringing product or products, which could materially and adversely affect our business, financial condition and
operating results.

Linear Technology Corporation

In March 2002, Linear Technology Corporation (Linear) filed a complaint against Novellus, among other parties, in the Superior Court of the State of California for the County of Santa Clara (the Superior
Court) seeking damages (including punitive damages), declaratory relief and injunctions for causes of action involving alleged breach of contract, fraud, unfair competition and breach of warranty. The Superior Court dismissed Linears claims
for fraud and unfair competition on October 5, 2004. The Court of Appeal for the Sixth Appellate District affirmed this dismissal on June 18, 2007. Trial on the remaining claims began on January 19, 2010, in the Superior Court and is
ongoing. Although we cannot at this time predict the ultimate outcome in this case or estimate a range of any such potential loss, we believe that the ultimate disposition of these matters will not have a material adverse effect on our
business, financial condition or operating results.

Other Litigation

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

We are exposed to risks associated with our diversification strategy.

Our core business and expertise have historically been in the development, manufacture, sale and support of deposition technologies and wafer surface
preparation. We lack experience in the high-precision machine manufacturing equipment market serviced by IAG, compared with our knowledge of the semiconductor equipment industry, and cannot give any assurance that we can maintain or improve the
quality of products, level of sales and gross margins, or relations with key employees and significant customers or suppliers that are necessary to compete in this market.

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

From time to time, in the normal course of business, we indemnify third parties with whom we enter into contractual relationships, including customers and
lessors, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third party claims that our
products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. We have been, and in the future may be, compelled to enter into or accrue for
probable settlements of alleged indemnification obligations or subject to potential liability arising from our customers involvements in legal disputes. It is difficult to determine the maximum potential amount of liability under any
indemnification obligations, whether or not asserted, due to our limited history of prior indemnification claims and the unique



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facts and circumstances that are likely to be involved in each particular claim. Our business, financial condition and results of operations in a reported fiscal period could be materially
adversely affected if we expend significant amounts in defending or settling any purported claims, regardless of their merit or outcomes.

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

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



| |  | Difficulties in integrating the operations, technologies, products and personnel of acquired companies;
|- |  | -------------------------------------------------------------------------------------------------------



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



| |  | Difficulties entering new markets for which we have not previously manufactured and sold products;
|- |  | --------------------------------------------------------------------------------------------------



| |  | 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 securities dilutive to current shareholders, 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;
|- |  | ---------------------------------------------------------------------------------



| |  | The impairment of acquired intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The incurrence of unforeseen obligations or liabilities.
|- |  | --------------------------------------------------------

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

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

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

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



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



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

Not applicable.



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|Item 2. | Properties
|------- | ----------

Information
regarding our principal properties as of December 31, 2009 is as follows:



|                              |  |                                                                                                                                                                |  |                |  |                  |  |       
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | ---------------- |  | ------
|Location                      |  | Use                                                                                                                                                            |  | # of Buildings |  | Owned            |  | Leased
|                              |  |                                                                                                                                                                |  |                |  | (Square Footage)
|Semiconductor Group           |  |                                                                                                                                                                |  |                |  |                 
|San Jose, CA                  |  | Corporate Headquarters, Manufacturing, Research and Development, Engineering Applications, Demonstration Lab, Customer Support,
Administration and Warehousing |  | 8              |  | 485,000          |  |       
|Tualatin, OR                  |  | Manufacturing, Research and Development, Engineering, Customer Support, Administration and Warehousing                                                         |  | 4              |  | 442,000          |  |       
|Phoenix, AZ                   |  | Manufacturing, Research and Development, Engineering, Customer Support, Administration and Warehousing                                                         |  | 1              |  |                  |  | 32,000
|                              |  |                                                                                                                                                                | 
|Industrial Applications Group |  |                                                                                                                                                                |  |                |  |                 
|Rendsburg, Germany            |  | Manufacturing, Research and Development, Engineering, Customer Support, Administration and Warehousing                                                         |  | 1              |  | 189,000          |  | 23,000
|Hauterive, Switzerland        |  | Manufacturing, Research and Development, Customer Support and Administration                                                                                   |  | 1              |  | 128,000          |  |       
|Des Plaines, IL               |  | Manufacturing, Research and Development, Engineering, Customer Support, Administration and Warehousing                                                         |  | 1              |  | 41,000           |  |       
|Plainville, MA                |  | Customer Support and Warehousing                                                                                                                               |  | 1              |  |                  |  | 6,000 
|Leicestershire, UK            |  | Manufacturing, Customer Support, Administration and Warehousing                                                                                                |  | 1              |  | 9,000            |  |       
|                              |  |                                                                                                                                                                |  |                |  |                  |  |       
|                              |  | Total                                                                                                                                                          |  |                |  | 1,294,000        |  | 61,000
|                              |  |                                                                                                                                                                |  |                |  |                  |  |       

In our Semiconductor Group, we also lease several domestic field
offices totaling 20,000 square feet of space and several sites outside the United States totaling 162,000 square feet of space that we use as sales and customer service centers. Our facilities in Europe include 15,000 square feet of
leased space in various countries including Germany, France, Italy, Ireland, and Israel. Our facilities in Asia include 147,000 square feet of leased space in various countries including China, India, Japan, Korea, Malaysia, Singapore, Taiwan
and Vietnam. We also domestically own and lease 575,000 square feet not utilized for our operations, of which 359,000 square feet is leased to others.

In our Industrial Applications Group, we also lease four field offices totaling 25,000 square feet in Germany, China and Japan.

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



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##### Table of Contents

|Item 3. | Legal Proceedings
|------- | -----------------

Linear Technology Corporation

In March 2002, Linear Technology Corporation (Linear) filed a complaint against
Novellus, among other parties, in the Superior Court of the State of California for the County of Santa Clara (the Superior Court) seeking damages (including punitive damages), declaratory relief and injunctions for causes of action involving
alleged breach of contract, fraud, unfair competition and breach of warranty. The Superior Court dismissed Linears claims for fraud and unfair competition on October 5, 2004. The Court of Appeal for the Sixth Appellate District affirmed
this dismissal on June 18, 2007. Trial on the remaining claims began on January 19, 2010, in the Superior Court and is ongoing. Although we cannot at this time predict the ultimate outcome in this case or estimate a range of any such
potential loss, we believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Other Litigation

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



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

Not applicable.



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##### Table of Contents

PART II



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

Stock Information

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



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|               |  | 2009
|               |  | High |       | Low
|First Quarter  |  | $    | 16.96 |     | $ | 11.55
|Second Quarter |  |      | 18.97 |     |   | 15.76
|Third Quarter  |  |      | 21.32 |     |   | 16.64
|Fourth Quarter |  |      | 24.49 |     |   | 19.55
|               | 
|               |  | 2008
|               |  | High |       | Low
|First Quarter  |  | $    | 26.63 |     | $ | 20.99
|Second Quarter |  |      | 23.89 |     |   | 20.29
|Third Quarter  |  |      | 23.01 |     |   | 19.16
|Fourth Quarter |  |      | 19.64 |     |   | 10.46

As of February 19, 2010, there
were 709 holders of record of our common stock. We have not paid cash dividends on our common stock since inception, and our Board of Directors presently plans to use the cash generated from operations to reinvest in the business and to repurchase
common shares. Accordingly, it is anticipated that no cash dividends will be paid to holders of common stock in the foreseeable future.

Repurchase of Company Securities

In February 2004, our Board of Directors approved
a stock repurchase plan that authorized the repurchase of up to $500.0 million of our outstanding common stock through February 2007. In September 2004, our Board of Directors authorized an additional $1.0 billion for repurchase of our outstanding
common stock through September 2009. In October 2007, our Board of Directors authorized an additional $1.0 billion for repurchase of our outstanding common stock through October 2011.

Following is a summary of our stock repurchases pursuant to our publicly announced plans for the quarter ended December 31, 2009.



|                                            |  |                                 |  |                             |       |                                                                              |         |                                                                                      |   |              
|------------------------------------------- |  | ------------------------------- |  | --------------------------- | ----- | ---------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------------ | - | -------------
|Period                                      |  | Total Number ofShares Purchased |  | Average Price PaidPer Share |       | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |         | Approximate DollarValue of Shares thatMay yet bePurchased Under thePlans or Programs
|September 28, 2009 through October 31, 2009 |  | 95,316                          |  | $                           | 20.98 |                                                                              | 95,316  |                                                                                      | $ | 814.7 million
|November 1, 2009 through November 28, 2009  |  | 480,400                         |  | $                           | 20.69 |                                                                              | 480,400 |                                                                                      | $ | 804.8 million
|November 29, 2009 through December 31, 2009 |  | 55,400                          |  | $                           | 20.92 |                                                                              | 55,400  |                                                                                      | $ | 803.6 million
|                                            |  |                                 |  |                             |       |                                                                              |         |                                                                                      |   |              
|Total                                       |  | 631,116                         |  | $                           | 20.76 |                                                                              | 631,116 |                                                                                      | $ | 803.6 million
|                                            |  |                                 |  |                             |       |                                                                              |         |                                                                                      |   |              



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In addition to shares repurchased above, we withheld 231,817 shares through net share settlements for the
three months ended December 31, 2009 upon the vesting of restricted stock awards. For the majority of restricted stock awards granted, the number of shares issued on the date the restricted stock awards vest is net of the minimum statutory
withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. These withheld shares are not included within common stock repurchases under our authorized plan.

We are not obligated to make any purchases under our stock repurchase program. Subject to applicable state and federal corporate and securities laws,
repurchases under our stock repurchase program may be made at such times and in such amounts as we deem appropriate. Purchases made under our stock repurchase program can be discontinued at any time we feel additional purchases are not warranted. We
are subject to certain limitations under our debt agreement regarding the repurchase of common stock.

Cumulative 5-year
return

The following graph compares the cumulative 5-year total return attained by shareholders on our common stock relative to the
cumulative total returns of the S&P 500 index and the RDG Technology Composite index. The graph tracks the performance of a $100 investment in our common stock and in each of the indices (with the reinvestment of all dividends) from
December 31, 2004 to December 31, 2009.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Novellus Systems, Inc., The S&P 500 Index

And The RDG Technology Composite Index

LOGO



|* | $100 invested on 12/31/04 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
|- | -----------------------------------------------------------------------------------------------------------------

Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.



|                         |  |              |        |      |   |        |  |      |        |      |   |        |  |   |       |  |   |       
|------------------------ |  | ------------ | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ----- |  | - | ------
|                         |  | December 31,
|                         |  | 2004         |        | 2005 |   | 2006   |  | 2007 |        | 2008 |   | 2009  
|Novellus Systems, Inc.   |  | $            | 100.00 |      | $ | 86.48  |  | $    | 123.41 |      | $ | 98.85  |  | $ | 44.25 |  | $ | 83.69 
|S&P 500                  |  | $            | 100.00 |      | $ | 104.91 |  | $    | 121.48 |      | $ | 128.16 |  | $ | 80.74 |  | $ | 102.11
|RDG Technology Composite |  | $            | 100.00 |      | $ | 102.13 |  | $    | 111.45 |      | $ | 127.27 |  | $ | 71.89 |  | $ | 115.97



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

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



|Item 6. | Selected Financial Data
|------- | -----------------------

Set forth below is a summary of certain consolidated financial information with respect to Novellus as of the dates and for the periods indicated. The Consolidated Statements of Operations data set forth below for each of the five years in
the period ended December 31, 2009 and the Consolidated Balance Sheet data at each respective year end have been derived from our Consolidated Financial Statements, which have been audited. The Selected Consolidated Financial Data includes the
operating results and financial information of these companies from their respective dates of acquisition.

Selected Consolidated Financial
Data

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



|                                                                         |  |                                       |         |      |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |      
|------------------------------------------------------------------------ |  | ------------------------------------- | ------- | ---- | ---- | - | --------- | ---- |  | - | --------- | --- |  | ---- | --------- | --- |  | - | --------- | -----
|                                                                         |  | Years Ended December 31,              |        
|                                                                         |  | 2009                                  |         |      | 2008 |   |           | 2007 |  |   | 2006      |     |  | 2005 |          
|                                                                         |  | (In thousands, except per share data) |        
|Consolidated Statements ofOperations Data:                               |  |                                       |         |      |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |      
|Net sales                                                                |  | $                                     | 639,194 |      |      | $ | 1,011,004 |      |  | $ | 1,570,049 |     |  | $    | 1,658,516 |     |  | $ | 1,340,471 |      
|Gross profit                                                             |  |                                       | 241,090 |      |      |   | 435,944   |      |  |   | 769,189   |     |  |      | 824,349   |     |  |   | 599,126   | (5,6)
|Income (loss) before cumulative effect of change in accounting principle |  |                                       | (85,235 | )(1) |      |   | (115,710  | )(2) |  |   | 213,700   | (3) |  |      | 189,068   | (4) |  |   | 110,107   | (5,6)
|Cumulative effect of change in accounting principle, net of tax          |  |                                       |        |      |      |   |          |      |  |   |          |     |  |      | 948       |     |  |   |          |      
|Net income (loss)                                                        |  | $                                     | (85,235 | )(1) |      | $ | (115,710  | )(2) |  | $ | 213,700   | (3) |  | $    | 190,016   | (4) |  | $ | 110,107   | (5,6)
|Per common share:                                                        |  |                                       |         |      |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |      
|Income (loss) before cumulative effect of change in accounting principle |  |                                       |         |      |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |      
|Basic                                                                    |  | $                                     | (0.88   | )    |      | $ | (1.18     | )    |  | $ | 1.78      |     |  | $    | 1.51      |     |  | $ | 0.80      |      
|Diluted                                                                  |  | $                                     | (0.88   | )    |      | $ | (1.18     | )    |  | $ | 1.75      |     |  | $    | 1.49      |     |  | $ | 0.80      |      
|Cumulative effect of change in accounting principle, net of tax          |  |                                       |         |      |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |      
|Basic                                                                    |  | $                                     |        |      |      | $ |          |      |  | $ |          |     |  | $    | 0.01      |     |  | $ |          |      
|Diluted                                                                  |  | $                                     |        |      |      | $ |          |      |  | $ |          |     |  | $    | 0.01      |     |  | $ |          |      
|Net income (loss)                                                        |  |                                       |         |      |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |      
|Basic                                                                    |  | $                                     | (0.88   | )    |      | $ | (1.18     | )    |  | $ | 1.78      |     |  | $    | 1.52      |     |  | $ | 0.80      |      
|Diluted                                                                  |  | $                                     | (0.88   | )    |      | $ | (1.18     | )    |  | $ | 1.75      |     |  | $    | 1.50      |     |  | $ | 0.80      |      
|Shares used in basic per share calculations                              |  |                                       | 96,487  |      |      |   | 98,083    |      |  |   | 119,782   |     |  |      | 125,286   |     |  |   | 137,447   |      
|Shares used in diluted per share calculations                            |  |                                       | 96,487  |      |      |   | 98,083    |      |  |   | 121,915   |     |  |      | 126,483   |     |  |   | 138,423   |      



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|                                                  |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          
|------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                  |  | December 31,
|                                                  |  | 2009         |           | 2008 |   | 2007      |  | 2006 |           | 2005
|Consolidated Balance Sheet Data:                  |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          
|Cash, cash equivalents and short-term investments |  | $            | 501,370   |      | $ | 470,888   |  | $    | 596,766   |      | $ | 853,328   |  | $ | 654,983  
|Total assets                                      |  | $            | 1,558,978 |      | $ | 1,637,527 |  | $    | 2,076,943 |      | $ | 2,362,492 |  | $ | 2,290,249
|Long-term debt                                    |  | $            | 114,147   |      | $ |          |  | $    | 143,267   |      | $ | 127,862   |  | $ | 124,858  
|Shareholders equity                              |  | $            | 1,179,777 |      | $ | 1,246,782 |  | $    | 1,529,087 |      | $ | 1,834,705 |  | $ | 1,779,283



|(1) | The fiscal year 2009 results included charges of $24.5 million, consisting of severance expense, incremental inventory write-downs due to discounted products, costs
related to the consolidation of manufacturing facilities in our Tualatin, Oregon facility, the write-down of certain R&D assets to align our business with the current economic environment and restructuring and other charges. Of these expenses,
$10.9 million, $7.7 million, $2.1 million and $3.8 million were included in cost of sales, SG&A expenses, R&D expenses and restructuring and other charges, respectively. In addition, several discrete tax items with a net aggregate tax
expense of $18.4 million are included in the fiscal year 2009 results.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The fiscal year 2008 results included a non-cash goodwill impairment charge of $99.5 million and charges of $25.7 million, consisting of severance expense, incremental
inventory write-downs due to discounted products, and the write-down of certain R&D assets to align our business with the current economic environment. Of these expenses, $10.9 million, $6.2 million, $8.6 million and $99.5 million were included
in cost of sales, SG&A expenses, R&D expenses and impairment of goodwill, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The fiscal year 2007 results included a net restructuring and other benefit of $8.0 million, primarily from a gain on the sale of property and buildings in San Jose,
California.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | The fiscal year 2006 results included a net restructuring charge of $10.7 million, a 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Results for all fiscal years, excluding 2005, include the effects of stock-based compensation.
|--- | ----------------------------------------------------------------------------------------------



|(6) | The fiscal year 2005 results included a credit to cost of sales of $15.1 million related to the sale of inventories previously written down, net restructuring and
other charges of $9.2 million and inventory write-downs due to restructuring of $5.3 million.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Cautionary Note Regarding Forward-Looking Statements

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

The following information should be read in conjunction with Part I, Item 1. Business, Part I, Item 6. Selected Financial Data and Part II, Item 8. Consolidated Financial
Statements and the notes thereto. Forward-looking statements in this Annual Report on Form 10-K may be identified by words such as anticipates, estimates, expects, projects,
intends, plans, believes or similar expressions, and include, without limitation:



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



| |  | The statements in Item 1. Business  Semiconductor Group, concerning (1) our expectation that chip unit growth and
spending on semiconductor equipment will resume in 2010 at historical rates, which should it happen, we expect that increases in spending on semiconductor equipment will follow, (2) our belief that adoption of copper as the interconnect metal
in memory devices should lead to substantial purchases of copper deposition equipment, and (3) our expectation that deposition and surface preparation technologies will play an important role in new patterning schemes and technologies related
to mobile applications, which statements are subject to certain risks and uncertainties, including, without limitation, our inability to accurately predict chip unit growth and further cost cutting measures which may prevent spending on
semiconductor equipment in 2010, unexpected manufacturing complications which delay or disrupt the adoption of copper as the interconnect metal in memory devices which negatively effects the purchase of copper disposition equipment, and our
inability to predict the importance of deposition and surface preparation technologies as they relate to patterning schemes and technologies related to mobile applications;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statements in Item 1. Business  Semiconductor Business Strategy, concerning (1) our focus on high-productivity
systems, (2) our focus on reducing customer costs; (3) our intent to broaden our interconnect offerings; (4) our strategy to expand our market presence in Asia; (5) our strategy to anticipate the technologies that customers need
and design innovative products to enhance their manufacturing capabilities; (6) our plan to leverage our low cost manufacturing structure; and (7) our strategy to continue to provide training and support programs that are custom-tailored
to meet the individual needs of individual customers, 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 our 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, inability to allocate sufficient resources to R&D efforts, and fluctuations in
interest and foreign currency exchange rates and unexpected need to reduce support services due to increased costs and/or inability to hire and maintain qualified support technicians;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | The statements in Item 1. Business  Marketing, Sales and Service concerning (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 economic downturns, we may not be able to retain a sufficient number of qualified customer support and R&D personnel;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statement in Item 1. Business  Customers concerning our expectation that sales of our products to relatively few customers
will account for a high percentage of our net sales in the foreseeable future, which statement is subject to certain risks and uncertainties, including unexpected loss of a major customer, inability to provide our customers with cost effective
products and inability to predict the changing needs of our customers;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statement in Item 1. Business  Research and Development regarding our belief that R&D expenditures will continue to
represent a substantial percentage of our net sales in the future, 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 (1) our belief that our outsourcing strategy enables us to
minimize our fixed costs and capital expenditures while also providing the flexibility to scale production capacity as needed and allows us to focus on product differentiation through system design and quality control and (2) our belief that
our use of outsourced product specialists enables our subsystems to incorporate the latest and most advanced technologies in robotics, gas panel designs, and power supplies without the need for in-house expertise, 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 and unexpected need to implement further cost cutting
measures limiting the amount of resources we can allocate towards contracting with outsourced product specialists;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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, (2) our intention to file additional patent applications as appropriate, (3) our belief that the outcomes of current litigation will not have a material impact on our business, financial condition or
results of operations; and (4) 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
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| | 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 statement in Item 3. Legal Proceedings of our belief that the ultimate disposition of 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;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statements 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 chip unit
growth and spending on semiconductor equipment will resume in 2010 at historical rates, which should it happen, we expect that increases in spending on semiconductor equipment will follow, (3) our continued focus on operational execution to
improve profitability, (4) our plan to continue managing both our variable and fixed cost structure with the objective of maximizing cash flow from operations, and (5) our expectation that net orders will continue to fluctuate due to the
cyclical nature of our business; which statements are subject to numerous risks and uncertainties, including, without limitation, our inability to maintain our customer accounts, fluctuations in market demand for semiconductors, our inability to
accurately predict chip unit growth and further cost cutting measures which may prevent spending on semiconductor equipment through 2010, instability in the semiconductor industry and inability to predict the origin of revenues, our inability to
realize marketable products from our investment in R&D, our inability to attain market acceptance for new product introductions and the cyclical nature of the semiconductor industry;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statements in Item 7. Managements Discussion and Analysis of Financial Condition  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 it is reasonably possible that IAG could fail the first step of the annual impairment test in the future given the relatively low fair value of this reporting unit, which could result in additional impairment charges that
would negatively impact our results of operations, and (2) our belief that net deferred tax assets will be realized due to anticipated future income and our ability to carry back losses to prior years, 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, unexpected changes to federal, state or local tax laws, our inability to meet current forecasts or a sustained decline in
our market capitalization that is determined to be indicative of a reduction in fair value of one or both of our reporting units, our inability to estimate changes in our unrecognized tax benefits over the next twelve months;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statements in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Research and
Development (R&D) of our strategies, beliefs, plans, expectations and
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| | 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 capital and foreign losses which may be carried
forward from prior years and (2) our expectation that the modification after review of our intercompany agreements will reduce our tax liability in future years, which statement is subject to certain risks and uncertainties including changes to
our eligibility for foreign tax credits and shifts in our geographical mix of income and our inability to estimate the future tax liability associated with our intercompany agreements;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statement in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital
Resources that 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 statement is subject to certain risks and uncertainties,
including an unanticipated need for additional liquid assets in the next 12 months to fund operations and repurchases of our Common Stock;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 statements in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Contractual
Obligations that (1) we have made adequate provision for potential exposure related to inventory on order which may go unused, and (2) we expect to make payments of $0.6 million related to our pension and post-retirement benefit
plans in fiscal 2010, which statements are subject to certain risks and uncertainties, including, without limitation, our inability to predict our exposure related to inventory on order which may go unused and inaccuracies related to the amount of
payments to be made to the Companys pension and post-retirement benefit plans;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statements in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Recent Accounting
Pronouncements and Item 8. Financial Statements and Supplementary Data  Notes to Consolidated Financial Statements  Note 2. Significant Accounting Policies  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 certain recently issued accounting pronouncements adopted by
FASB will have a significant impact on our Consolidated Financial Statements, which statements are subject to certain risks and uncertainties, including, without limitation, our inability to accurately assess (1) whether unrecognized tax
benefits will significantly change in the next twelve months or (2) the impact of recent accounting pronouncements on our Consolidated Financial Statements;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The statements 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 and (3) that we do not expect the adoption of the amended FASB disclosure requirements for the fair value
measurement for recurring and nonrecurring liabilities to have a significant impact on our Consolidated Financial Statements, 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, our inability to accurately predict the creditworthiness of large financial institutions and our
inability to accurately predict the impact of amended FASB accounting guidance to which the Company is subject;
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| |  | Our statements in Item 8. Financial Statements and Supplementary Data  Notes to Consolidated Financial Statements  Note 4. Fair value
of Financial Instruments that (1) we believe the $10.7 million of impairment we recorded is temporary as we have both the ability and intent to hold these securities to recovery and (2) based on our credit quality assessment we
expect to recover the amortized cost basis of these securities, which statements are subject to certain risks and uncertainties, including, without limitation, our assumption that we will continue to have the ability to hold the securities and that
the value of these securities will be recovered without incurring significant losses and instability of the credit quality of the auction-rate securities which negatively impacts our ability to recover the amortized cost basis of these securities;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our statement in Item 8. Financial Statements and Supplementary Data  Notes to Consolidated Financial Statements 
Note 6. Derivative Financial Instruments that we anticipate reclassifying net the accumulated loss recorded as of December 31, 2009 from OCI to net sales within 12 months, which statement is subject to certain risks and
uncertainties, including, without limitation, our inability to reclassify accumulated losses from OCI to net sales within 12 months due to fluctuations in foreign currency exchange contracts and the inability to anticipate hedge effectiveness;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our statement in Item 8. Financial Statements and Supplementary Data  Notes to Consolidated Financial Statements 
Note 8. 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 10. 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;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our statements in Item 8. Financial Statements and Supplementary Data  Notes to Consolidated Financial Statements 
Note 15. Income Taxes regarding (1) our expectation that in years 2011 and beyond, our income subject to tax in California will be lower than under prior tax law and that our California deferred tax assets are therefore less likely to be
realized and (2) our belief that adequate accruals have been provided for any potential adjustments that may result from current examination by several state tax authorities, which statement are subject to certain risks and uncertainties,
including, without limitation our inability to predict our unrecognized tax benefits, inability to adequately estimate the amount of potential adjustments and unexpected revisions to the California income tax laws; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our statement in Item 8. Financial Statements and Supplementary Data  Notes to Consolidated Financial Statements 
Note 17. Stock-Based Compensation and Employee Benefit Plans that we expect to recognize unrecognized compensation cost related to restricted stock awards yearly in varying amounts through 2013, which statement is subject to certain risks
and uncertainties, including, without limitation modification to performance conditions, inability to satisfy performance expectations and unexpected forfeitures related thereto.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Introduction

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



| |  | Overview of Our Business and Industry;
|- |  | --------------------------------------



| |  | Financial Performance Overview;
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| |  | Critical Accounting Policies;
|- |  | -----------------------------



| |  | Results of Operations;
|- |  | ----------------------



| |  | Liquidity and Capital Resources;
|- |  | --------------------------------



| |  | Off-Balance Sheet Arrangements;
|- |  | -------------------------------



| |  | Contractual Obligations; and
|- |  | ----------------------------



| |  | Recent Accounting Pronouncements.
|- |  | ---------------------------------

Overview of Our Business and Industry

Novellus Systems, Inc. is a California corporation organized in 1984. At Novellus, we
primarily develop, manufacture, sell and support equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. Customers for these products manufacture chips for sale or for incorporation in their own products,
or provide chip-manufacturing services to third parties. The segment of our business serving this area is the Semiconductor Group. Beginning in 2004, Novellus entered into a market segment beyond semiconductor manufacturing through various
acquisitions. This segment, referred to as our Industrial Applications Group (IAG), develops, manufactures, sells and supports grinding, lapping and polishing equipment for fine-surface optimization and serves a broad spectrum of industrial
applications.

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

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

As a supplier to the global semiconductor and semiconductor-related industries, we are subject to business cycles and trends which are difficult to predict.
As indicated above, our Semiconductor Group products are used to manufacture chips that are used throughout the electronics industry, including the personal computer, mobile phone, consumer electronics and portable media player markets. Our
customers operate principally in the semiconductor memory and logic markets.

In fiscal 2006 and 2007, our customers grew capacity and those
capacity additions outpaced the rate of demand, leading to declines in the average selling price of chips. This oversupply-driven weakness was rendered more



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severe in the second half of 2008 and the first quarter of 2009 by the contraction in demand for semiconductors due to the global economic crisis. Semiconductor sales have rebounded in recent
quarters, leading to resumption in capacity additions by our customers; however, due to the exceptional weakness in the first quarter of 2009, semiconductor and semiconductor capital equipment sales still declined year-over-year in 2009. Unit growth
rates for chip sales are generally expected to resume in 2010 at historical rates, and if this happens, we expect that increases in spending on semiconductor equipment will follow.

Given the significant downward pressure on revenues over the past two years, we have continued to focus on operational execution and paring down our cost structure to improve operating results, including
the consolidation of buildings at our San Jose, California campus. In July 2009, we announced our plans to consolidate manufacturing in our Tualatin, Oregon facility. During 2009, we incurred $3.7 million in charges related to our manufacturing
consolidation efforts. Of these charges, $3.3 million was in cost of sales and $0.4 million was in selling, general and administrative expenses. The consolidation efforts are scheduled for completion in the first quarter of 2010. We plan to continue
managing both our variable and fixed cost structure with the objective of maximizing cash flow from operations. However, variable compensation expense would increase to the extent that we return to profitability.

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

The following table sets forth certain quarterly and annual financial information for the periods indicated (in thousands, except per share data):



|                                       |  |                          |         |    |                       |   |         |              |  |   |               |   |  |   |         |   |  |   |         |   
|-------------------------------------- |  | ------------------------ | ------- | -- | --------------------- | - | ------- | ------------ |  | - | ------------- | - |  | - | ------- | - |  | - | ------- | --
|                                       |  | Quarterly Financial Data |         |    | Year EndedDecember 31 |  
|                                       |  | FirstQuarter             |         |    | SecondQuarter         |   |         | ThirdQuarter |  |   | FourthQuarter |   | 
|2009:                                  |  |                          |         |    |                       |   |         |              |  |   |               |   |  |   |         |   |  |   |         |   
|Net sales                              |  | $                        | 98,913  |    |                       | $ | 119,208 |              |  | $ | 176,879       |   |  | $ | 244,194 |   |  | $ | 639,194 |   
|Gross profit                           |  | $                        | 25,738  |    |                       | $ | 31,006  |              |  | $ | 70,708        |   |  | $ | 113,638 |   |  | $ | 241,090 |   
|Net income (loss)                      |  | $                        | (66,392 | )  |                       | $ | (50,008 | )            |  | $ | (4,026        | ) |  | $ | 35,191  |   |  | $ | (85,235 | ) 
|Diluted net income (loss) per share    |  | $                        | (0.69   | )  |                       | $ | (0.52   | )            |  | $ | (0.04         | ) |  | $ | 0.36    |   |  | $ | (0.88   | ) 
|Shipments                              |  | $                        | 92,130  |    |                       | $ | 119,982 |              |  | $ | 165,446       |   |  | $ | 244,485 |   |  | $ | 622,043 |   
|Change in shipments from prior period  |  |                          | (48     | )% |                       |   | 30      | %            |  |   | 38            | % |  |   | 48      | % |  |   | (35     | )%
|Net orders                             |  | $                        | 77,795  |    |                       | $ | 111,187 |              |  | $ | 171,548       |   |  | $ | 257,610 |   |  | $ | 618,140 |   
|Change in net orders from prior period |  |                          | (6      | )% |                       |   | 43      | %            |  |   | 54            | % |  |   | 50      | % |  |   | (24     | )%



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|                                       |  |                          |         |    |                       |   |         |              |  |   |               |    |  |   |          |    |  |   |           |   
|-------------------------------------- |  | ------------------------ | ------- | -- | --------------------- | - | ------- | ------------ |  | - | ------------- | -- |  | - | -------- | -- |  | - | --------- | --
|                                       |  |                         
|                                       |  | Quarterly Financial Data |         |    | Year EndedDecember 31 |  
|                                       |  | FirstQuarter             |         |    | SecondQuarter         |   |         | ThirdQuarter |  |   | FourthQuarter |    | 
|2008:                                  |  |                          |         |    |                       |   |         |              |  |   |               |    |  |   |          |    |  |   |           |   
|Net sales                              |  | $                        | 314,713 |    |                       | $ | 257,740 |              |  | $ | 250,098       |    |  | $ | 188,453  |    |  | $ | 1,011,004 |   
|Gross profit                           |  | $                        | 144,940 |    |                       | $ | 110,963 |              |  | $ | 111,524       |    |  | $ | 68,517   |    |  | $ | 435,944   |   
|Net income                             |  | $                        | 15,529  |    |                       | $ | (2,385  | )            |  | $ | 1,397         |    |  | $ | (130,251 | )  |  | $ | (115,710  | ) 
|Diluted net income per share           |  | $                        | 0.15    |    |                       | $ | (0.02   | )            |  | $ | 0.01          |    |  | $ | (1.36    | )  |  | $ | (1.18     | ) 
|Shipments                              |  | $                        | 312,857 |    |                       | $ | 240,319 |              |  | $ | 230,153       |    |  | $ | 175,635  |    |  | $ | 958,964   |   
|Change in shipments from prior period  |  |                          | (14     | )% |                       |   | (23     | )%           |  |   | (4            | )% |  |   | (24      | )% |  |   | (39       | )%
|Net orders                             |  | $                        | 297,025 |    |                       | $ | 234,628 |              |  | $ | 202,765       |    |  | $ | 82,695   |    |  | $ | 817,113   |   
|Change in net orders from prior period |  |                          | (13     | )% |                       |   | (21     | )%           |  |   | (14           | )% |  |   | (59      | )% |  |   | (41       | )%

We expect that net orders will continue
to fluctuate due to the cyclical nature of our business. The receipt of net orders in a particular quarter affects revenue in subsequent quarters. Net orders typically result in revenue either at shipment and transfer of title or upon customer
acceptance of the equipment. Our revenue recognition policy addresses the distinction between the revenue recognized upon shipment and transfer of title and the revenue recognized upon customer acceptance. Equipment generally ships within two to six
months of receiving the related order, and if applicable, customer acceptance is typically received one to six months after shipment. These time lines are general estimates and actual times may vary depending on varying circumstances. Deferred
revenue as of December 31, 2009 was $31.3 million.

Demand for our systems has varied significantly from period to period as a
result of several factors, including but not limited to, downturns in the economy and semiconductor industry, supply of and demand for semiconductor devices, and competition in the semiconductor industry among suppliers of similar products. For
these and other reasons, our results of operations for fiscal years 2009, 2008 and 2007 may not necessarily be indicative of future operating results.

Financial Performance Overview

The following is an overview of our financial performance for the year ended December 31,
2009 compared to the year ended December 31, 2008:



| |  | Net sales decreased 37% to $639.2 million from $1.01 billion;
|- |  | -------------------------------------------------------------



| |  | Net loss improved by $30.5 million to a net loss of $85.2 million from net loss of $115.7 million, which included a goodwill write-off of $99.5
million;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Diluted net loss per share improved to $(0.88) from $(1.18);
|- |  | ------------------------------------------------------------



| |  | Shipments decreased 35% to $622.0 million from $959.0 million; and
|- |  | ------------------------------------------------------------------



| |  | Net orders decreased 24% to $618.1 million from $817.1 million.
|- |  | ---------------------------------------------------------------

Critical Accounting Policies

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and
liabilities. We evaluate estimates on an ongoing basis and base our estimates on historical experience and on various other assumptions



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believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our Consolidated
Financial Statements. Our other significant accounting policies are described in Note 2 of our Consolidated Financial Statements; however, these policies do not typically require us to make estimates or judgments that are difficult, complex or
subjective.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sellers price is fixed or determinable, and collection of the
receivable is reasonably assured. It is common for us to ship equipment and transfer title at the point of delivery to the buyer under the terms of our contractual relationship. When uncertainty exists as to customer acceptance due to
customer-specific equipment performance conditions, we defer revenue recognition until acceptance and record the deferred revenue and associated costs of sales in deferred profit on our Consolidated Balance Sheet.

Our equipment sales generally have two elements: the equipment and installation of that equipment. While installation is not essential to the functionality
of the delivered equipment, final payment is not billable until customer acceptance for many of our sales contracts. Provided that we meet defined customer acceptance experience levels with both the customer and the specific type of equipment, we
recognize revenue for the equipment element upon shipment and transfer of title. For those sales contracts where final payment is not billable until customer acceptance, the final payment (which typically exceeds the fair value of the installation)
is recognized upon customer acceptance. This practice creates variability in our gross margin, as revenue related to customer acceptance is recognized with little or no associated costs, which may not be indicative of our future operating
performance.

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

Revenue related to sales of spare parts is recognized upon shipment. Revenue related to maintenance and
service contracts is recognized ratably over the duration of the contracts. Unearned maintenance and service contract revenue as well as unearned revenue from certain equipment sales arrangements are included in other accrued liabilities.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. We periodically assess the recoverability of all inventories, including purchased and spare parts, work-in-process, finished goods and evaluation systems, to
determine whether adjustments are required to record inventory at the lower of cost or market. Inventory that is obsolete or in excess of our forecasted usage is written down to its estimated realizable value if less than cost based on our
assumptions about future demand and market conditions. If actual demand is lower than our forecast, additional inventory write-downs may be required.

Goodwill and Other Intangible Assets

We review our long-lived assets, including
goodwill and other intangible assets, for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be



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recoverable. We perform our goodwill impairment test in the fourth quarter of each fiscal year separately for each of our reporting units. We define reporting units as the individual segments in
which we operate. The first step of the test identifies whether potential impairment may have occurred, and the second step measures the amount of the impairment, if any. Impairment is present when the carrying amount of net assets exceeds the fair
value estimated during the first step of our impairment test. The estimation of the fair value of each reporting unit is determined based upon data generated from a discounted cash flow model, known as the income approach, and a comparable market
price model, known as the market approach. The income approach requires us to make a number of assumptions, including future growth rates, expense trends and working capital turnover ratios for each reporting unit over an extended period of time.
Although the assumptions we utilize are consistent with the assumptions used to generate our annual strategic plan, there is significant judgment in the timing and level of future cash flows attributable to each reporting unit. If our future
operating results do not meet current forecasts or if we have a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or both of our reporting units, future impairment charges related
to goodwill or long-lived assets may be required.

A non-cash impairment charge of $99.5 million related to our Industrial Applications Group
was recorded in 2008. During the first quarter of 2009, our expectations of future operating results declined from those used to perform our annual impairment test in the fourth quarter of 2008. This fact, in conjunction with the results of the 2008
annual impairment test, led us to determine that an indicator of potential impairment existed for both of our reporting units and that an interim impairment test was required. After completing the interim impairment test, we determined that the
estimated fair value of each reporting unit exceeded its carrying value. As a result, no additional impairment charges were required.

Our
annual impairment test performed in the fourth quarter of 2009 did not identify potential impairment for either our Semiconductor Group or our Industrial Applications Group. While the fair value of the Semiconductor Group exceeded book value by a
wide margin, the fair value of our Industrial Applications Group exceeded book value by $15.5 million, or 31%. Our impairment analysis for IAG is sensitive to small changes in assumptions in our valuation model. Given the relatively low fair value
of this reporting unit, we believe it is reasonably possible that IAG could fail the first step of the annual impairment test in the future, which could result in additional impairment charges that would negatively impact our results of operations.

As of December 31, 2009, the carrying amounts of goodwill on our Consolidated Balance Sheet subject to impairment are $108.4 million and
$18.0 million for the Semiconductor Group and Industrial Applications Group, respectively. We amortize our intangible assets with definite lives on a straight-line basis over their estimated useful lives.

Income Taxes

Certain estimates and judgments are required in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation and
valuation of certain tax assets and liabilities, which arise from temporary differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax
positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We
recognize deferred tax assets and liabilities using statutory tax rates for temporary differences between the book and tax basis of recorded assets and liabilities, net operating losses and tax credit carryforwards. As of December 31, 2009, we
had net deferred tax assets of $98.1 million, net of our valuation allowance of $27.6 million. We believe that our net deferred tax assets will be realized due to anticipated future income and our ability to carry back losses to prior years. We have
considered all sources of taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If in the future we determine that we would not be able to realize all or part of our net deferred
tax assets, an additional valuation



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allowance would decrease income in the period in which such determination is made.

We
evaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Any
change in measurement of these liabilities would result in the recognition of an additional charge or benefit to our income tax provision. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes.

Warranty Obligations

We generally provide warranty coverage for a predetermined amount of time on systems and modules for material and labor to repair and service the equipment. We record the estimated cost of warranty
coverage to cost of sales when revenue is recognized. The estimated cost of warranty is determined by the warranty term and the historical labor and material costs for a specific product. We review the actual product failure, material usage rates
and labor costs on a quarterly basis and adjust our warranty liability as necessary. Product warranty obligations that extend for more than 12 months from our balance sheet date are included in other non-current liabilities.

Stock-Based Compensation Expense

Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the
appropriate fair value model and calculating the fair value of stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could materially impact our operating results. See
Note 17 to our Consolidated Financial Statements for further disclosures regarding the impact of stock-based compensation on our Consolidated Financial Statements and significant estimates used.

Investments

Our
investments are designated as available-for-sale securities and are reported at fair value. Investments with original maturities greater than 90 days which are available for use in current operations are considered to be short-term investments,
except for our investments in auction-rate-securities. Our auction-rate securities with scheduled maturities in excess of one-year from the balance sheet date are considered long-term as there is no active market to sell these securities. In valuing
our investments we predominantly use market data or data derived from market sources. When markets are not considered to be active we may use (a) observable market prices in less active markets, (b) non-binding market prices that are
corroborated by observable market data, or (c) quoted market prices for similar instruments. When market data is not available, we employ a cash-flow-based modeling technique to arrive at the recorded fair value. This process involves
incorporating our assumptions about the anticipated term and yield that a market participant would require to purchase the security in the marketplace. Temporary unrealized gains and losses, net of tax, are recorded within other comprehensive income
(loss) (OCI). Changes in the fair value of our investments impact our net income only when such investments are sold or when an other than temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by
using the amortized cost of the specific security sold. As of December 31, 2009, we have recognized an unrealized temporary impairment loss of $10.7 million within OCI primarily associated with the fair-value assessment of our auction-rate
securities. See Note 4 to our Consolidated Financial Statements.



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Contingencies and Litigation

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. We accrue the cost of an adverse judgment if, in our
estimation, the adverse outcome is probable and we can reasonably estimate the ultimate cost. Changes in these factors could materially impact our financial position or our results of operations.

Results of Operations

Net Sales



|                              |  |                          |         |                 |   |           |                 |   |           |  |     |    |  |     |   
|----------------------------- |  | ------------------------ | ------- | --------------- | - | --------- | --------------- | - | --------- |  | --- | -- |  | --- | --
|                              |  | Years Ended December 31, |         | % Changein 2009 |   |           | % Changein 2008 |  
|                              |  | 2009                     |         | 2008            |   | 2007      |                 |  
|                              |  | (Dollars in thousands)   |         |                 |   |           |                 |  
|Semiconductor Group           |  | $                        | 569,324 |                 | $ | 837,651   |                 | $ | 1,395,703 |  | (32 | )% |  | (40 | )%
|Industrial Applications Group |  |                          | 69,870  |                 |   | 173,353   |                 |   | 174,346   |  | (60 | )% |  | (1  | )%
|                              |  |                          |         |                 |   |           |                 |   |           |  |     |    |  |     |   
|Net sales                     |  | $                        | 639,194 |                 | $ | 1,011,004 |                 | $ | 1,570,049 |  | (37 | )% |  | (36 | )%
|                              |  |                          |         |                 |   |           |                 |   |           |  |     |    |  |     |   

Net sales are correlated to shipments in the current period, previously reported shipments and timing of customer
acceptance. Semiconductor Group net sales decreased $268.3 million, or 32%, and Industrial Applications Group net sales decreased $103.5 million, or 60%, from 2008 to 2009 primarily due to the continuation of the world-wide economic downturn and
general unavailability of credit that began in 2008. Semiconductor Group net sales began to steadily recover in the last three quarters of 2009, resulting in fourth quarter 2009 net sales of $226.7 million, which represents over 35% of fiscal 2009
total net sales. No meaningful recovery was seen in the Industrial Application Group through the fourth quarter of 2009.

Semiconductor Group
net sales decreased $558.1 million from 2007 to 2008 primarily as a result of the world-wide economic downturn and the related unavailability of credit to certain customers. Industrial Applications Group 2008 net sales remained relatively flat from
2007 as favorable exchange rates increased net sales by 9% offsetting weaker demand for polishing systems.

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



|              |  |                         |   |  |      |   |  |      |  
|------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|              |  | Years EndedDecember 31, |  
|              |  | 2009                    |   |  | 2008 |   |  | 2007 |  
|Asia          |  | 60                      | % |  | 57   | % |  | 66   | %
|North America |  | 29                      | % |  | 31   | % |  | 26   | %
|Europe        |  | 11                      | % |  | 12   | % |  | 8    | %

Gross
Profit



|                              |  |                          |         |   |      |   |         |      |  |   |         |  
|----------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                              |  | Years Ended December 31, |        
|                              |  | 2009                     |         |   | 2008 |   |         | 2007 | 
|                              |  | (Dollars in thousands)   |        
|Gross profit                  |  | $                        | 241,090 |   |      | $ | 435,944 |      |  | $ | 769,189 |  
|% of net sales (gross margin) |  |                          | 38      | % |      |   | 43      | %    |  |   | 49      | %

Gross margin in 2009 declined by 5
percentage points compared to 2008 gross margin of 43%. The primary reason for the decrease was the 35% decline in shipments compared to 2008, which had the effect of reducing gross margin by 3 percentage points. The remaining decrease in gross
margin is due to the mix of products sold. During 2009, we sold previously written down inventory, which resulted in gross profit of $7.1 million. Those sales had no significant impact on our 2009 gross margin.



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Gross margin in 2008 declined by 6 percentage points compared to 2007 gross margin of 49%. During 2008, we
incurred $20.2 million of incremental expense due to reduced absorption of our manufacturing costs compared to 2007. We also incurred $11.4 million more in inventory write-downs during 2008 than during 2007, $8.6 million of which was related to
internal decisions to focus on our core product lines. In addition, a higher percentage of net sales were from the Industrial Applications Group where margins are generally lower than in the Semiconductor Group. During 2008, we sold previously
written down inventory, which resulted in gross profit of $0.6 million. Those sales had no significant impact on our 2008 gross margin.

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

Selling, General and Administrative (SG&A)



|               |  |                          |         |   |                 |   |         |                 |  |   |         |   |  |     |    |  |     |   
|-------------- |  | ------------------------ | ------- | - | --------------- | - | ------- | --------------- |  | - | ------- | - |  | --- | -- |  | --- | --
|               |  | Years Ended December 31, |         |   | % Changein 2009 |   |         | % Changein 2008 | 
|               |  | 2009                     |         |   | 2008            |   |         | 2007            |  |   |        
|               |  | (Dollars in thousands)   |         |   |                 |   |         |                 | 
|SG&A expense   |  | $                        | 164,125 |   |                 | $ | 224,233 |                 |  | $ | 266,018 |   |  | (27 | )% |  | (16 | )%
|% of net sales |  |                          | 26      | % |                 |   | 22      | %               |  |   | 17      | % |  |     |    |  |     |   

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

SG&A expense in 2009 was $164.1 million, a 27% reduction from 2008. The decrease in SG&A expense is primarily related to a 25% reduction in employee
headcount and other general cost reduction efforts. SG&A expense increased as a percentage of net sales as a result of the decline in net sales from 2008.

SG&A expense decreased $41.8 million in 2008 from 2007. The reduction in expense was attributable to lower employee compensation costs due to lower headcount and a reduction in variable and incentive
compensation including profit sharing and commissions. These cost savings were offset by $6.2 million in incremental charges incurred during 2008, primarily related to workforce reductions. SG&A expense increased as a percentage of net sales as
a result of the decline in net sales from 2007.

Research and Development (R&D)



|               |  |                          |         |   |                 |   |         |                 |  |   |         |   |  |     |    |  |    |   
|-------------- |  | ------------------------ | ------- | - | --------------- | - | ------- | --------------- |  | - | ------- | - |  | --- | -- |  | -- | --
|               |  | Years Ended December 31, |         |   | % Changein 2009 |   |         | % Changein 2008 | 
|               |  | 2009                     |         |   | 2008            |   |         | 2007            |  |   |        
|               |  | (Dollars in thousands)   |         |   |                 |   |         |                 | 
|R&D expense    |  | $                        | 149,101 |   |                 | $ | 219,660 |                 |  | $ | 241,025 |   |  | (32 | )% |  | (9 | )%
|% of net sales |  |                          | 23      | % |                 |   | 22      | %               |  |   | 15      | % |  |     |    |  |    |   

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

R&D expense in 2009 was $149.1 million, a 32%
decrease from 2008. The decrease in R&D expense is primarily related to a 12% reduction in employee headcount along with other general cost reduction efforts, including cutbacks in R&D project spending.



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R&D expense decreased $21.4 million in 2008 from 2007. The reduction in expense was attributable to
lower headcount and profit sharing expense. These cost savings were offset by $8.6 million in incremental charges incurred during the year, primarily related to workforce reductions and the impairment of certain R&D assets in order to focus on
certain product lines. R&D expense increased as a percentage of net sales as a result of the decline in net sales from 2007.

Restructuring and Other Charges (Benefits), net



|                                           |  |                          |             |   |      |   |             |      |  |   |              |  
|------------------------------------------ |  | ------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ------------ | -
|                                           |  | Years Ended December 31, |            
|                                           |  | 2009                     |             |   | 2008 |   |             | 2007 | 
|                                           |  | (Dollars in thousands)   |            
|Restructuring and other charges (benefits) |  | $                        | 3,840       |   |      | $ | 4,545       |      |  | $ | (8,013       | )
|% of net sales                             |  |                          | less than 1 | % |      |   | less than 1 | %    |  |   | less than -1 | %

In 2009 and 2008, we incurred $3.8 million
and $4.5 million in additional restructuring charges primarily related to changes in estimates of future sublease income for facility exit activities recorded in prior years.

In 2007, we completed the sale of certain facilities in San Jose, California, resulting in a gain of $9.1 million. This sale substantially completed the actions contemplated under our 2006 restructuring
plan. Offsetting the gain on sale of assets was $1.1 million in additional expense resulting from changes in estimates associated primarily with future estimated sublease income.

See Note 10 to our Consolidated Financial Statements for further discussion of our restructuring activities.

Impairment of Goodwill



|                       |  |                          |   |   |      |   |        |      |  |   |   |  
|---------------------- |  | ------------------------ | - | - | ---- | - | ------ | ---- |  | - | - | -
|                       |  | Years Ended December 31, |  
|                       |  | 2009                     |   |   | 2008 |   |        | 2007 | 
|                       |  | (Dollars in thousands)   |  
|Impairment of goodwill |  | $                        |  |   |      | $ | 99,522 |      |  | $ |  |  
|% of net sales         |  |                          | 0 | % |      |   | 10     | %    |  |   | 0 | %

In 2008, we incurred a non-cash goodwill
impairment charge of $99.5 million to reduce the carrying value of goodwill within our Industrial Applications Group reporting unit. Further discussion of this charge is included in Note 8 to our Consolidated Financial Statements. No goodwill
impairment charges were incurred in 2009 or 2007.

Interest and Other Income, net



|                               |  |                          |        |   |                 |   |             |                 |  |   |        |   |  |     |    |  |      |   
|------------------------------ |  | ------------------------ | ------ | - | --------------- | - | ----------- | --------------- |  | - | ------ | - |  | --- | -- |  | ---- | --
|                               |  | Years Ended December 31, |        |   | % Changein 2009 |   |             | % Changein 2008 | 
|                               |  | 2009                     |        |   | 2008            |   |             | 2007            |  |   |       
|                               |  | (Dollars in thousands)   |       
|Interest income                |  | $                        | 9,569  |   |                 | $ | 17,600      |                 |  | $ | 38,414 |   |  | (46 | )% |  | (54  | )%
|Interest expense               |  |                          | (2,073 | ) |                 |   | (7,021      | )               |  |   | (6,376 | ) |  | 70  | %  |  | (10  | )%
|Other income (expense), net    |  |                          | (901   | ) |                 |   | (5,659      | )               |  |   | 12,592 |   |  | 84  | %  |  | (145 | )%
|                               |  |                          |        |   |                 |   |             |                 |  |   |        |   |  |     |    |  |      |   
|Interest and other income, net |  | $                        | 6,595  |   |                 | $ | 4,920       |                 |  | $ | 44,630 |   |  | 34  | %  |  | (89  | )%
|                               |  |                          |        |   |                 |   |             |                 |  |   |        |   |  |     |    |  |      |   
|% of net sales                 |  |                          | 1      | % |                 |   | Less than 1 | %               |  |   | 3      | % |  |     |    |  |      |   

Interest income was $9.6 million in 2009, or $8.0 million less than in 2008 and $28.8 million less than in 2007.
This is primarily due to the combination of lower interest rates during 2009 and lower average cash balances.



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Interest expense was $2.1 million in 2009, or $4.9 million less than in 2008 and $4.3 million less than in
2007. This is primarily due to the repayments of our debt obligations during 2007 and 2008, combined with lower effective interest rates, as most of our obligations have floating interest rates.

Other income (expense), net, was a loss of $0.9 million in 2009 compared to a loss of $5.7 million in 2008 and a gain of $12.6 million in 2007. The loss in
2009 consists mainly of foreign currency losses of $3.8 million. This compares to a $3.5 million foreign currency loss in 2008 and a $4.5 million gain in 2007. The foreign currency loss in 2009 was offset by a $2.2 million gain on other investments
compared to losses on investments in 2008 and 2007, including other-than-temporary impairments, of $8.7 million and $1.4 million, respectively. Other income in 2009 was $0.7 million, compared to $6.6 million in 2008 and $9.5 million in 2007.

Income Taxes



|                                       |  |                          |        |    |      |   |       |      |  |   |         |  
|-------------------------------------- |  | ------------------------ | ------ | -- | ---- | - | ----- | ---- |  | - | ------- | -
|                                       |  | Years Ended December 31, |       
|                                       |  | 2009                     |        |    | 2008 |   |       | 2007 | 
|                                       |  | (Dollars in thousands)   |       
|Provision for income taxes             |  | $                        | 15,854 |    |      | $ | 8,614 |      |  | $ | 101,089 |  
|% of income (loss) before income taxes |  |                          | (23    | )% |      |   | (8    | )%   |  |   | 32      | %

As a result of our global business
structure, in periods of profitability we expect to achieve tax rates lower than current federal rates as we benefit from a geographical mix of income at lower rates and foreign tax credit planning strategies. Likewise, in periods of operating
losses, those losses accumulate in lower tax rate jurisdictions which reduces our tax benefit. Our effective tax rates for 2009 and 2008 reflect the unfavorable impact of losses in lower tax rate jurisdictions. In 2009, we incurred charges of $25.2
million to reduce previously recognized deferred tax assets, of which $20.2 million is due to a California tax law change enacted during the year. The remaining charges relate to valuation allowances in certain foreign jurisdictions. Offsetting that
charge was a net tax benefit of $20.7 million due to the utilization of net operating loss carryforwards. During 2009 we also reviewed our intercompany agreements, which resulted in a modification. This modification had no immediate impact to
operating cash flow and is expected to reduce our tax liability in future years. As a result of this item, as well as other less significant items recognized during the year, we recorded incremental tax expense of $22.1 million to increase net
unrecognized tax benefits. The 2008 effective tax rate was negatively impacted by the $99.5 million goodwill impairment charge, most of which was non-deductible for tax purposes.

Liquidity and Capital Resources

Cash, Cash Equivalents and
Short-Term Investments



|                                                        |  |                        |         |                  |   |        
|------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                                        |  | December 31,2009       |         | December 31,2008
|                                                        |  | (Dollars in thousands)
|Cash and cash equivalents                               |  | $                      | 142,047 |                  | $ | 184,332
|Short-term investments                                  |  |                        | 359,323 |                  |   | 286,556
|                                                        |  |                        |         |                  |   |        
|Total cash, cash equivalents and short-term investments |  | $                      | 501,370 |                  | $ | 470,888
|                                                        |  |                        |         |                  |   |        

We have historically financed our operating and capital resource
requirements through cash flows from operations, sales of equity securities and borrowings. Our primary source of liquidity as of December 31, 2009 consisted of $501.4 million of cash, cash equivalents and short-term investments. This amount
represents an increase of $30.5 million from $470.9 million as of December 31, 2008, which is primarily due to cash generated from operations during the year.



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Restricted Cash, Cash Equivalents and Long-Term Investments



|                                                |  |                        |         |                  |   |        
|----------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                                |  | December 31,2009       |         | December 31,2008
|                                                |  | (Dollars in thousands)
|Restricted cash and cash equivalents            |  | $                      | 133,105 |                  | $ | 119,702
|Long-term investments                           |  |                        | 78,763  |                  |   | 91,873 
|                                                |  |                        |         |                  |   |        
|Total restricted cash and long-term investments |  | $                      | 211,868 |                  | $ | 211,575
|                                                |  |                        |         |                  |   |        

We held $211.9 million in restricted cash and long-term investments as
of December 31, 2009, an increase of $0.3 million from $211.6 million as of December 31, 2008. The restricted cash and cash equivalents are primarily money market funds and Euro-denominated time-based deposits held to secure our debt
obligations.

Long-term investments consist of tax-exempt auction-rate securities, whose underlying assets are either student loans
substantially backed by the federal government or closed-end municipal funds. Beginning in February 2008, these auction-rate securities became illiquid because their scheduled auctions failed to settle. An auction failure occurs when the parties
wishing to sell securities at auction cannot. As a result, these investments are classified as long-term in our Consolidated Balance Sheet as we may have limited or no opportunities to liquidate these investments and fully recover their par value in
the near term. We redeemed $18.8 million and $15.1 million of auction rate securities at par value during 2009 and 2008, respectively. We have recorded a temporary unrealized loss of $10.7 million within OCI related to these investments in our
Consolidated Financial Statements as of December 31, 2009. See Note 4 to our Consolidated Financial Statements.

Cash Flow Summary



|                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                              |  | Years Ended December 31 |        
|                                                              |  | 2009                    |         |   | 2008 |   |          | 2007 | 
|                                                              |  | (Dollars in thousands)  |        
|Net cash provided by (used in):                               |  |                         |         |   |      |   |          |      |  |   |          |  
|Operating activities                                          |  | $                       | 63,329  |   |      | $ | 189,236  |      |  | $ | 305,689  |  
|Investing activities                                          |  |                         | (81,406 | ) |      |   | 43,593   |      |  |   | 364,107  |  
|Financing activities                                          |  |                         | (23,786 | ) |      |   | (224,299 | )    |  |   | (553,862 | )
|Effects of exchange rate changes on cash and cash equivalents |  |                         | (422    | ) |      |   | 731      |      |  |   | 674      |  
|                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents          |  | $                       | (42,285 | ) |      | $ | 9,261    |      |  | $ | 116,608  |  
|                                                              |  |                         |         |   |      |   |          |      |  |   |          |  

Operating

Net cash provided by operating activities for the year ended December 31, 2009 was $63.3 million. We generated $63.3 million of cash from operations during 2009 by offsetting our net loss of
$85.2 million with the effect of non-cash charges, net of $92.1 million and decreases in working capital levels of $56.4 million.

Net cash
provided by operating activities for the year ended December 31, 2008 was $189.2 million. We generated $189.2 million of cash from operations during 2008 by offsetting our net loss of $115.7 million with the effect of non-cash charges, net
of $200.7 million and decreases in working capital levels of $104.2 million.

Net cash provided by operating activities for the year ended
December 31, 2007 was $305.7 million. The primary sources of cash from operating activities were net income of $213.7 million, adjusted to exclude the effect of non-cash charges and benefits of $126.4 million, offset by increases in
working capital levels of $34.4 million.



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Investing

Net cash used in investing activities for the year ended December 31, 2009 was $81.4 million, consisting primarily of cash used for net purchases, sales and maturities of investments of
$55.6 million and an increase in restricted cash and cash equivalents of $13.0 million. Net cash was also reduced by $11.9 million for capital expenditures.

Net cash provided by investing activities for the year ended December 31, 2008 was $43.6 million, consisting primarily of cash received from net purchases, sales and maturities of investments of
$22.0 million and a reduction in restricted cash and cash equivalents of $41.3 million. Net cash was also reduced by $17.9 million for capital expenditures and $1.9 million for the purchase of Micron Machine Tools, Inc.

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

Financing

Net cash used in financing activities for the year ended December 31, 2009 was $23.8 million, due primarily to the repurchase of common stock for $30.7 million and partially offset by
proceeds from employee stock compensation plans of $7.3 million. We also refinanced our previous debt obligation of $110.6 million during 2009. See further discussion in our Credit Arrangements section below.

Net cash used in financing activities for the year ended December 31, 2008 was $224.3 million, due primarily to the repurchase of common stock for
$208.1 million and payments on debt obligations of $26.9 million. These outflows were partially offset by proceeds from employee stock compensation plans of $10.7 million.

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

Credit Arrangements

We have short-term credit facilities with various financial
institutions totaling $46.1 million. These credit facilities bear interest at various rates and expire on various dates through August 2010. As of December 31, 2009, we had insignificant current debt obligations outstanding, $3.7 million was
pledged against outstanding letters of credit and the remaining $42.4 million was unutilized.

On June 17, 2009, we entered into a
three-year Credit Agreement, which was amended on September 23, 2009 (the Agreement), with Bank of America, N.A. The Agreement established a secured credit line with an aggregate committed maximum amount of 80 million Euros at an interest
rate of Euro Interbank Offered Rate (EURIBOR) plus 75 basis points, the outstanding balance of which is due and payable on or before June 22, 2012. Upon execution of the Agreement, we borrowed 79.5 million Euros against this credit line.
The proceeds of the loan were used to retire our credit facility with JPMorgan Chase Bank, which was due and payable on June 25, 2009. The JPMorgan Credit Agreement was used to fund the acquisition of Peter Wolters AG in 2004 and for general
corporate purposes. As of December 31, 2009, we had amounts outstanding under the Agreement of 79.5 million Euros, or $114.1 million, at an effective interest rate of 1.2%, secured by deposits in money market funds at a minimum of 105
percent of the outstanding balance. Amounts used to secure the debt are included within non-current restricted cash and cash equivalents on our Consolidated Balance Sheet. The Agreement contains customary affirmative covenants,
representations and warranties and events of default and limited negative covenants and financial covenants, which are subject to various exceptions and qualifications. We were in compliance with these covenants as of
December 31, 2009.



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On April 21, 2009 we terminated our $150.0 million senior unsecured revolving credit facility with Bank
of America, N.A. We did not incur any penalties related to the termination. We had no amounts available or outstanding under this facility as of the termination date.

We believe that our financial resources will be sufficient to meet our needs through the next 12 months.

Off-Balance Sheet Arrangements

Standby Letters of Credit

We provide standby letters of credit to certain parties as required for certain transactions we initiate during the ordinary course of business. As of
December 31, 2009, the maximum potential amount of future payments that we could be required to make under these letters of credit was $3.7 million. We have not recorded a liability in connection with these arrangements beyond that
required to appropriately account for the underlying transaction being guaranteed. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these
arrangements.

Guarantee and Indemnity Arrangements

We have guarantee arrangements on behalf of certain of our subsidiaries for line-of-credit borrowings and operating leases. In the event of default on these
arrangements, we would have a maximum exposure of $25.7 million as of December 31, 2009. We have not recorded a liability in connection with these arrangements beyond that required to appropriately account for the underlying transaction
being guaranteed. We also indemnify our directors, officers, employees and agents to the maximum extent permitted under the laws of the State of California.

Contractual Obligations

The following is a table summarizing our contractual obligations
and purchase commitments under borrowing arrangements and future minimum lease payments under all non-cancelable operating leases as of December 31, 2009.



|                                |  |                           |        |                |   |        |           |      |         |      |   |            |  |   |       |  |   |        |  |   |         |   |  |   |        
|------------------------------- |  | ------------------------- | ------ | -------------- | - | ------ | --------- | ---- | ------- | ---- | - | ---------- |  | - | ----- |  | - | ------ |  | - | ------- | - |  | - | -------
|                                |  | Years Ending December 31, |        | SubleaseIncome |   |        | Net Total
|                                |  | 2010                      |        | 2011           |   | 2012   |           | 2013 |         | 2014 |   | Thereafter |  |  
|                                |  | (Dollars in thousands)   
|Non-cancelable operating leases |  | $                         | 10,684 |                | $ | 9,328  |           | $    | 5,729   |      | $ | 5,284      |  | $ | 2,916 |  | $ | 10,778 |  | $ | (19,477 | ) |  | $ | 25,242 
|Purchase and other commitments  |  |                           | 19,595 |                |   | 4,403  |           |      | 4,408   |      |   |           |  |   |      |  |   |       |  |   |        |   |  |   | 28,406 
|Debt obligations                |  |                           | 13     |                |   |       |           |      | 114,147 |      |   |           |  |   |      |  |   |       |  |   |        |   |  |   | 114,160
|                                |  |                           |        |                |   |        |           |      |         |      |   |            |  |   |       |  |   |        |  |   |         |   |  |   |        
|Total contractual obligations   |  | $                         | 30,292 |                | $ | 13,731 |           | $    | 124,284 |      | $ | 5,284      |  | $ | 2,916 |  | $ | 10,778 |  | $ | (19,477 | ) |  | $ | 167,808
|                                |  |                           |        |                |   |        |           |      |         |      |   |            |  |   |       |  |   |        |  |   |         |   |  |   |        

We have non-cancelable operating leases for various facilities. Rent
expense for the years ended December 31, 2009, 2008 and 2007 was $3.4 million, $4.5 million and $3.8 million, respectively, net of sublease income of $1.1 million, $1.1 million and $1.0 million, respectively. Certain of the operating
leases contain provisions which permit us to renew the leases at the end of their respective lease terms.

We have firm purchase commitments
with various suppliers to ensure the availability of components and services. Our minimum obligation as of December 31, 2009 under these arrangements was $23.4 million. Actual expenditures will vary based upon the volume of the
transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or cancelled. Certain agreements provide for potential cancellation
penalties. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We believe we have made adequate provision for potential exposure related to inventory on order which may go
unused. As of December 31, 2009, we had $5.0 million in other non-inventory related commitments.



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Liabilities related to our pension and post-retirement benefit plans are reported in our Consolidated
Balance Sheets but are not reflected in the contractual obligation table due to the absence of stated maturities. We have net obligations as of December 31, 2009 related to our pension plans and post-retirement medical plan of
$9.3 million. We funded $0.5 million to these plans in fiscal 2009. We expect to fund an additional $0.6 million in fiscal 2010.

As of December 31, 2009, we have recorded unrecognized tax benefits of $49.7 million and interest and penalties of $1.9 million, both of which are classified as non-current liabilities in the Consolidated Balance Sheet. At this time,
the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audit outcomes.

Recent Accounting Pronouncements

For a description of recently adopted and issued
accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our Consolidated Financial Statements, see Note 2 to our Consolidated Financial Statements.



|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

Interest Rate Risk

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

We mitigate default risk by investing in only high credit quality securities and by monitoring the credit rating of the
underlying issuers. Excluding our investments in auction rate securities, our portfolio includes only short-term investments with active secondary or resale markets.

The interest rates on the majority of our obligations are floating. Therefore, our results are affected by the interest rate changes to variable-rate short-term and long-term borrowings.

The tables below present the amounts we recorded and related weighted average interest rates by year of contractual maturity for our investment portfolio
and debt obligations as of December 31, 2009 and 2008. The amounts presented in the tables below approximate fair value.



|                                     |  |                     |         |   |             |   |         |             |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|------------------------------------ |  | ------------------- | ------- | - | ----------- | - | ------- | ----------- |  | - | ------------ | - |  | ------------ | ----- | - |  | - | ------ | - |  | - | ------- | -
|                                     |  | Periods of Maturity |         |   | Total       |  
|December 31, 2009                    |  | Less than1 Year     |         |   | 1 to 3Years |   |         | 3 to 5Years |  |   | 5 to 10Years |   |  | Over 10Years |       |  
|                                     |  | (In thousands)      |        
|Assets:                              |  |                     |         |   |             |   |         |             |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Cash and cash equivalents            |  | $                   | 142,047 |   |             | $ |        |             |  | $ |             |   |  | $            |      |   |  | $ |       |   |  | $ | 142,047 |  
|Average interest rate                |  |                     | 0.13    | % |             |   |        |             |  |   |             |   |  |              |      |   |  |   |       |   |  |   | 0.13    | %
|Short-term investments               |  | $                   | 164,549 |   |             | $ | 175,481 |             |  | $ |             |   |  | $            | 1,520 |   |  | $ | 14,075 |   |  | $ | 355,625 |  
|Average interest rate                |  |                     | 3.95    | % |             |   | 3.35    | %           |  |   |             |   |  |              | 1.54  | % |  |   | 1.34   | % |  |   | 3.54    | %
|Long-term investments                |  | $                   |        |   |             | $ |        |             |  | $ | 1,305        |   |  | $            |      |   |  | $ | 77,458 |   |  | $ | 78,763  |  
|Average interest rate                |  |                     |        |   |             |   |        |             |  |   | 0.63         | % |  |              |      |   |  |   | 0.67   | % |  |   | 0.66    | %
|Restricted cash and cash equivalents |  | $                   | 133,105 |   |             | $ |        |             |  | $ |             |   |  | $            |      |   |  | $ |       |   |  | $ | 133,105 |  
|Average interest rate                |  |                     | 0.14    | % |             |   |        |             |  |   |             |   |  |              |      |   |  |   |       |   |  |   | 0.14    | %
|                                     |  |                     |         |   |             |  
|Liabilities:                         |  |                     |         |   |             |   |         |             |  |   |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Short-term borrowings                |  | $                   | 13      |   |             | $ |        |             |  | $ |             |   |  | $            |      |   |  | $ |       |   |  | $ | 13      |  
|Average interest rate                |  |                     | 5.00    | % |             |   |        |             |  |   |             |   |  |              |      |   |  |   |       |   |  |   | 5.00    | %
|Long-term borrowings                 |  | $                   |        |   |             | $ | 114,599 |             |  | $ |             |   |  | $            |      |   |  | $ |       |   |  | $ | 114,599 |  
|Average interest rate                |  |                     |        |   |             |   | 1.18    | %           |  |   |             |   |  |              |      |   |  |   |       |   |  |   | 1.18    | %



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|                                     |  |                     |         |   |             |   |         |             |  |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|------------------------------------ |  | ------------------- | ------- | - | ----------- | - | ------- | ----------- |  | ------------ | - |  | ------------ | ----- | - |  | - | ------ | - |  | - | ------- | -
|                                     |  | Periods of Maturity |         |   | Total       |  
|December 31, 2008                    |  | Less than1 Year     |         |   | 1 to 3Years |   |         | 3 to 5Years |  | 5 to 10Years |   |  | Over 10Years |       |  
|                                     |  | (In thousands)      |        
|Assets:                              |  |                     |         |   |             |   |         |             |  |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Cash and cash equivalents            |  | $                   | 184,332 |   |             | $ |        |             |  | $            |  |  | $            |      |   |  | $ |       |   |  | $ | 184,332 |  
|Average interest rate                |  |                     | 1.93    | % |             |   |        |             |  |              |  |  |              |      |   |  |   |       |   |  |   | 1.93    | %
|Short-term investments               |  | $                   | 58,194  |   |             | $ | 203,303 |             |  | $            |  |  | $            | 5,421 |   |  | $ | 15,500 |   |  | $ | 282,418 |  
|Average interest rate                |  |                     | 3.72    | % |             |   | 4.22    | %           |  |              |  |  |              | 4.76  | % |  |   | 5.67   | % |  |   | 4.21    | %
|Long-term investments                |  | $                   |        |   |             | $ |        |             |  | $            |  |  | $            | 5,790 |   |  | $ | 86,083 |   |  | $ | 91,873  |  
|Average interest rate                |  |                     |        |   |             |   |        |             |  |              |  |  |              | 1.83  | % |  |   | 2.38   | % |  |   | 2.35    | %
|Restricted cash and cash equivalents |  | $                   | 119,702 |   |             | $ |        |             |  | $            |  |  | $            |      |   |  | $ |       |   |  | $ | 119,702 |  
|Average interest rate                |  |                     | 1.79    | % |             |   |        |             |  |              |  |  |              |      |   |  |   |       |   |  |   | 1.79    | %
|                                     |  |                     |         |   |             |  
|Liabilities:                         |  |                     |         |   |             |   |         |             |  |              |   |  |              |       |   |  |   |        |   |  |   |         |  
|Short-term borrowings                |  | $                   | 112,907 |   |             | $ |        |             |  | $            |  |  | $            |      |   |  | $ |       |   |  | $ | 112,907 |  
|Average interest rate                |  |                     | 2.92    | % |             |   |        |             |  |              |  |  |              |      |   |  |   |       |   |  |   | 2.92    | %

The less than 1 year
category of short-term investments contains $13.9 million and $10.6 million as of December 31, 2009 and 2008, respectively, of other investments that do not have contractual maturities. The tables above exclude interest receivable of
$3.7 million and $4.1 million as of December 31, 2009 and 2008, respectively, which is included in short-term investments on the Consolidated Balance Sheet.

As of December 31, 2009, we held tax-exempt auction-rate securities with an estimated fair value of $78.8 million, whose underlying assets are either student loans substantially backed by the federal
government or closed-end municipal funds. Beginning in February 2008, these auction-rate securities became illiquid because their scheduled auctions failed to settle. An auction failure occurs when the parties wishing to sell securities at auction
cannot. As a result, we may have limited or no opportunities to liquidate these investments and fully recover their stated value in the near term. These investments are classified as long-term in our Consolidated Balance Sheets. As of
December 31, 2009, we have recorded a cumulative temporary unrealized loss of $10.7 million within OCI.



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Foreign Currency Risk

We conduct business in various foreign countries located primarily in Europe and Asia. We are therefore exposed to changes in exchange rates of currencies in those regions. We utilize foreign currency
forward contracts to mitigate our exposure to changes in exchange rates by hedging intercompany balances denominated in currencies other than the U.S. dollar, hedging our net investment in certain foreign subsidiaries and by designating certain
forward contracts as cash flow hedges on transactions in which costs are denominated in U.S. dollars but the related revenues are generated in a foreign currency. As of December 31, 2009, we had 79.5 million Euros outstanding under
our Euro-denominated floating rate debt with Bank of America N.A. of which 27.1 million Euros was used to mitigate the economic impact of our net investment in certain foreign subsidiaries and was designated as a net investment hedge. Our
remaining foreign currency risk associated with our Euro-denominated debt is mitigated through our restricted cash holdings in Euros. Our hedging program is generally designed to minimize the impact of foreign currency fluctuations on our results of
operations. We do not use foreign currency forward exchange contracts for speculative or trading purposes. For further discussion related to the accounting treatment of our derivative instruments see Note 2 to our Consolidated Financial
Statements. The tables below present the notional amounts (at the contract exchange rates), the weighted-average contractual foreign currency exchange rates and the estimated fair value of our contracts outstanding as of December 31, 2009 and
2008.



|                                             |  |                                                  |       |   |                      |       |                                 |   |      |  
|-------------------------------------------- |  | ------------------------------------------------ | ----- | - | -------------------- | ----- | ------------------------------- | - | ---- | -
|                                             |  | December 31, 2009                                |      
|                                             |  | NotionalSell (Buy)                               |       |   | AverageContract Rate |       | Estimated FairValue-Gain (Loss) |  
|                                             |  | (In thousands, except for average contract rate) |      
|Foreign currency forward exchange contracts: |  |                                                  |       |   |                      |       |                                 |   |      |  
|Japanese yen                                 |  | $                                                | 6,474 |   |                      | 91.56 |                                 | $ | (173 | )
|Swiss franc                                  |  |                                                  | 1,453 |   |                      | 1.04  |                                 |   |     |  
|Chinese renminbi                             |  |                                                  | 479   |   |                      | 6.83  |                                 |   | (2   | )
|Israeli shekel                               |  |                                                  | (307  | ) |                      | 3.79  |                                 |   | (6   | )
|Other                                        |  |                                                  | (4    | ) |                      |       |                                 |   | (3   | )
|                                             |  |                                                  |       |   |                      |       |                                 |   |      |  
|                                             |  | $                                                | 8,095 |   |                      |       |                                 | $ | (184 | )
|                                             |  |                                                  |       |   |                      |       |                                 |   |      |  



|                                             |  |                                                  |        |   |                      |       |                                 |   |        |  
|-------------------------------------------- |  | ------------------------------------------------ | ------ | - | -------------------- | ----- | ------------------------------- | - | ------ | -
|                                             |  | December 31, 2008                                |       
|                                             |  | NotionalSell (Buy)                               |        |   | AverageContract Rate |       | Estimated FairValue-Gain (Loss) |  
|                                             |  | (In thousands, except for average contract rate) |       
|Foreign currency forward exchange contracts: |  |                                                  |        |   |                      |       |                                 |   |        |  
|Japanese yen                                 |  | $                                                | 24,780 |   |                      | 95.53 |                                 | $ | (1,867 | )
|Euro                                         |  |                                                  | 14,893 |   |                      | 0.71  |                                 |   | 41     |  
|Israeli shekel                               |  |                                                  | 2,114  |   |                      | 3.69  |                                 |   | (4     | )
|Swiss franc                                  |  |                                                  | 1,313  |   |                      | 1.08  |                                 |   | 1      |  
|Other                                        |  |                                                  | (14    | ) |                      |       |                                 |   | (16    | )
|                                             |  |                                                  |        |   |                      |       |                                 |   |        |  
|                                             |  | $                                                | 43,086 |   |                      |       |                                 | $ | (1,845 | )
|                                             |  |                                                  |        |   |                      |       |                                 |   |        |  



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|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

NOVELLUS SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|----------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                |  | Years Ended December 31,              |        
|                                                |  | 2009                                  |         |   | 2008 |   |           | 2007 | 
|                                                |  | (In thousands, except per share data) |        
|Net sales                                       |  | $                                     | 639,194 |   |      | $ | 1,011,004 |      |  | $ | 1,570,049 |  
|Cost of sales                                   |  |                                       | 398,104 |   |      |   | 575,060   |      |  |   | 800,860   |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Gross profit                                    |  |                                       | 241,090 |   |      |   | 435,944   |      |  |   | 769,189   |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Selling, general and administrative             |  |                                       | 164,125 |   |      |   | 224,233   |      |  |   | 266,018   |  
|Research and development                        |  |                                       | 149,101 |   |      |   | 219,660   |      |  |   | 241,025   |  
|Restructuring and other charges (benefits), net |  |                                       | 3,840   |   |      |   | 4,545     |      |  |   | (8,013    | )
|Impairment of goodwill                          |  |                                       |        |   |      |   | 99,522    |      |  |   |          |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Total operating expenses                        |  |                                       | 317,066 |   |      |   | 547,960   |      |  |   | 499,030   |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Operating income (loss)                         |  |                                       | (75,976 | ) |      |   | (112,016  | )    |  |   | 270,159   |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Interest income                                 |  |                                       | 9,569   |   |      |   | 17,600    |      |  |   | 38,414    |  
|Interest expense                                |  |                                       | (2,073  | ) |      |   | (7,021    | )    |  |   | (6,376    | )
|Other income (expense), net                     |  |                                       | (901    | ) |      |   | (5,659    | )    |  |   | 12,592    |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Interest and other income, net                  |  |                                       | 6,595   |   |      |   | 4,920     |      |  |   | 44,630    |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Income (loss) before provision for income taxes |  |                                       | (69,381 | ) |      |   | (107,096  | )    |  |   | 314,789   |  
|Provision for income taxes                      |  |                                       | 15,854  |   |      |   | 8,614     |      |  |   | 101,089   |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Net income (loss)                               |  | $                                     | (85,235 | ) |      | $ | (115,710  | )    |  | $ | 213,700   |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Net income (loss) per share:                    |  |                                       |         |   |      |   |           |      |  |   |           |  
|Basic                                           |  | $                                     | (0.88   | ) |      | $ | (1.18     | )    |  | $ | 1.78      |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Diluted                                         |  | $                                     | (0.88   | ) |      | $ | (1.18     | )    |  | $ | 1.75      |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Shares used in basic per share calculations     |  |                                       | 96,487  |   |      |   | 98,083    |      |  |   | 119,782   |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  
|Shares used in diluted per share calculations   |  |                                       | 96,487  |   |      |   | 98,083    |      |  |   | 121,915   |  
|                                                |  |                                       |         |   |      |   |           |      |  |   |           |  







See accompanying Notes to Consolidated Financial Statements.



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NOVELLUS SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                           |  |                |           |   |      |   |           |  
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                           |  | December 31,   |          
|                                                                                                                           |  | 2009           |           |   | 2008 |  
|                                                                                                                           |  | (In thousands) |          
|ASSETS                                                                                                                     |  |                |           |   |      |   |           |  
|Current assets:                                                                                                            |  |                |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                  |  | $              | 142,047   |   |      | $ | 184,332   |  
|Short-term investments                                                                                                     |  |                | 359,323   |   |      |   | 286,556   |  
|Accounts receivable, net of allowance for doubtful accounts of $2,606 in 2009 and $4,057 in 2008                           |  |                | 150,624   |   |      |   | 144,330   |  
|Inventories                                                                                                                |  |                | 162,213   |   |      |   | 213,305   |  
|Deferred tax assets, net                                                                                                   |  |                | 46,900    |   |      |   | 44,051    |  
|Restricted cash and cash equivalents                                                                                       |  |                |          |   |      |   | 116,819   |  
|Prepaid and other current assets                                                                                           |  |                | 36,715    |   |      |   | 53,209    |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total current assets                                                                                                       |  |                | 897,822   |   |      |   | 1,042,602 |  
|Property and equipment, net                                                                                                |  |                | 239,111   |   |      |   | 271,866   |  
|Non-current restricted cash and cash equivalents                                                                           |  |                | 133,105   |   |      |   | 2,883     |  
|Long-term investments                                                                                                      |  |                | 78,763    |   |      |   | 91,873    |  
|Goodwill                                                                                                                   |  |                | 126,438   |   |      |   | 126,073   |  
|Intangibles and other assets                                                                                               |  |                | 83,739    |   |      |   | 102,230   |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total assets                                                                                                               |  | $              | 1,558,978 |   |      | $ | 1,637,527 |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|                                                                                                                           |  |               
|LIABILITIES AND SHAREHOLDERS
EQUITY                                                                                       |  |                |           |   |      |   |           |  
|Current liabilities:                                                                                                       |  |                |           |   |      |   |           |  
|Accounts payable                                                                                                           |  | $              | 72,656    |   |      | $ | 50,832    |  
|Accrued payroll and related expenses                                                                                       |  |                | 21,566    |   |      |   | 35,907    |  
|Accrued warranty                                                                                                           |  |                | 17,014    |   |      |   | 25,732    |  
|Other accrued liabilities                                                                                                  |  |                | 49,571    |   |      |   | 47,533    |  
|Income taxes payable                                                                                                       |  |                | 1,580     |   |      |   | 17,527    |  
|Deferred profit                                                                                                            |  |                | 9,094     |   |      |   | 14,784    |  
|Current debt obligations                                                                                                   |  |                | 13        |   |      |   | 112,907   |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total current liabilities                                                                                                  |  |                | 171,494   |   |      |   | 305,222   |  
|Long-term debt obligations                                                                                                 |  |                | 114,147   |   |      |   |          |  
|Long-term income taxes payable                                                                                             |  |                | 48,332    |   |      |   | 29,778    |  
|Other non-current liabilities                                                                                              |  |                | 45,228    |   |      |   | 55,745    |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total liabilities                                                                                                          |  |                | 379,201   |   |      |   | 390,745   |  
|Commitments and contingencies (Notes 13 and 14)                                                                            |  |                |           |   |      |   |           |  
|Shareholders equity:                                                                                                      |  |                |           |   |      |   |           |  
|Preferred stock, no par value; authorized shares  10,000; no shares issued and outstanding                                |  |                |          |   |      |   |          |  
|Common stock, no par value; authorized shares  240,000; shares issued and outstanding  96,867 in 2009 and
97,089 in 2008 |  |                | 1,179,220 |   |      |   | 1,158,637 |  
|Retained earnings                                                                                                          |  |                | 5,226     |   |      |   | 99,981    |  
|Accumulated other comprehensive loss                                                                                       |  |                | (4,669    | ) |      |   | (11,836   | )
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total shareholders equity                                                                                                 |  |                | 1,179,777 |   |      |   | 1,246,782 |  
|                                                                                                                           |  |                |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                                                 |  | $              | 1,558,978 |   |      | $ | 1,637,527 |  
|                                                                                                                           |  |                |           |   |      |   |           |  

See accompanying Notes to Consolidated Financial Statements.



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NOVELLUS SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                                                         |  | Years Ended December 31, |         
|                                                                                         |  | 2009                     |          |   | 2008 |   |          | 2007 | 
|                                                                                         |  | (In thousands)           |         
|Cash flows from operating activities:                                                    |  |                          |          |   |      |   |          |      |  |   |            |  
|Net income (loss)                                                                        |  | $                        | (85,235  | ) |      | $ | (115,710 | )    |  | $ | 213,700    |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |            |  
|Loss (gain) on disposal of property and equipment, net                                   |  |                          | 518      |   |      |   | 2,565    |      |  |   | (9,168     | )
|Impairment of goodwill                                                                   |  |                          |         |   |      |   | 99,522   |      |  |   |           |  
|Depreciation and amortization                                                            |  |                          | 46,861   |   |      |   | 63,317   |      |  |   | 66,924     |  
|Deferred income taxes                                                                    |  |                          | 5,788    |   |      |   | (7,834   | )    |  |   | 36,319     |  
|Stock-based compensation                                                                 |  |                          | 30,388   |   |      |   | 32,563   |      |  |   | 28,118     |  
|Excess tax benefit from stock-based compensation                                         |  |                          | (850     | ) |      |   | (98      | )    |  |   | (855       | )
|Other-than-temporary impairment of investments                                           |  |                          |         |   |      |   | 4,228    |      |  |   | 1,763      |  
|Other non-cash charges, net                                                              |  |                          | 9,467    |   |      |   | 6,507    |      |  |   | 3,327      |  
|Changes in operating assets and liabilities:                                             |  |                          |          |   |      |   |          |      |  |   |            |  
|Accounts receivable, net                                                                 |  |                          | (8,343   | ) |      |   | 198,215  |      |  |   | (32,857    | )
|Inventories                                                                              |  |                          | 53,904   |   |      |   | 45,797   |      |  |   | (8,093     | )
|Prepaid and other assets                                                                 |  |                          | 18,742   |   |      |   | (28,892  | )    |  |   | 2,658      |  
|Accounts payable                                                                         |  |                          | 21,865   |   |      |   | (32,636  | )    |  |   | 3,904      |  
|Accrued payroll and related expenses                                                     |  |                          | (11,175  | ) |      |   | (34,304  | )    |  |   | (6,490     | )
|Accrued warranty                                                                         |  |                          | (10,901  | ) |      |   | (24,397  | )    |  |   | (846       | )
|Income taxes payable                                                                     |  |                          | 2,369    |   |      |   | 18,309   |      |  |   | (10,412    | )
|Deferred profit                                                                          |  |                          | (5,797   | ) |      |   | (37,646  | )    |  |   | 10,284     |  
|Other liabilities                                                                        |  |                          | (4,272   | ) |      |   | (270     | )    |  |   | 7,413      |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Net cash provided by operating activities                                                |  |                          | 63,329   |   |      |   | 189,236  |      |  |   | 305,689    |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|                                                                                         |  |                          |         
|Cash flows from investing activities:                                                    |  |                          |          |   |      |   |          |      |  |   |            |  
|Proceeds from sales of investments                                                       |  |                          | 246,934  |   |      |   | 390,595  |      |  |   | 1,203,486  |  
|Proceeds from maturities of investments                                                  |  |                          | 25,926   |   |      |   | 84,310   |      |  |   | 206,665    |  
|Purchases of investments                                                                 |  |                          | (328,445 | ) |      |   | (452,936 | )    |  |   | (1,042,393 | )
|Capital expenditures                                                                     |  |                          | (11,891  | ) |      |   | (17,903  | )    |  |   | (33,216    | )
|Proceeds from sale of property and equipment                                             |  |                          | 1,267    |   |      |   | 92       |      |  |   | 47,185     |  
|Decrease (increase) in restricted cash and cash equivalents                              |  |                          | (13,003  | ) |      |   | 41,348   |      |  |   | (17,281    | )
|Business acquisitions, net of cash acquired                                              |  |                          | (194     | ) |      |   | (1,913   | )    |  |   | (339       | )
|Purchase of intangible assets                                                            |  |                          | (2,000   | ) |      |   |         |      |  |   |           |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Net cash provided by (used in) investing activities                                      |  |                          | (81,406  | ) |      |   | 43,593   |      |  |   | 364,107    |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|                                                                                         |  |                          |         
|Cash flows from financing activities:                                                    |  |                          |          |   |      |   |          |      |  |   |            |  
|Proceeds from debt obligations                                                           |  |                          | 110,632  |   |      |   |         |      |  |   |           |  
|Payments on debt obligations                                                             |  |                          | (110,608 | ) |      |   | (25,972  | )    |  |   | (43        | )
|Repayments of lines of credit, net                                                       |  |                          | (1,255   | ) |      |   | (965     | )    |  |   | (18,117    | )
|Proceeds from employee stock compensation plans                                          |  |                          | 7,251    |   |      |   | 10,669   |      |  |   | 41,917     |  
|Repurchases of common stock                                                              |  |                          | (30,656  | ) |      |   | (208,129 | )    |  |   | (578,474   | )
|Excess tax benefit from stock-based compensation                                         |  |                          | 850      |   |      |   | 98       |      |  |   | 855        |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Net cash used in financing activities                                                    |  |                          | (23,786  | ) |      |   | (224,299 | )    |  |   | (553,862   | )
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Effects of exchange rate changes on cash and cash equivalents                            |  |                          | (422     | ) |      |   | 731      |      |  |   | 674        |  
|Net change in cash and cash equivalents                                                  |  |                          | (42,285  | ) |      |   | 9,261    |      |  |   | 116,608    |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Cash and cash equivalents at beginning of period                                         |  |                          | 184,332  |   |      |   | 175,071  |      |  |   | 58,463     |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Cash and cash equivalents at end of period                                               |  | $                        | 142,047  |   |      | $ | 184,332  |      |  | $ | 175,071    |  
|                                                                                         |  |                          |          |   |      |   |          |      |  |   |            |  
|Supplemental disclosures:                                                                |  |                          |          |   |      |   |          |      |  |   |            |  
|Cash paid during the year for:                                                           |  |                          |          |   |      |   |          |      |  |   |            |  
|Interest                                                                                 |  | $                        | 2,203    |   |      | $ | 6,837    |      |  | $ | 7,070      |  
|Income taxes, net                                                                        |  | $                        | 3,906    |   |      | $ | 27,461   |      |  | $ | 72,488     |  

See accompanying Notes
to Consolidated Financial Statements.



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NOVELLUS SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|----------------------------------------------------------------------------------------------- |  | -------------- | - |  | ----------------------------------------- | --------- | - | ------------------------ | - | -------- | - |  | - | ------- | - |  | - | --------- | -
|                                                                                                |  |                |   |  | AccumulatedOtherComprehensiveIncome(Loss) |           |   | TotalShareholdersEquity |  
|                                                                                                |  | Common Stock   |   |  | RetainedEarnings                          |           |   |                         
|                                                                                                |  | Shares         |   |  | Amount                                    |           |   |                          |  
|                                                                                                |  | (In thousands) |  
|Balance, December 31, 2006                                                                      |  | 125,452        |   |  | $                                         | 1,393,914 |   |                          | $ | 438,196  |   |  | $ | 2,595   |   |  | $ | 1,834,705 |  
|Adoption of new authoritative guidance for sabbatical leave, net of tax of $2,200               |  |               |   |  |                                           |          |   |                          |   | (3,800   | ) |  |   |        |   |  |   | (3,800    | )
|Components of comprehensive income:                                                             |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Net income                                                                                      |  |               |   |  |                                           |          |   |                          |   | 213,700  |   |  |   |        |   |  |   | 213,700   |  
|Net change in unrealized loss on investments, net of tax of $85                                 |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | (237    | ) |  |   | (237      | )
|Foreign currency translation adjustments, net of tax of $159                                    |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | 4,486   |   |  |   | 4,486     |  
|Net change in unrealized loss on derivative instruments                                         |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | (2,249  | ) |  |   | (2,249    | )
|Net change in unrealized loss on pension obligation, net of tax of $207                         |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | 681     |   |  |   | 681       |  
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Comprehensive income                                                                            |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   | 216,381   |  
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Issuance of common stock under employee compensation plans, net                                 |  | 1,626          |   |  |                                           | 44,946    |   |                          |   |         |   |  |   |        |   |  |   | 44,946    |  
|Income tax benefits realized from activity in employee stock plans                              |  |               |   |  |                                           | 2,158     |   |                          |   |         |   |  |   |        |   |  |   | 2,158     |  
|Stock-based compensation                                                                        |  |               |   |  |                                           | 28,299    |   |                          |   |         |   |  |   |        |   |  |   | 28,299    |  
|Repurchases of common stock                                                                     |  | (21,734        | ) |  |                                           | (249,784  | ) |                          |   | (343,818 | ) |  |   |        |   |  |   | (593,602  | )
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Balance, December 31, 2007                                                                      |  | 105,344        |   |  |                                           | 1,219,533 |   |                          |   | 304,278  |   |  |   | 5,276   |   |  |   | 1,529,087 |  
|Components of comprehensive income:                                                             |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Net loss                                                                                        |  |               |   |  |                                           |          |   |                          |   | (115,710 | ) |  |   |        |   |  |   | (115,710  | )
|Net change in unrealized loss on investments, net of tax of $(85)                               |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | (10,647 | ) |  |   | (10,647   | )
|Foreign currency translation adjustments, net of tax of $1,582                                  |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | (7,059  | ) |  |   | (7,059    | )
|Net change in unrealized loss on derivative instruments                                         |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | 1,441   |   |  |   | 1,441     |  
|Net change in unrealized loss on pension obligation                                             |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | (847    | ) |  |   | (847      | )
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Comprehensive loss                                                                              |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   | (132,822  | )
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Issuance of common stock under employee compensation plans, net                                 |  | 721            |   |  |                                           | 13,335    |   |                          |   | (263     | ) |  |   |        |   |  |   | 13,072    |  
|Income tax provision for activity in employee stock plans                                       |  |               |   |  |                                           | (2,620    | ) |                          |   |         |   |  |   |        |   |  |   | (2,620    | )
|Stock-based compensation                                                                        |  |               |   |  |                                           | 33,074    |   |                          |   |         |   |  |   |        |   |  |   | 33,074    |  
|Repurchases of common stock                                                                     |  | (8,976         | ) |  |                                           | (104,685  | ) |                          |   | (88,324  | ) |  |   |        |   |  |   | (193,009  | )
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Balance, December 31, 2008                                                                      |  | 97,089         |   |  |                                           | 1,158,637 |   |                          |   | 99,981   |   |  |   | (11,836 | ) |  |   | 1,246,782 |  
|Adoption of new authoritative guidance for other-than-temporary impairments for debt securities |  |               |   |  |                                           |          |   |                          |   | 3,491    |   |  |   | (3,491  | ) |  |   |          |  
|Components of comprehensive income:                                                             |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Net loss                                                                                        |  |               |   |  |                                           |          |   |                          |   | (85,235  | ) |  |   |        |   |  |   | (85,235   | )
|Net change in unrealized loss on investments                                                    |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | 7,281   |   |  |   | 7,281     |  
|Foreign currency translation adjustments, net of tax of $(740)                                  |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | 3,168   |   |  |   | 3,168     |  
|Net change in unrealized loss on derivative instruments                                         |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | 1,010   |   |  |   | 1,010     |  
|Net change in unrealized loss on pension obligation, net of tax of $21                          |  |               |   |  |                                           |          |   |                          |   |         |   |  |   | (801    | ) |  |   | (801      | )
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Comprehensive loss                                                                              |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   | (74,577   | )
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Issuance of common stock under employee compensation plans, net                                 |  | 1,235          |   |  |                                           | 10,740    |   |                          |   |         |   |  |   |        |   |  |   | 10,740    |  
|Income tax provision for activity in employee stock plans                                       |  |               |   |  |                                           | (2,577    | ) |                          |   |         |   |  |   |        |   |  |   | (2,577    | )
|Stock-based compensation                                                                        |  |               |   |  |                                           | 30,065    |   |                          |   |         |   |  |   |        |   |  |   | 30,065    |  
|Repurchases of common stock                                                                     |  | (1,457         | ) |  |                                           | (17,645   | ) |                          |   | (13,011  | ) |  |   |        |   |  |   | (30,656   | )
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  
|Balance, December 31, 2009                                                                      |  | 96,867         |   |  | $                                         | 1,179,220 |   |                          | $ | 5,226    |   |  | $ | (4,669  | ) |  | $ | 1,179,777 |  
|                                                                                                |  |                |   |  |                                           |           |   |                          |   |          |   |  |   |         |   |  |   |           |  

See accompanying Notes to Consolidated Financial Statements.



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.     Description of the Business

Novellus Systems, Inc., together with its subsidiaries,
is primarily a supplier of semiconductor manufacturing equipment used in the fabrication of integrated circuits. We are focused on delivering innovative interconnect products and technologies that meet the increasingly complex and demanding needs of
the worlds largest semiconductor manufacturers. The semiconductor manufacturing equipment that we build, market and service provides todays semiconductor device manufacturers with high productivity and low total cost of ownership. The
segment of our business serving this area is the Semiconductor Group. Novellus also develops, manufactures, sells and supports grinding, lapping and polishing equipment for a broad spectrum of industrial applications. The segment of our business
serving this market is the Industrial Applications Group.

Note 2.    Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying Consolidated Financial Statements include our accounts and the accounts of our subsidiaries after elimination of all significant
intercompany account balances and transactions.

Our Consolidated Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We evaluate estimates on an ongoing basis, including those related to recognition of revenue, valuation of investments, adequacy of the allowance
for doubtful accounts, valuation of inventory, valuation of deferred tax assets, valuation of goodwill and other intangible assets, adequacy of warranty obligations, measurement of restructuring and impairment charges, compliance with hedge
accounting for derivatives, contingencies and litigation, and measurement of stock-based compensation. We base estimates on historical experience and on other market based assumptions that we believe to be reasonable under current circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our intent is to accurately state assets and liabilities given facts known at the time of
measurement. Actual results may differ from these estimates.

We have evaluated subsequent events through February 24, 2010, the issuance
date of our financial statements.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sellers price is
fixed or determinable, and collection of the receivable is reasonably assured. It is common for us to ship equipment and transfer title at the point of delivery to the buyer under the terms of our contractual relationship. When uncertainty exists as
to customer acceptance due to customer-specific performance conditions, we defer revenue recognition until acceptance and record the deferred revenue and associated costs of sales in deferred profit on our Consolidated Balance Sheet.

Our equipment sales generally have two elements: the equipment and installation of that equipment. While installation is not essential to the functionality
of the delivered equipment, final payment is not billable until customer acceptance for many of our sales contracts. Provided that we meet defined customer acceptance experience levels with both the customer and the specific type of equipment, we
recognize revenue for the equipment element upon shipment and transfer of title. For those sales contracts where final payment is not billable until customer acceptance, the final payment (which typically exceeds the fair value of the installation)
is recognized upon customer acceptance.



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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

Revenue related to sales of spare parts is recognized upon shipment. Revenue
related to maintenance and service contracts is recognized ratably over the duration of the contracts. Unearned maintenance and service contract revenue as well as unearned revenue from certain equipment sales arrangements are included in other
accrued liabilities.

Cash and Cash Equivalents

We consider all highly liquid debt instruments with insignificant interest rate risk and original maturities of 90 days or less to be cash equivalents.

Restricted Cash and Cash Equivalents

We maintain certain amounts of cash and cash equivalents on deposit which are restricted from general use. These amounts are used primarily to secure our Euro-based credit facility (see Note 11). The
fair value of restricted cash and cash equivalents is determined in the same manner as cash and short-term investments.

Investments

Our investments are designated as available-for-sale securities and are reported at fair value.
Investments with original maturities greater than 90 days which are available for use in current operations are considered to be short-term investments, except for our investments in auction-rate-securities. Our auction-rate securities with
scheduled maturities in excess of one-year from the balance sheet date are considered long-term as there is no active market to sell these securities. In valuing our investments we predominantly use market data or data derived from market sources.
When markets are not considered to be active we may use (a) observable market prices in less active markets, (b) non-binding market prices that are corroborated by observable market data, or (c) quoted market prices for similar
instruments. When market data is not available, we employ a cash-flow-based modeling technique to arrive at the recorded fair value. This process involves incorporating our assumptions about the anticipated term and yield that a market participant
would require to purchase the security in the marketplace. Temporary unrealized gains and losses, net of tax, are recorded within other comprehensive income (loss) (OCI). Changes in the fair value of our investments impact our net income only when
such investments are sold or when an other than temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by using the amortized cost of the specific security sold.

Allowance for Doubtful Accounts

We evaluate our allowance for doubtful accounts based on a combination of factors. In circumstances where specific invoices are deemed to be uncollectible, we provide a specific allowance for bad debt
against the amount due to reduce the net recognized receivable to the amount we reasonably believe will be collected. We also provide allowances based on our write-off history. We charge accounts receivable balances against our allowance for
doubtful accounts once we have concluded our collection efforts are unsuccessful. Accounts receivable is



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considered past due when not paid in accordance with the contractual terms of the related arrangement. Our provision for bad debt was $2.7 million and $0.9 million for the years ended
December 31, 2008 and 2007, respectively. For the year ended December 31, 2009, we recognized a net benefit for bad debt of $0.8 million due to the recovery of amounts previously reserved.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. We periodically assess the recoverability of all inventories, including purchased and spare parts, work-in-process, finished goods and evaluation systems, to
determine whether adjustments are required to record inventory at the lower of cost or market. Inventory that we determine to be obsolete or in excess of our forecasted usage is written down to its estimated realizable value if less than cost based
on our assumptions about future demand and market conditions. If actual demand is lower than our forecast, additional inventory write-downs may be required.

Income Taxes

We recognize deferred tax assets and liabilities using statutory tax
rates for temporary differences between the book and tax basis of recorded assets and liabilities, net operating losses and tax credit carryforwards. As of December 31, 2009, we had net deferred tax assets of $98.1 million, net of our valuation
allowance of $27.6 million. We believe that our net deferred tax assets will be realized due to anticipated future income and our ability to carry back losses to prior years. We have considered all sources of taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation allowance. If in the future we determine that we would not be able to realize all or part of our net deferred tax assets, an additional valuation allowance would decrease
income in the period in which such determination is made.

We evaluate uncertain tax positions on a quarterly basis. This evaluation is based
on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Any change in measurement of these liabilities would result in the recognition of an
additional charge or benefit to our income tax provision. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes.

Property and Equipment

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



|                                         |  |              
|---------------------------------------- |  | -------------
|Manufacturing and engineering equipment  |  | 3  10 years 
|Office furniture, fixtures and equipment |  | 3    7 years
|Buildings and leasehold improvements     |  | 3  39 years 

Goodwill and Other Intangible Assets

We review our long-lived assets, including goodwill and other intangible assets,
for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We perform our goodwill impairment test in the fourth quarter of each fiscal year separately
for each of our reporting units. We define reporting units as the individual segments in which we operate. The first



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step of the test identifies whether potential impairment may have occurred, and the second step measures the amount of the impairment, if any. Impairment is present when the carrying amount of
net assets exceeds the fair value estimated during the first step of our impairment test. The estimation of the fair value of each reporting unit is determined based upon data generated from a discounted cash flow model, known as the income
approach, and a comparable market price model, known as the market approach. The income approach requires us to make a number of assumptions, including future growth rates, expense trends and working capital turnover ratios for each reporting unit
over an extended period of time. Although the assumptions we utilize are consistent with the assumptions used to generate our annual strategic plan, there is significant judgment in the timing and level of future cash flows attributable to each
reporting unit. If our future operating results do not meet current forecasts or if we have a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or both of our reporting units,
future impairment charges related to goodwill or long-lived assets may be required. We amortize our intangible assets with definite lives on a straight-line basis over their estimated useful lives.

Warranty Obligations

We generally provide warranty coverage for a predetermined amount of time on systems and modules for material and labor to repair and service the equipment. We record the estimated cost of warranty coverage to cost of sales when revenue is
recognized. The estimated cost of warranty is determined by the warranty term and the historical labor and material costs for a specific product. We review the actual product failure and material usage rates on a quarterly basis and adjust our
warranty liability as necessary. Product warranty obligations that extend for more than 12 months from our balance sheet date are included in other non-current liabilities.

Restructuring and Impairment Charges

We record a liability for costs associated with an exit or disposal activity when the liability is incurred, rather than when the exit or disposal plan is approved. Accordingly, restructuring accruals are
recorded when management initiates an exit plan that will cause us to incur costs that have no future economic benefit. The restructuring accrual related to vacant facilities is calculated net of estimated sublease income. Sublease income is
estimated based on expected occupancy rates and current market rates for similar properties. If we are unable to sublet the vacated properties on a timely basis or if we are forced to sublet them at lower rates due to changes in market conditions,
we will adjust the accruals accordingly.

Contingencies and Litigation

We assess the probability of adverse judgments in connection with current and threatened litigation. We accrue the cost of an adverse judgment if, in our
estimation, the adverse outcome is probable and we can reasonably estimate the ultimate cost.

Foreign Currency
Translation

We translate assets and liabilities of non-U.S. dollar functional currency subsidiaries into dollars at the rates of
exchange in effect at the balance sheet date. Revenue and expenses are translated using rates that approximate those in effect during the period. Translation gains or losses related to these foreign subsidiaries are included as a component of
accumulated OCI.



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Derivatives

We enter into foreign currency forward exchange contracts with maturities of less than 12 months to mitigate the impact of currency exchange fluctuations on (a) probable anticipated system sales
denominated in Japanese yen (b) our net investment in certain foreign subsidiaries and (c) existing monetary asset and liability balances denominated in foreign currencies. All derivatives are recorded at fair value in either prepaid and
other current assets or other accrued liabilities. We report cash flows from derivative instruments in cash flows from operating activities. We used the income approach to value our derivative instruments using observable inputs other than quoted
prices, including interest rates and credit risk.

Shipping and Handling Costs

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

Advertising Expenses

We expense advertising costs as incurred. Advertising
expenses for 2009, 2008 and 2007 were $0.8 million, $1.1 million and $2.2 million, respectively.

Concentrations and Other Risks

We use financial instruments that potentially subject us to concentrations of credit
risk. Such instruments include cash equivalents, investments, accounts receivable and financial instruments used in hedging activities. We invest our cash in cash deposits, money market funds, commercial paper, certificates of deposit or readily
marketable debt securities. We place our investments with high-credit quality financial institutions, which limits the credit exposure from any one financial institution or instrument. Excluding impairment charges relating to auction-rate
securities, we have not historically recognized significant losses on our short-term investments. As of December 31, 2009, we had $71.1 million time-based deposits in excess of federally insured amounts.

We sell a significant portion of our systems to a limited number of customers. Net sales to our ten largest customers in 2009, 2008 and 2007 accounted for
71%, 60% and 59% of our total net sales, respectively. Three customers accounted for 22%, 12% and 11% of receivables as of December 31, 2009. Two customers accounted for 21% and 11% of receivables as of December 31, 2008. We expect sales
of our products to relatively few customers will continue to account for a high percentage of our net sales in the foreseeable future. None of our customers have entered into long-term purchase agreements that would require them to purchase our
products.

We perform ongoing credit evaluations of our customers financial condition and generally require no collateral. Based on a
customers financial strength we may require prepayment or an irrevocable letter of credit. We have an exposure to non-performance by counterparties on the foreign exchange contracts we use in hedging activities. These counterparties are large
international financial institutions, and to date no such counterparty has failed to meet its financial obligations to us. We do not believe there is a significant risk of non-performance by these counterparties because we continuously monitor our
positions, the credit ratings of such counterparties, and the amount of contracts we enter into with any one party.

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



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Stock-Based Compensation Expense

Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite
service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could
materially impact our operating results. See Note 17 for the significant estimates used to calculate our stock-based compensation expense.

Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting
Standards Board (FASB) issued authoritative guidance to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This guidance was effective for the Companys interim reporting period ended on September 26, 2009
and only impacts references for accounting guidance.

In September 2006, the FASB issued new authoritative guidance regarding fair value
measurements. This guidance establishes specific criteria for the fair value measurements of financial and nonfinancial assets and liabilities that are already subject to fair value under current accounting rules. This guidance also requires
expanded disclosures related to fair value measurements. We fully adopted this guidance on January 1, 2009. See Note 4 for information about fair value measurements.

In December 2007, the FASB issued new authoritative guidance regarding business combinations that amends the provisions related to the initial recognition and measurement, subsequent measurement and
disclosure of assets and liabilities arising from contingencies in a business combination. Under this guidance, an entity is generally required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date. It further requires acquisition-related costs to be recognized separately from the acquisition and expensed as incurred, restructuring costs to be expensed in periods subsequent to the
acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to impact the provision for income taxes. In addition, acquired in-process research and
development is capitalized as an intangible asset and amortized over its estimated useful life. We adopted this guidance on January 1, 2009. The adoption did not have a significant impact on our Consolidated Financial Statements.

In March 2008, the FASB issued new authoritative guidance which requires enhanced disclosures about an entitys derivative and hedging activities. We
adopted this guidance on January 1, 2009. See Note 6 for the required disclosures.

In April 2009, the FASB issued new authoritative
guidance which amends the requirements for the recognition and measurement of other-than-temporary impairments for debt securities by modifying the pre-existing intent and ability indicator. Under this guidance, an other-than-temporary
impairment is triggered for impaired debt securities when there is intent to sell the security, it is more likely than not that the security will be required to be sold before recovery, or when recovery of the entire amortized cost of the security
is not expected. This guidance also changes the presentation of other-than-temporary impairments in the income statement for those impairments attributed to credit losses. We adopted this guidance on March 29, 2009. As a result, we recorded an
adjustment of $3.5 million to increase beginning retained earnings and accumulated OCI. See Note 4 for the required disclosures.



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In April 2009, the FASB issued additional authoritative guidance for estimating fair value when the
volume and level of activity for the asset or liability have significantly decreased. This guidance also includes guidance on identifying circumstances that indicate when a transaction is not orderly and requires disclosure of the inputs and
valuation techniques used to measure fair value and a discussion of changes in valuation techniques. We adopted this guidance on March 29, 2009. The adoption did not have a significant impact on our Consolidated Financial Statements.

In May 2009, the FASB issued new authoritative guidance which established general standards of accounting for and disclosures of events that
occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted this guidance for our second quarter ended June 27, 2009. The adoption did not have a significant impact on our Consolidated
Financial Statements. We have disclosed the date through which subsequent events have been evaluated in the Principles of Consolidation and Basis of Presentation section of this note.

In August 2009, the FASB issued authoritative guidance which reaffirms the existing definition of fair value and reintroduces the concept of entry value into the determination of fair value of
liabilities. Entry value is the amount an entity would receive to enter into an identical liability. We adopted this guidance during our fourth quarter of 2009. The adoption did not have a significant impact on our Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued new authoritative guidance addressing revenue arrangements with multiple deliverables. This guidance requires revenue to be allocated to multiple-elements based on their
relative selling price. Under the relative selling price method, a best estimate of the selling price may be used if vendor-specific or other third-party evidence of fair value is not available. The guidance will eliminate our use of the residual
method to allocate the arrangement consideration. This guidance is effective for our fiscal year beginning on or after January 1, 2011 with early adoption permitted provided that the guidance is retroactively applied to the beginning of the
year of adoption. We are currently evaluating the potential impact of this guidance on our Consolidated Financial Statements.

In January
2010, the FASB amended the disclosure requirements for the fair value measurements for recurring and nonrecurring assets and liabilities. The guidance provides that an entity shall disclose any significant transfers of assets and liabilities between
those that are actively traded in markets (level 1) and those that are not actively traded but have observable inputs (level 2), and the reasons for the transfers. This guidance is effective for interim or fiscal periods beginning after
December 15, 2009, which will be the Companys first quarter of fiscal 2010. The guidance also provides that disclosures for assets and liabilities with significant unobservable inputs (level 3) should separately disclose purchases, sales,
issuances and settlements. This guidance is effective for our fiscal year beginning January 1, 2010. We do not expect the adoption of this guidance to have a significant impact on our Consolidated Financial Statements.

Note 3.    Net Income (Loss) Per Share

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

Diluted net income
per share is computed by dividing net income by the weighted-average number of common and potential common shares outstanding during the period. Potential common shares represent the number of additional common shares that would have been
outstanding if the dilutive potential shares had been issued,



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which consist primarily of stock options and restricted stock awards. For purposes of computing diluted net income per share, weighted average potential common shares do not include potential
common shares that are either anti-dilutive under the treasury stock method or restricted shares subject to performance conditions that have not been met. Accordingly, potential common shares of 13.8 million for the year ended December 31,
2007 were excluded from the computation.

Diluted net loss per share excludes potential common shares, as the effect would be anti-dilutive.
As such, the denominator used in computing both basic and diluted net loss per share for the years ended December 31, 2009 and 2008 are the same. The number of potential common shares that could dilute basic net income per share was
20.1 million and 22.6 million for the years ended December 31, 2009 and 2008, respectively.

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



|                                            |  |                                          |         |   |      |   |          |      |  |   |        
|------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------
|                                            |  | Years Ended December 31,                
|                                            |  | 2009                                     |         |   | 2008 |   |          | 2007
|                                            |  | (In thousands, except per share amounts)
|Numerator:                                  |  |                                          |         |   |      |   |          |      |  |   |        
|Net income (loss)                           |  | $                                        | (85,235 | ) |      | $ | (115,710 | )    |  | $ | 213,700
|                                            |  |                                          |         |   |      |   |          |      |  |   |        
|Denominator:                                |  |                                          |         |   |      |   |          |      |  |   |        
|Basic weighted-average shares outstanding   |  |                                          | 96,487  |   |      |   | 98,083   |      |  |   | 119,782
|Dilutive potential common shares            |  |                                          |        |   |      |   |         |      |  |   | 2,133  
|                                            |  |                                          |         |   |      |   |          |      |  |   |        
|Diluted weighted-average shares outstanding |  |                                          | 96,487  |   |      |   | 98,083   |      |  |   | 121,915
|                                            |  |                                          |         |   |      |   |          |      |  |   |        
|Basic net income (loss) per share           |  | $                                        | (0.88   | ) |      | $ | (1.18    | )    |  | $ | 1.78   
|Diluted net income (loss) per share         |  | $                                        | (0.88   | ) |      | $ | (1.18    | )    |  | $ | 1.75   

Note 
4.    Fair Value of Financial Instruments

Fair Value Hierarchy

We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and we
consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

Our financial instruments consist primarily of money market funds, municipal bonds, variable-rate demand notes, corporate bonds, auction-rate securities and derivative instruments. Three levels of inputs
are used to measure the fair value of our investments:



|          |  |                                                                                                                                                     
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1  |  | Quoted prices in active markets for identical assets or liabilities.                                                                                
|          | 
|          |  | We classify our money market funds as Level 1 instruments as they are traded in active markets with sufficient volume and frequency of transactions.



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|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|Level 2  |  | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions
(less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or
liabilities.                                                                                                          
|          | 
|          |  | We classify our municipal bonds, variable-rate demand notes and corporate bonds as Level 2 instruments due to our use of observable market prices in less active markets or, when
observable market prices were not available, our use of non-binding market prices that are corroborated by observable market data or quoted market prices for similar instruments. We classify our derivative instruments as Level 2 instruments due to
our use of observable inputs other than quoted prices, including interest rates and credit risk.
|          | 
|Level 3  |  | Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.                                                                                                                                                                                                                                                                                                                                                                                                          
|          | 
|          |  | We classify our auction-rate securities as Level 3 instruments as we use a cash-flow-based valuation model to measure the fair value of these securities that requires the use of
significant unobservable inputs. Our valuation of these securities incorporates our assumptions about the anticipated term and yield that a market participant would require to purchase such securities in the marketplace. See further discussion on
auction-rate securities below.                                                                   

Financial Instruments Measured at Fair Value on a Recurring Basis

Financial instruments measured at fair value on a recurring basis, excluding accrued interest components, consist of the following types of
instruments:



|                           |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|-------------------------- |  | ---------------------------------------------------------- | ------- | ------------------------------------------- | - | -------------------------------------- |  | - | ------ |  | - | -------
|                           |  | Fair Value Measurements as of December 31, 2009            |         | Total                                      
|                           |  | Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) |         | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservableInputs(Level 3) | 
|                           |  | (In thousands)                                            
|Assets                     |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Money market funds         |  | $                                                          | 169,914 |                                             | $ |                                       |  | $ |       |  | $ | 169,914
|Municipal bonds            |  |                                                            |        |                                             |   | 313,156                                |  |   |       |  |   | 313,156
|Variable-rate demand notes |  |                                                            |        |                                             |   | 21,908                                 |  |   |       |  |   | 21,908 
|Corporate bonds            |  |                                                            |        |                                             |   | 6,641                                  |  |   |       |  |   | 6,641  
|Auction-rate securities    |  |                                                            |        |                                             |   |                                       |  |   | 78,763 |  |   | 78,763 
|Derivative assets (1)      |  |                                                            |        |                                             |   | 137                                    |  |   |       |  |   | 137    
|                           |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Total assets               |  | $                                                          | 169,914 |                                             | $ | 341,842                                |  | $ | 78,763 |  | $ | 590,519
|                           |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Liabilities                |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Derivative liabilities (1) |  | $                                                          |        |                                             | $ | 322                                    |  | $ |       |  | $ | 322    
|                           |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        



|(1) | See additional disclosures relating to our derivatives and hedging activities in Note 6.
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|                           |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|-------------------------- |  | ---------------------------------------------------------- | ------- | ------------------------------------------- | - | -------------------------------------- |  | - | ------ |  | - | -------
|                           |  | Fair Value Measurements as of December 31, 2008            |         | Total                                      
|                           |  | Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) |         | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservableInputs(Level 3) | 
|                           |  | (In thousands)                                            
|Assets                     |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Money market funds         |  | $                                                          | 254,323 |                                             | $ |                                       |  | $ |       |  | $ | 254,323
|Municipal bonds            |  |                                                            |        |                                             |   | 259,775                                |  |   |       |  |   | 259,775
|Variable-rate demand notes |  |                                                            |        |                                             |   | 18,504                                 |  |   |       |  |   | 18,504 
|Auction-rate securities    |  |                                                            |        |                                             |   |                                       |  |   | 91,873 |  |   | 91,873 
|Derivative assets          |  |                                                            |        |                                             |   | 2,204                                  |  |   |       |  |   | 2,204  
|                           |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Total assets               |  | $                                                          | 254,323 |                                             | $ | 280,483                                |  | $ | 91,873 |  | $ | 626,679
|                           |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Liabilities                |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Derivative liabilities     |  | $                                                          |        |                                             | $ | 4,049                                  |  | $ |       |  | $ | 4,049  
|                           |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        

Financial instruments measured and recorded at fair value on a
recurring basis, excluding accrued interest components, were presented on our Consolidated Balance Sheets as follows:



|                                                 |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|------------------------------------------------ |  | ---------------------------------------------------------- | ------- | ------------------------------------------- | - | -------------------------------------- |  | - | ------ |  | - | -------
|                                                 |  | Fair Value Measurements as of December 31, 2009            |         | Total                                      
|                                                 |  | Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) |         | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservableInputs(Level 3) | 
|                                                 |  | (In thousands)                                            
|Assets                                           |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Cash and cash equivalents                        |  | $                                                          | 108,839 |                                             | $ |                                       |  | $ |       |  | $ | 108,839
|Short-term investments                           |  |                                                            |        |                                             |   | 341,705                                |  |   |       |  |   | 341,705
|Prepaid and other current assets (1)             |  |                                                            |        |                                             |   | 137                                    |  |   |       |  |   | 137    
|Non-current restricted cash and cash equivalents |  |                                                            | 61,075  |                                             |   |                                       |  |   |       |  |   | 61,075 
|Long-term investments                            |  |                                                            |        |                                             |   |                                       |  |   | 78,763 |  |   | 78,763 
|                                                 |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Total assets                                     |  | $                                                          | 169,914 |                                             | $ | 341,842                                |  | $ | 78,763 |  | $ | 590,519
|                                                 |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|                                                 |  |                                                            |         |                                            
|Liabilities                                      |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Other accrued liabilities (1)                    |  | $                                                          |        |                                             | $ | 322                                    |  | $ |       |  | $ | 322    
|                                                 |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        



|(1) | See additional disclosures relating to our derivatives and hedging activities in Note 6.
|--- | ----------------------------------------------------------------------------------------



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|                                              |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|--------------------------------------------- |  | ---------------------------------------------------------- | ------- | ------------------------------------------- | - | -------------------------------------- |  | - | ------ |  | - | -------
|                                              |  | Fair Value Measurements as of December 31, 2008            |         | Total                                      
|                                              |  | Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) |         | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservableInputs(Level 3) | 
|                                              |  | (In thousands)                                            
|Assets                                        |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Cash and cash equivalents                     |  | $                                                          | 137,504 |                                             | $ | 6,458                                  |  | $ |       |  | $ | 143,962
|Short-term investments                        |  |                                                            |        |                                             |   | 271,821                                |  |   |       |  |   | 271,821
|Restricted cash and cash equivalents, current |  |                                                            | 116,819 |                                             |   |                                       |  |   |       |  |   | 116,819
|Prepaid and other current assets              |  |                                                            |        |                                             |   | 2,204                                  |  |   |       |  |   | 2,204  
|Long-term investments                         |  |                                                            |        |                                             |   |                                       |  |   | 91,873 |  |   | 91,873 
|                                              |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Total assets                                  |  | $                                                          | 254,323 |                                             | $ | 280,483                                |  | $ | 91,873 |  | $ | 626,679
|                                              |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|                                              |  |                                                            |         |                                            
|Liabilities                                   |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        
|Other accrued liabilities                     |  | $                                                          |        |                                             | $ | 4,049                                  |  | $ |       |  | $ | 4,049  
|                                              |  |                                                            |         |                                             |   |                                        |  |   |        |  |   |        

The table below presents a reconciliation of all financial instruments
measured at fair value on a recurring basis using significant unobservable inputs (Level 3). We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the
valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses
presented below include changes in the fair value related to both observable and unobservable inputs. All Level 3 financial instruments are auction-rate securities.



|                                              |  |                                                                      |         |   |                  |   |         |  
|--------------------------------------------- |  | -------------------------------------------------------------------- | ------- | - | ---------------- | - | ------- | -
|                                              |  | Fair Value MeasurementsUsing SignificantUnobservable Inputs(Level 3) |        
|                                              |  | December 31,2009                                                     |         |   | December 31,2008 |  
|                                              |  | (In thousands)                                                       |        
|Balance, beginning of period                  |  | $                                                                    | 91,873  |   |                  | $ |        |  
|Transfers in                                  |  |                                                                      |        |   |                  |   | 123,420 |  
|Realized and unrealized gains (losses), net   |  |                                                                      |         |   |                  |   |         |  
|Included in net income (loss)                 |  |                                                                      |        |   |                  |   | (3,491  | )
|Included in other comprehensive income (loss) |  |                                                                      | 5,715   |   |                  |   | (12,961 | )
|Settlements                                   |  |                                                                      | (18,825 | ) |                  |   | (15,095 | )
|                                              |  |                                                                      |         |   |                  |   |         |  
|Balance, end of period                        |  | $                                                                    | 78,763  |   |                  | $ | 91,873  |  
|                                              |  |                                                                      |         |   |                  |   |         |  

Auction-rate securities include auction-rate notes and auction-rate preferred shares of tax-exempt closed-end municipal
funds. Our auction-rate notes consist of student loans that are substantially backed by the federal government. Due to auction failures in the marketplace, we will not have access to these funds unless (a) future auctions are successful,
(b) the securities are called by the issuer, (c) we sell the securities in a secondary market, or (d) the underlying notes mature. Currently, there are no active secondary markets. As of December 31, 2009, we have recorded a
cumulative temporary impairment loss of $10.7 million within OCI based upon our assessment of the fair value of these securities. We believe that this impairment is temporary as we do not intend to sell these securities and we do not believe we will
be required to sell these securities before recovery of their amortized cost basis, and based on our credit quality assessment we expect to recover the amortized cost basis of these securities.



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Fair Value of Other Financial Instruments

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



|                            |  |                |         |                     |   |               |  |                     |         |  |   |        
|--------------------------- |  | -------------- | ------- | ------------------- | - | ------------- |  | ------------------- | ------- |  | - | -------
|                            |  | December 31,  
|                            |  | 2009           |         | 2008               
|                            |  | CarryingValue  |         | Estimated FairValue |   | CarryingValue |  | Estimated FairValue
|                            |  | (In thousands)
|Assets                      |  |                |         |                     |   |               |  |                     |         |  |   |        
|Cash                        |  | $              | 33,208  |                     | $ | 33,208        |  | $                   | 40,370  |  | $ | 40,370 
|Accrued interest receivable |  |                | 3,698   |                     |   | 3,698         |  |                     | 4,139   |  |   | 4,139  
|Other investments           |  |                | 13,920  |                     |   | 13,920        |  |                     | 10,596  |  |   | 10,596 
|Non-current restricted cash |  |                | 72,032  |                     |   | 72,032        |  |                     | 2,883   |  |   | 2,883  
|                            |  |                |         |                     |   |               |  |                     |         |  |   |        
|Total assets                |  | $              | 122,858 |                     | $ | 122,858       |  | $                   | 57,988  |  | $ | 57,988 
|                            |  |                |         |                     |   |               |  |                     |         |  |   |        
|                            |  |                |         |                    
|Liabilities                 |  |                |         |                     |   |               |  |                     |         |  |   |        
|Current debt obligations    |  | $              | 13      |                     | $ | 13            |  | $                   | 112,907 |  | $ | 112,254
|Long-term debt obligations  |  |                | 114,147 |                     |   | 114,599       |  |                     |        |  |   |       
|                            |  |                |         |                     |   |               |  |                     |         |  |   |        
|Total liabilities           |  | $              | 114,160 |                     | $ | 114,612       |  | $                   | 112,907 |  | $ | 112,254
|                            |  |                |         |                     |   |               |  |                     |         |  |   |        

The carrying value of cash, accrued interest receivable and
non-current restricted cash approximates fair value because of the short maturity of those instruments. Other investments primarily relate to corporate owned life insurance contracts used to offset our deferred compensation obligations. These
investments have a determinable cash surrender value, which is the best available evidence of fair value. Accrued interest receivable and other investments are classified within short-term investments on our Consolidated Balance Sheets. Our debt
obligations are not publicly traded and are primarily denominated in Euros. The estimated fair value of our debt obligations is based primarily on a market approach, comparing our interest rates to those rates we believe we would reasonably receive
upon re-entry into the market. Judgment is required to estimate the fair value, using available market information and appropriate valuation methods.



|See | additional disclosures regarding our investments in Note 5.
|--- | -----------------------------------------------------------

Note  5.    Investments

All of our investments are classified as
available-for-sale. The cost and estimated fair value of our investments are as follows:



|                           |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|-------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                           |  | December 31, 2009
|                           |  | Cost              |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Estimated FairValue
|                           |  | (In thousands)   
|Municipal bonds            |  | $                 | 309,277 |                      | $ | 3,935                 |  | $ | (56                 | ) |  | $ | 313,156
|Variable-rate demand notes |  |                   | 21,908  |                      |   |                      |  |   |                    |   |  |   | 21,908 
|Corporate bonds            |  |                   | 6,654   |                      |   | 8                     |  |   | (21                 | ) |  |   | 6,641  
|Auction-rate securities    |  |                   | 89,500  |                      |   |                      |  |   | (10,737             | ) |  |   | 78,763 
|                           |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                      |  | $                 | 427,339 |                      | $ | 3,943                 |  | $ | (10,814             | ) |  | $ | 420,468
|                           |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                           |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|-------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                           |  | December 31, 2008
|                           |  | Cost              |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                           |  | (In thousands)   
|Municipal bonds            |  | $                 | 251,020 |                      | $ | 2,730                 |  | $ | (432                | ) |  | $ | 253,318
|Variable-rate demand notes |  |                   | 18,500  |                      |   | 4                     |  |   |                    |   |  |   | 18,504 
|Auction-rate securities    |  |                   | 104,834 |                      |   |                      |  |   | (12,961             | ) |  |   | 91,873 
|                           |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                      |  | $                 | 374,354 |                      | $ | 2,734                 |  | $ | (13,393             | ) |  | $ | 363,695
|                           |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        

Also included in our short-term investments balance as of
December 31, 2009 and 2008 were other investments of $13.9 million and $10.6 million, respectively, and interest receivable of $3.7 million and $4.1 million, respectively, that are excluded from the tables above.

The maturities of our investments as of December 31, 2009 are as follows:



|                             |  |                |         |            |   |        
|---------------------------- |  | -------------- | ------- | ---------- | - | -------
|                             |  | Cost           |         | Fair Value
|                             |  | (In thousands)
|Due in less than one year    |  | $              | 149,278 |            | $ | 150,629
|Due in 1 to 3 years          |  |                | 172,966 |            |   | 175,482
|Due in 3 to 5 years          |  |                | 1,500   |            |   | 1,305  
|Due in 5 to 10 years         |  |                | 1,520   |            |   | 1,520  
|Due in greater than 10 years |  |                | 102,075 |            |   | 91,533 
|                             |  |                |         |            |   |        
|Total                        |  | $              | 427,339 |            | $ | 420,469
|                             |  |                |         |            |   |        

Securities with contractual maturities greater than five years consist
of auction-rate securities and variable-rate demand notes. We classify auction-rate securities in long-term investments on our Consolidated Balance Sheets as they are not readily available to us due to failed auctions in the marketplace. We classify
variable-rate demand notes in short-term investments on our Consolidated Balance Sheets as they are payable on demand.

The breakdown of
investments with unrealized losses as of December 31, 2009 is as follows:



|                        |  |                                         |        |                  |                                          |     |           |       |                  |        |  |           |         |                  |  |   |         |  |   |         |  
|----------------------- |  | --------------------------------------- | ------ | ---------------- | ---------------------------------------- | --- | --------- | ----- | ---------------- | ------ |  | --------- | ------- | ---------------- |  | - | ------- |  | - | ------- | -
|                        |  | In Loss Position for LessThan 12 Months |        |                  | In Loss Position for12 Months or Greater |     |           | Total |                 
|                        |  | FairValue                               |        | UnrealizedLosses |                                          |     | FairValue |       | UnrealizedLosses |        |  | FairValue |         | UnrealizedLosses | 
|                        |  | (In thousands)                          |       
|Municipal bonds         |  | $                                       | 21,444 |                  | $                                        | (56 | )         |       | $                |       |  | $         |        |                  |  | $ | 21,444  |  | $ | (56     | )
|Corporate bonds         |  |                                         | 5,216  |                  |                                          | (21 | )         |       |                  |       |  |           |        |                  |  |   | 5,216   |  |   | (21     | )
|Auction-rate securities |  |                                         |       |                  |                                          |    |           |       |                  | 78,763 |  |           | (10,737 | )                |  |   | 78,763  |  |   | (10,737 | )
|                        |  |                                         |        |                  |                                          |     |           |       |                  |        |  |           |         |                  |  |   |         |  |   |         |  
|Total                   |  | $                                       | 26,660 |                  | $                                        | (77 | )         |       | $                | 78,763 |  | $         | (10,737 | )                |  | $ | 105,423 |  | $ | (10,814 | )
|                        |  |                                         |        |                  |                                          |     |           |       |                  |        |  |           |         |                  |  |   |         |  |   |         |  

The gross unrealized losses related to municipal and corporate bonds are primarily due to fluctuations in interest rates and
quoted market prices. The gross unrealized losses related to auction-rate securities are primarily due to our assumptions about the anticipated term and yield of these investments given the lack of an active market. We review our investment
portfolio for possible impairment on a quarterly basis. We view these unrealized losses as temporary in nature. Impairment is based on an analysis of factors that may have adverse affects on the fair value of the investment. Factors considered in
determining whether a loss is temporary include our intent to sell the



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



security, our ability to hold the security to recovery of its amortized cost basis and our assessment of the credit quality of the security, including whether we expect to recover the amortized
cost of the security.

See additional disclosures regarding the fair value of our investments in Note 4.

Note 6.    Derivative Financial Instruments

We manage our foreign currency exchange risk through foreign currency forward exchange contracts and foreign denominated floating-rate debt to hedge against the short-term impact of currency fluctuations.
We enter into foreign currency forward exchange contracts with maturities generally less than 12 months to mitigate the impact of currency fluctuations on (a) probable system sales denominated in Japanese yen, (b) our net investment in
certain foreign subsidiaries and (c) other monetary asset and liability balances denominated in foreign currencies. We utilize a portion of our foreign denominated floating-rate debt to mitigate the economic impact of our net investment in
certain foreign subsidiaries. As of December 31, 2009, 27.1 million Euros of floating-rate debt was designated as a net investment hedge. All derivatives are recorded at fair value in either prepaid and other current assets or other
accrued liabilities. We report cash flows from derivative instruments in cash flows from operating activities. We use the income approach to value our derivative instruments using observable inputs other than quoted prices, including interest rates
and credit risk.

The notional amounts of outstanding hedge contracts as of December 31, 2009 are as follows:



|                       |  |                |        |                |   |       
|---------------------- |  | -------------- | ------ | -------------- | - | ------
|                       |  | Buy Contracts  |        | Sell Contracts
|                       |  | (In thousands)
|Japanese Yen           |  | $              | 40,217 |                | $ | 46,690
|British Pound Sterling |  |                | 4,556  |                |   | 4,558 
|Malaysian Ringgit      |  |                | 3,497  |                |   | 3,496 
|Chinese Renminbi       |  |                | 3,209  |                |   | 3,687 
|Israeli Shekel         |  |                | 2,285  |                |   | 1,978 
|Indian Rupee           |  |                | 1,804  |                |   | 1,803 
|Korean Won             |  |                | 1,279  |                |   | 1,279 
|Taiwan Dollar          |  |                | 1,308  |                |   | 1,306 
|Swiss Franc            |  |                |       |                |   | 1,453 
|                       |  |                |        |                |   |       
|Total                  |  | $              | 58,155 |                | $ | 66,250
|                       |  |                |        |                |   |       

Cash Flow Hedges.    We designate and
document our foreign currency forward exchange contracts as cash flow hedges on sales transactions in which costs are denominated in U.S. dollars and the related revenues are generated in Japanese yen. We evaluate and calculate the effectiveness of
each hedge at least quarterly, using the dollar offset method, comparing the change in the forward contracts fair value on a spot-to-spot basis to the spot-to-spot change in the anticipated transaction. The effective change is recorded in OCI
until the sale is recognized. Ineffectiveness, along with the excluded time value of the forward contracts, is recorded in net sales as designated at the inception of the forward contract. In the event it becomes probable that an anticipated hedged
transaction will not occur within the specified time period, the gains or losses on the related cash flow hedges are immediately reclassified from accumulated OCI to net sales in the Consolidated Statement of Operations. For the years ended
December 31, 2009, 2008 and 2007, we reclassified losses of $0.7 million, $0.7 million and $1.7 million from accumulated OCI into net sales as a result of the discontinuance of anticipated hedged transactions.

Net Investment Hedges.    We hedge our net investment in certain foreign subsidiaries to reduce economic currency risk. Our
foreign denominated floating-rate debt and foreign currency forward exchange contracts used



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



to hedge this exposure are designated and documented as net investment hedges. The carrying value of the foreign denominated floating-rate debt that is designated as a hedging instrument is
remeasured at each reporting date to reflect the changes in the foreign currency exchange spot rate, with changes since the last remeasurement date recorded within OCI. Effectiveness is evaluated at least quarterly, excluding time value, and hedges
are highly effective when currency pairs and notional amounts on the forward exchange contracts are properly aligned with the net investment in subsidiaries. Changes in the spot-to-spot value are recorded as foreign currency translation adjustments
within OCI. Ineffectiveness, if any, along with the excluded time value of the forward contracts, is recorded in other income (expense), net.

Other Foreign Currency Hedges.    We enter into foreign currency forward exchange contracts to hedge (a) intercompany balances that are denominated in non-functional currencies (b) certain third-party
receivables denominated in Japanese yen and (c) anticipated sales denominated in foreign currency that we do not designate and document as cash flow hedges. The maturities of these contracts are generally less than 12 months. Gains or losses
arising from the remeasurement of these contracts to fair value each period are recorded in other income (expense), net.

The fair value and
balance sheet classification of foreign exchange contract derivatives are as follows:



|                                                              |  |                  |    
|------------------------------------------------------------- |  | ---------------- | ---
|                                                              |  | December 31,2009
|                                                              |  | (In thousands)  
|Prepaid and other current assets:                             |  |                  |    
|Derivative assets designated as hedging instruments:          |  |                  |    
|Net investment hedges                                         |  | $                | 3  
|Derivative assets not designated as hedging instruments:      |  |                  |    
|Other foreign currency hedges                                 |  | $                | 134
|                                                              |  |                  |    
|Total derivative assets (1)                                   |  | $                | 137
|                                                              |  |                  |    
|Other accrued liabilities:                                    |  |                  |    
|Derivative liabilities designated as hedging instruments:     |  |                  |    
|Net investment hedges                                         |  | $                | 5  
|Derivative liabilities not designated as hedging instruments: |  |                  |    
|Other foreign currency hedges                                 |  |                  | 317
|                                                              |  |                  |    
|Total derivative liabilities (1)                              |  | $                | 322
|                                                              |  |                  |    



|(1) | See additional fair value measurement disclosures in Note 4.
|--- | ------------------------------------------------------------



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The following tables summarize the pre-tax effect of foreign exchange contract derivatives by
(a) cash flow hedges, (b) net investment hedges and (c) other foreign currency hedges on OCI and the Consolidated Statements of Operations for the year ended December 31, 2009.

(a)    Cash Flow Hedges:



|                                                                            |  |                  |        |  
|--------------------------------------------------------------------------- |  | ---------------- | ------ | -
|                                                                            |  | December 31,2009 |       
|                                                                            |  | (In thousands)   |       
|Accumulated loss in OCI, beginning of period                                |  | $                | (1,138 | )
|Losses recorded in OCI (effective portion), net                             |  |                  | (119   | )
|Gains reclassified from OCI to net sales (effective portion), net           |  |                  | 1,130  |  
|                                                                            |  |                  |        |  
|Accumulated loss in OCI, end of period                                      |  | $                | (127   | )
|                                                                            |  |                  |        |  
|Gains recorded in net sales related to the ineffective portion, net         |  | $                | 6      |  
|Gains recorded in net sales related to the excluded time value portion, net |  | $                | 15     |  
|Reclassified losses from OCI to net sales due to discontinuance of hedge    |  | $                | (673   | )

We anticipate reclassifying the
accumulated loss recorded as of December 31, 2009 from OCI to net sales within 12 months.

(b)    Net Investment
Hedges:



|                                                                               |  |                  |    
|------------------------------------------------------------------------------ |  | ---------------- | ---
|                                                                               |  | December 31,2009
|                                                                               |  | (In thousands)  
|Gains recorded in OCI (effective portion), net                                 |  | $                | 225
|Gains recorded in other income related to the excluded time value portion, net |  | $                | 106

(c)    Other
Foreign Currency Hedges:



|                                      |  |                            |    
|------------------------------------- |  | -------------------------- | ---
|                                      |  | Year endedDecember 31,2009
|                                      |  | (In thousands)            
|Gains recognized in other income, net |  | $                          | 517

Note 7.    Balance Sheet Details

Inventories



|                          |  |                |         |      |   |        
|------------------------- |  | -------------- | ------- | ---- | - | -------
|                          |  | December 31,  
|                          |  | 2009           |         | 2008
|                          |  | (In thousands)
|Purchased and spare parts |  | $              | 104,833 |      | $ | 139,635
|Work-in-process           |  |                | 32,002  |      |   | 31,101 
|Finished goods            |  |                | 25,378  |      |   | 42,569 
|                          |  |                |         |      |   |        
|Inventories               |  | $              | 162,213 |      | $ | 213,305
|                          |  |                |         |      |   |        

Finished goods include $8.0 million and $13.7 million as of
December 31, 2009 and 2008, respectively, of evaluation systems at customer locations.



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Property and equipment, net



|                                           |  |                |          |   |      |   |          |  
|------------------------------------------ |  | -------------- | -------- | - | ---- | - | -------- | -
|                                           |  | December 31,   |         
|                                           |  | 2009           |          |   | 2008 |  
|                                           |  | (In thousands) |         
|Manufacturing and engineering equipment    |  | $              | 418,391  |   |      | $ | 466,810  |  
|Land, buildings and leasehold improvements |  |                | 259,525  |   |      |   | 258,594  |  
|Office furniture, fixtures and equipment   |  |                | 111,121  |   |      |   | 133,322  |  
|                                           |  |                |          |   |      |   |          |  
|                                           |  |                | 789,037  |   |      |   | 858,726  |  
|Less accumulated depreciation              |  |                | (549,926 | ) |      |   | (586,860 | )
|                                           |  |                |          |   |      |   |          |  
|Property and equipment, net                |  | $              | 239,111  |   |      | $ | 271,866  |  
|                                           |  |                |          |   |      |   |          |  

Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was $42.2 million, $56.3 million and
$59.8 million, respectively.

Accrued warranty

Changes in our accrued warranty liability are as follows:



|                                                                            |  |                |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | December 31,   |        
|                                                                            |  | 2009           |         |   | 2008 |  
|                                                                            |  | (In thousands) |        
|Balance, beginning of period                                                |  | $              | 30,438  |   |      | $ | 54,857  |  
|Warranties issued                                                           |  |                | 25,935  |   |      |   | 74,327  |  
|Settlements                                                                 |  |                | (30,242 | ) |      |   | (94,429 | )
|Net changes in liability for pre-existing warranties, including expirations |  |                | (6,520  | ) |      |   | (4,317  | )
|                                                                            |  |                |         |   |      |   |         |  
|Balance, end of period                                                      |  |                | 19,611  |   |      |   | 30,438  |  
|Less: long-term portion                                                     |  |                | (2,597  | ) |      |   | (4,706  | )
|                                                                            |  |                |         |   |      |   |         |  
|Accrued warranty, current                                                   |  | $              | 17,014  |   |      | $ | 25,732  |  
|                                                                            |  |                |         |   |      |   |         |  

Other accrued liabilities



|                                  |  |                |        |      |   |       
|--------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                  |  | December 31,  
|                                  |  | 2009           |        | 2008
|                                  |  | (In thousands)
|Deferred revenue                  |  | $              | 9,247  |      | $ | 10,793
|Customer advances                 |  |                | 8,655  |      |   | 9,181 
|Deferred compensation obligations |  |                | 12,541 |      |   | 6,989 
|Restructuring reserve             |  |                | 4,587  |      |   | 3,430 
|Other                             |  |                | 14,541 |      |   | 17,140
|                                  |  |                |        |      |   |       
|Accrued other liabilities         |  | $              | 49,571 |      | $ | 47,533
|                                  |  |                |        |      |   |       



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Note 8.    Goodwill and Other Intangible Assets

Goodwill

Changes
in goodwill are as follows:



|                               |  |                    |         |                             |   |         |       |  |   |         |  
|------------------------------ |  | ------------------ | ------- | --------------------------- | - | ------- | ----- |  | - | ------- | -
|                               |  | SemiconductorGroup |         | IndustrialApplicationsGroup |   |         | Total | 
|                               |  | (In thousands)     |        
|Net balance, December 31, 2007 |  | $                  | 108,431 |                             | $ | 130,513 |       |  | $ | 238,944 |  
|Impairment of goodwill         |  |                    |        |                             |   | (99,522 | )     |  |   | (99,522 | )
|Acquisition of a business      |  |                    |        |                             |   | 211     |       |  |   | 211     |  
|Foreign currency translation   |  |                    |        |                             |   | (13,560 | )     |  |   | (13,560 | )
|                               |  |                    |         |                             |   |         |       |  |   |         |  
|Net balance, December 31, 2008 |  |                    | 108,431 |                             |   | 17,642  |       |  |   | 126,073 |  
|Foreign currency translation   |  |                    |        |                             |   | 365     |       |  |   | 365     |  
|                               |  |                    |         |                             |   |         |       |  |   |         |  
|Net balance, December 31, 2009 |  | $                  | 108,431 |                             | $ | 18,007  |       |  | $ | 126,438 |  
|                               |  |                    |         |                             |   |         |       |  |   |         |  

As of December 31, 2009, 2008 and 2007, gross goodwill balances in the Semiconductor Group were $108.4 million, and
there were no accumulated impairment balances. As of December 31 2009, 2008 and 2007, gross goodwill balances in the Industrial Applications Group were $117.5 million, $117.2 million and $130.5 million, respectively. As of December 31,
2009 and 2008, accumulated impairment balances in the Industrial Applications Group were $99.5 million, and there was no accumulated impairment balance as of December 31, 2007.

As part of our annual goodwill impairment test performed in 2008, we recorded a non-cash impairment charge of $99.5 million to reduce the carrying value of goodwill for our Industrial Applications Group.
At that time, we also reviewed our long-lived tangible and intangible assets within the Industrial Applications Group for potential impairment. We determined that the forecasted undiscounted cash flows related to the asset groups were in excess of
their carrying values, and therefore, these assets were not impaired.

During the first quarter of 2009 our expectations of future operating
results declined from those used to perform our annual impairment test in the fourth quarter of 2008. This fact, in conjunction with the results of the 2008 annual impairment test, led us to determine that an indicator of potential impairment
existed for both of our reporting units and that an interim impairment test was required. After completing the interim impairment test, we determined that the estimated fair value of each reporting unit exceeded its carrying value. As a result, no
additional impairment charges were required.

Our annual impairment test performed in the fourth quarter of 2009 did not identify potential
impairment for either our Semiconductor Group or our Industrial Applications Group. However, if our future operating results do not meet current forecasts or if we have a sustained decline in our market capitalization that is determined to be
indicative of a reduction in fair value of one or both of our reporting units, additional impairment charges may be required.



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Intangible Assets

Our acquired intangible assets are as follows:



|                              |  |                                   |  |       |        |                         |   |         |     |  |   |       
|----------------------------- |  | --------------------------------- |  | ----- | ------ | ----------------------- | - | ------- | --- |  | - | ------
|December 31, 2009             |  | WeightedAverageAmortizationPeriod |  | Gross |        | AccumulatedAmortization |   |         | Net
|                              |  | (Years)                           |  |       |        | (In thousands)          |   |         |    
|Patents and other intangibles |  | 11                                |  | $     | 18,658 |                         | $ | (4,797  | )   |  | $ | 13,861
|Developed technology          |  | 6                                 |  |       | 31,066 |                         |   | (29,114 | )   |  |   | 1,952 
|Trademark                     |  | 10                                |  |       | 7,682  |                         |   | (4,050  | )   |  |   | 3,632 
|                              |  |                                   |  |       |        |                         |   |         |     |  |   |       
|Total                         |  | 9                                 |  | $     | 57,406 |                         | $ | (37,961 | )   |  | $ | 19,445
|                              |  |                                   |  |       |        |                         |   |         |     |  |   |       



|                              |  |                                   |  |       |        |                         |   |         |     |  |   |       
|----------------------------- |  | --------------------------------- |  | ----- | ------ | ----------------------- | - | ------- | --- |  | - | ------
|December 31, 2008             |  | WeightedAverageAmortizationPeriod |  | Gross |        | AccumulatedAmortization |   |         | Net
|                              |  | (Years)                           |  |       |        | (In thousands)          |   |         |    
|Patents and other intangibles |  | 12                                |  | $     | 16,656 |                         | $ | (3,110  | )   |  | $ | 13,546
|Developed technology          |  | 6                                 |  |       | 30,829 |                         |   | (26,619 | )   |  |   | 4,210 
|Trademark                     |  | 10                                |  |       | 7,532  |                         |   | (3,214  | )   |  |   | 4,318 
|                              |  |                                   |  |       |        |                         |   |         |     |  |   |       
|Total                         |  | 9                                 |  | $     | 55,017 |                         | $ | (32,943 | )   |  | $ | 22,074
|                              |  |                                   |  |       |        |                         |   |         |     |  |   |       

The amortization expense for the identifiable intangible assets was
$4.7 million, $7.0 million and $7.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. Our estimated amortization expense for the identifiable intangible assets for each of the next five fiscal years will be
$3.7 million for 2010; $2.6 million for 2011, 2012 and 2013; and $2.3 million for 2014. In 2009, we purchased certain technology patents related to our Semiconductor Group with a fair value of $2.0 million and a weighted average
amortization period of 6 years. In connection with our acquisition of Micron Machine Tools, Inc. in 2008, our Industrial Applications Group acquired developed technology and a trademark with fair values of $1.1 million and $0.4 million,
respectively, with weighted average amortization periods of 6 and 10 years, respectively. As of December 31, 2009, we had no identifiable intangible assets with indefinite lives.

Note 9.    Business Combinations

In December 2008, our
Industrial Applications Group acquired certain assets and liabilities of Micron Machine Tools, Inc. (Micron), a privately-held manufacturer of high-precision manufacturing tools based in Massachusetts, for $2.1 million. We funded $1.9 million of the
acquisition with existing cash resources on the acquisition date. The remaining $0.2 million was paid in December 2009. The acquisition was accounted for as a business combination, which requires the purchase price to be allocated to the assets
acquired and liabilities assumed based on their estimated fair values at date of acquisition. The fair value of the net assets acquired was $1.9 million, resulting in $0.2 million of goodwill. Our Consolidated Financial Statements include the
financial position, results of operations and cash flows of Micron from the date of acquisition. Pro forma results of operations have not been presented because the effects of this acquisition were not material.

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



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Note 10.    Restructuring and Other Charges (Benefits), net

In an effort to consolidate our operations, streamline product offerings and align our manufacturing operations with current business conditions, we have
implemented various restructuring plans since 2001. All restructuring activity presented below is related to the Semiconductor Group and is included in operating income as part of restructuring and other charges (benefits), net. As of
December 31, 2009, substantially all actions under our restructuring plans had been completed; except for payments of future rent obligations, which we estimate will be paid in cash through 2017.

The following table summarizes our restructuring activity:



|                                        |  |                          |        |   |      |   |        |  
|--------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                        |  | Years Ended December 31, |       
|                                        |  | 2009                     |        |   | 2008 |  
|                                        |  | (In thousands)           |       
|Balance, beginning of period            |  | $                        | 18,178 |   |      | $ | 17,654 |  
|Cash payments for rent obligations      |  |                          | (3,972 | ) |      |   | (4,021 | )
|Adjustment of prior restructuring costs |  |                          | 3,840  |   |      |   | 4,545  |  
|                                        |  |                          |        |   |      |   |        |  
|Balance, end of period                  |  | $                        | 18,046 |   |      | $ | 18,178 |  
|                                        |  |                          |        |   |      |   |        |  

Adjustments of prior restructuring costs relate to changes in estimated sublease income over the remaining lease term for
facility exit activities recorded in prior years and include normal accretion.

During 2007, we sold certain facilities in San Jose,
California which resulted in a gain of $9.1 million. This benefit was offset by an adjustment to prior restructuring costs of $1.1 million.

Note 11.    Debt Obligations

As of December 31, 2009, we had insignificant current debt
obligations outstanding.

On June 17, 2009, we entered into a three-year Credit Agreement, which was amended on September 23, 2009
(the Agreement), with Bank of America, N.A. The Agreement established a secured credit line with an aggregate committed maximum amount of 80 million Euros at an interest rate of Euro Interbank Offered Rate (EURIBOR) plus 75 basis points, the
outstanding balance of which is due and payable on or before June 22, 2012. Upon execution of the Agreement, we borrowed 79.5 million Euros against this credit line. The proceeds of the loan were used to retire our credit facility with
JPMorgan Chase Bank, which was due and payable on June 25, 2009. The JPMorgan Credit Agreement was used to fund the acquisition of Peter Wolters AG in 2004 and for general corporate purposes. As of December 31, 2009, we had amounts
outstanding under the Agreement of 79.5 million Euros, or $114.1 million, at an effective interest rate of 1.2%, secured by deposits in money market funds at a minimum of 105 percent of the outstanding balance. Amounts used to secure the debt
are included within non-current restricted cash and cash equivalents on our Consolidated Balance Sheet. The Agreement contains customary affirmative covenants, representations and warranties and events of default
and limited negative covenants and financial covenants, which are subject to various exceptions and qualifications. We were in compliance with these covenants as of December 31, 2009.

On April 21, 2009 we terminated our $150.0 million senior unsecured revolving credit facility with Bank of America, N.A. We did not incur any penalties
related to the termination. We had no amounts available or outstanding under this facility as of the termination date.



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Note 12.    Other Income (Expense), net

The components of other income (expense), net are as follows:



|                                               |  |                          |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                               |  | Years Ended December 31, |       
|                                               |  | 2009                     |        |   | 2008 |   |        | 2007 | 
|                                               |  | (In thousands)           |       
|Foreign currency gain (loss), net              |  | $                        | (3,797 | ) |      | $ | (3,544 | )    |  | $ | 4,515  |  
|Other-than-temporary impairment of investments |  |                          |       |   |      |   | (4,228 | )    |  |   | (1,763 | )
|Gain (loss) on other investments               |  |                          | 2,183  |   |      |   | (4,464 | )    |  |   | 355    |  
|Other                                          |  |                          | 713    |   |      |   | 6,577  |      |  |   | 9,485  |  
|                                               |  |                          |        |   |      |   |        |      |  |   |        |  
|Other income (expense), net                    |  | $                        | (901   | ) |      | $ | (5,659 | )    |  | $ | 12,592 |  
|                                               |  |                          |        |   |      |   |        |      |  |   |        |  

Note 13.    Commitments and Guarantees

Standby Letters of Credit

We provide standby letters of credit to certain parties as required for certain transactions we initiate during the ordinary course of business. As of December 31, 2009, the maximum potential amount of future payments that we could be
required to make under these letters of credit was $3.7 million. We have not recorded any liability in connection with these arrangements beyond that required to appropriately account for the underlying transaction being guaranteed. We do not
believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these arrangements.

Guarantee Arrangements

We have guarantee arrangements on behalf of certain of our
consolidated subsidiaries for line-of-credit borrowings and operating leases. In the event of default on these arrangements, we would have a maximum exposure of $25.7 million as of December 31, 2009.

Lease Commitments

We have non-cancelable operating leases for various facilities and other assets. Rent expense for the years ended December 31, 2009, 2008 and 2007 was $3.4 million, $4.5 million and $3.8 million, respectively, net of sublease
income of $1.1 million, $1.1 million and $1.0 million, respectively. Certain of the operating leases contain provisions which permit us to renew the leases at the end of their respective lease terms.

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



|                                |  |                           |        |                |   |       |          |      |       |      |   |            |  |   |       |  |   |        |  |   |         |   |  |   |       
|------------------------------- |  | ------------------------- | ------ | -------------- | - | ----- | -------- | ---- | ----- | ---- | - | ---------- |  | - | ----- |  | - | ------ |  | - | ------- | - |  | - | ------
|                                |  | Years Ending December 31, |        | SubleaseIncome |   |       | NetTotal
|                                |  | 2010                      |        | 2011           |   | 2012  |          | 2013 |       | 2014 |   | Thereafter |  |  
|                                |  | (In thousands)           
|Non-cancelable operating leases |  | $                         | 10,684 |                | $ | 9,328 |          | $    | 5,729 |      | $ | 5,284      |  | $ | 2,916 |  | $ | 10,778 |  | $ | (19,477 | ) |  | $ | 25,242



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Purchase and Other Commitments

We have firm purchase commitments with various suppliers to ensure the availability of components and services. Our minimum obligation as of
December 31, 2009 under these arrangements was $23.4 million. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be
less in the event that the arrangements are renegotiated or cancelled. Certain agreements provide for cancellation penalties. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably
estimable. We have made adequate provision for potential exposure related to inventory on orders that may go unused. As of December 31, 2009 we had $5.0 million in other non-inventory related commitments.

Note 14.    Litigation

Linear Technology Corporation

In March 2002, Linear Technology Corporation
(Linear) filed a complaint against Novellus, among other parties, in the Superior Court of the State of California for the County of Santa Clara (the Superior Court) seeking damages (including punitive damages), declaratory relief and injunctions
for causes of action involving alleged breach of contract, fraud, unfair competition and breach of warranty. The Superior Court dismissed Linears claims for fraud and unfair competition on October 5, 2004. The Court of Appeal for the
Sixth Appellate District affirmed this dismissal on June 18, 2007. Trial on the remaining claims began on January 19, 2010, in the Superior Court and is ongoing. Although we cannot at this time predict the ultimate outcome in this case or
estimate a range of any such potential loss, we believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Other Litigation

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

Note 15.    Income Taxes

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



|         |  |                          |         |   |      |   |          |      |  |   |        
|-------- |  | ------------------------ | ------- | - | ---- | - | -------- | ---- |  | - | -------
|         |  | Years Ended December 31,
|         |  | 2009                     |         |   | 2008 |   |          | 2007
|         |  | (In thousands)          
|Domestic |  | $                        | (17,973 | ) |      | $ | (25,265  | )    |  | $ | 221,329
|Foreign  |  |                          | (51,408 | ) |      |   | (81,831  | )    |  |   | 93,460 
|         |  |                          |         |   |      |   |          |      |  |   |        
|Total    |  | $                        | (69,381 | ) |      | $ | (107,096 | )    |  | $ | 314,789
|         |  |                          |         |   |      |   |          |      |  |   |        

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



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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



|                                 |  |                          |         |   |      |   |        |      |  |   |         |  
|-------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                 |  | Years Ended December 31, |        
|                                 |  | 2009                     |         |   | 2008 |   |        | 2007 | 
|                                 |  | (In thousands)           |        
|Current                          |  | $                        | 8,644   |   |      | $ | 1,630  |      |  | $ | 30,350  |  
|Deferred                         |  |                          | (17,771 | ) |      |   | (6,876 | )    |  |   | 35,910  |  
|                                 |  |                          |         |   |      |   |        |      |  |   |         |  
|Federal                          |  |                          | (9,127  | ) |      |   | (5,246 | )    |  |   | 66,260  |  
|                                 |  |                          |        
|Current                          |  |                          | (1,706  | ) |      |   | 3,241  |      |  |   | 2,518   |  
|Deferred                         |  |                          | 20,017  |   |      |   | (5,128 | )    |  |   | 4,226   |  
|                                 |  |                          |         |   |      |   |        |      |  |   |         |  
|State                            |  |                          | 18,311  |   |      |   | (1,887 | )    |  |   | 6,744   |  
|                                 |  |                          |        
|Current                          |  |                          | 3,728   |   |      |   | 14,249 |      |  |   | 32,656  |  
|Deferred                         |  |                          | 2,942   |   |      |   | 1,498  |      |  |   | (4,571  | )
|                                 |  |                          |         |   |      |   |        |      |  |   |         |  
|Foreign                          |  |                          | 6,670   |   |      |   | 15,747 |      |  |   | 28,085  |  
|                                 |  |                          |         |   |      |   |        |      |  |   |         |  
|Total provision for income taxes |  | $                        | 15,854  |   |      | $ | 8,614  |      |  | $ | 101,089 |  
|                                 |  |                          |         |   |      |   |        |      |  |   |         |  

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



|                                                |  |                          |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                |  | Years Ended December 31, |        
|                                                |  | 2009                     |         |   | 2008 |   |         | 2007 | 
|                                                |  | (In thousands)           |        
|Expected provision at 35%                       |  | $                        | (24,283 | ) |      | $ | (37,484 | )    |  | $ | 110,176 |  
|State tax, net of federal benefit               |  |                          | (738    | ) |      |   | (1,887  | )    |  |   | 6,743   |  
|Tax-exempt interest                             |  |                          | (2,873  | ) |      |   | (4,119  | )    |  |   | (9,275  | )
|Research and development credits                |  |                          | (395    | ) |      |   | (3,399  | )    |  |   | (3,921  | )
|Foreign income/losses taxed at different rates  |  |                          | 31,908  |   |      |   | 13,515  |      |  |   | (2,575  | )
|Nondeductible impairment of goodwill            |  |                          |        |   |      |   | 34,833  |      |  |   |        |  
|Stock-based compensation                        |  |                          | 3,181   |   |      |   | 4,333   |      |  |   | 4,759   |  
|Utilization of net operating loss carryforwards |  |                          | (20,730 | ) |      |   |        |      |  |   |        |  
|Impact of California tax law change             |  |                          | 20,220  |   |      |   |        |      |  |   |        |  
|Valuation allowance                             |  |                          | 4,029   |   |      |   | 2,004   |      |  |   | (1,313  | )
|Other                                           |  |                          | 5,535   |   |      |   | 818     |      |  |   | (3,505  | )
|                                                |  |                          |         |   |      |   |         |      |  |   |         |  
|Total provision for income taxes                |  | $                        | 15,854  |   |      | $ | 8,614   |      |  | $ | 101,089 |  
|                                                |  |                          |         |   |      |   |         |      |  |   |         |  



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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



|                                                |  |                |         |   |      |   |         |  
|----------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                |  | December 31,   |        
|                                                |  | 2009           |         |   | 2008 |  
|                                                |  | (In thousands) |        
|Deferred tax assets:                            |  |                |         |   |      |   |         |  
|Reserves and accruals                           |  | $              | 44,818  |   |      | $ | 42,899  |  
|Capitalized in-process research and development |  |                | 14,793  |   |      |   | 21,418  |  
|Stock-based compensation                        |  |                | 19,724  |   |      |   | 21,631  |  
|Deferred profit                                 |  |                | 3,865   |   |      |   | 3,633   |  
|Net operating loss carryforwards                |  |                | 43,622  |   |      |   | 34,654  |  
|Credits                                         |  |                | 21,350  |   |      |   | 15,449  |  
|Other                                           |  |                | 8,499   |   |      |   | 11,750  |  
|                                                |  |                |         |   |      |   |         |  
|Total deferred tax assets                       |  |                | 156,671 |   |      |   | 151,434 |  
|Valuation allowance                             |  |                | (27,560 | ) |      |   | (2,357  | )
|                                                |  |                |         |   |      |   |         |  
|Deferred tax assets, net of valuation allowance |  |                | 129,111 |   |      |   | 149,077 |  
|                                                |  |               
|Deferred tax liabilities:                       |  |                |         |   |      |   |         |  
|Depreciation                                    |  |                | (22,004 | ) |      |   | (35,112 | )
|Other liabilities                               |  |                | (8,967  | ) |      |   | (8,313  | )
|                                                |  |                |         |   |      |   |         |  
|Total net deferred tax assets                   |  | $              | 98,140  |   |      | $ | 105,652 |  
|                                                |  |                |         |   |      |   |         |  

The net increase in valuation allowance was $25.2 million for the year ended December 31, 2009, primarily due to a
California law change enacted in the Companys first quarter. The California Budget Act of 2008, which was signed into law on February 20, 2009, revises certain provisions of the California State Tax Code, including the option to elect an
alternative method to attribute taxable income to California for tax years beginning on or after January 1, 2011. We now expect that in years 2011 and beyond, our income subject to tax in California will be lower than under prior tax law and
therefore realization of our California deferred tax assets is no longer more likely than not. As of December 31, 2009, we also had a valuation allowance of $5.2 million on deferred tax assets related to certain foreign jurisdictions. We will
continue to monitor and reassess the need for further increases or decreases to the valuation allowance in these and other foreign jurisdictions.

As of December 31, 2009, our federal and state net operating losses for tax return purposes were $95.7 million and $50.3 million, respectively. If not utilized, these carryforwards will begin to expire in 2014. As of December 31,
2009, we had federal and state tax credit carryforwards of $6.0 million and $30.3 million, respectively. The majority of these credits carryforward indefinitely.

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



|                                                      |                |              |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- | -------------- | ------------ | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |                | December 31, |       
|                                                      | 2009           |              |        | 2008 |  |   | 2007   |  
|                                                      | (In thousands) |             
|Balance, beginning of period                          |                | $            | 27,575 |      |  | $ | 26,635 |   |  | $ | 11,298 |  
|Additions for tax positions taken in a prior year     |                |              | 5,848  |      |  |   | 26     |   |  |   | 3,710  |  
|Additions for tax positions taken in the current year |                |              | 17,589 |      |  |   | 2,406  |   |  |   | 14,542 |  
|Reductions for tax positions taken in the prior year  |                |              | (1,360 | )    |  |   | (1,492 | ) |  |   | (2,915 | )
|                                                      |                |              |        |      |  |   |        |   |  |   |        |  
|Balance, end of period                                |                | $            | 49,652 |      |  | $ | 27,575 |   |  | $ | 26,635 |  
|                                                      |                |              |        |      |  |   |        |   |  |   |        |  



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Of the total unrecognized tax benefits as of December 31, 2009 and 2008, $46.4 million and $26.9
million, respectively, if recognized, would affect our effective tax rate. The remaining amounts in unrecognized tax benefits would not impact our rate as they are offset by valuation allowances. For the year ended December 31, 2009, reductions
for tax positions taken in the prior year include $1.1 million of reductions due to settlements.

With certain exceptions, we are no longer
subject to U.S. federal or state income tax examinations by tax authorities for years prior to 2004, although the utilization of tax loss and credit carryforwards from fiscal years 2001 through 2003 could be subject to examination. We believe that
adequate accruals have been provided for any potential adjustments that may result from current examinations by several state tax authorities. The timing of the settlement of these examinations is uncertain. We have not been notified of any
additional examinations. Due to certain years remaining open for examination, it is reasonably possible that the total unrecognized tax benefits could increase or decrease over the next twelve months as we may be subject to either examination by tax
authorities or a lapse in statute of limitations. Currently, we cannot provide a range of the change in estimate.

As of December 31,
2009 and 2008, the total amount accrued for interest and penalties was $1.9 million and $4.0 million, respectively, which was classified as a non-current liability in the Consolidated Balance Sheet. During the year ended December 31, 2009,
interest and penalties were a benefit of $1.2 million and during the years ended December 31, 2008 and 2007, interest and penalties expense was $2.2 million and $1.7 million, respectively.

Note 16.    Shareholders Equity

Accumulated Other Comprehensive Income (Loss)

The components of accumulated OCI,
net of related taxes are as follows:



|                                                                                       |  |                |        |   |      |   |         |  
|-------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------- | -
|                                                                                       |  | December 31,   |       
|                                                                                       |  | 2009           |        |   | 2008 |  
|                                                                                       |  | (In thousands) |       
|Foreign currency translation adjustments, net of tax of $(588) in 2009and $152 in 2008 |  | $              | 4,173  |   |      | $ | 1,005   |  
|Unrealized gain (loss) on investments                                                  |  |                | (6,870 | ) |      |   | (10,660 | )
|Unrealized loss on cash flow hedges                                                    |  |                | (127   | ) |      |   | (1,137  | )
|Unrealized loss on pension liability, net of tax of $183 in 2009 and $162 in 2008      |  |                | (1,845 | ) |      |   | (1,044  | )
|                                                                                       |  |                |        |   |      |   |         |  
|Accumulated other comprehensive loss                                                   |  | $              | (4,669 | ) |      | $ | (11,836 | )
|                                                                                       |  |                |        |   |      |   |         |  

Common Stock Repurchases

Our Board of Directors has authorized the repurchase of our outstanding common stock. As of December 31, 2009, we had $803.6 million available for stock repurchases under these authorizations. During
the years ended December 31, 2009, 2008 and 2007, 1.1 million, 9.0 million and 21.7 million shares, respectively, were repurchased pursuant to this authority for $23.1 million, $193.0 million and $593.6 million, respectively, at
a weighted average purchase price of $20.79, $21.50 and $27.31 per share, respectively.

For the majority of restricted stock awards that
vest, the number of shares issued is net of shares withheld to pay the minimum statutory withholding for income taxes on behalf of the grantee. Although shares withheld are not issued, they are treated as common stock repurchases, effectively
reducing the number of shares that would



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otherwise have been issued upon vesting. During the years ended December 31, 2009, 2008 and 2007, the value of shares withheld was $7.6 million, $2.4 million, and $0.5 million, respectively,
to satisfy the minimum statutory withholding requirement related to the grantees tax obligations.

We are not obligated to make any
purchases under our stock repurchase program. Subject to applicable state and federal corporate and securities laws, repurchases under our stock repurchase program may be made at such times and in such amounts as we deem appropriate. Purchases made
under our stock repurchase program can be discontinued at any time we feel additional purchases are not warranted. We are subject to certain limitations under our debt agreement regarding the repurchase of common stock.

Note 17.    Stock-Based Compensation and Employee Benefit Plans

Stock-Based Compensation

Prior to 2007, we had several stock plans that provided for grants of equity instruments to our employees and non-employee directors. In 2007, the Board of Directors and shareholders approved the amended and restated 2001 Stock Incentive
Plan (the Plan) to increase the number of shares available for grant and to consolidate all stock plans into a single plan. In 2009, the Board of Directors and shareholders approved an amendment and restatement of the Plan to increase the
maximum number of shares available for grant under the Plan by 6.0 million shares and to adopt an interchangeable share reserve pursuant to which each award of restricted stock and restricted stock units is charged against the reserve as 1.6
shares for each share subject to the award. Awards under the Plan include incentive stock options, non-statutory stock options and restricted stock awards. Restricted stock awards include restricted stock and restricted stock units that are settled
in common stock. Stock options generally vest ratably over a four-year period on the anniversary date of the grant and expire ten years after the grant date. Restricted stock awards generally vest over three, four, or five-year periods, excluding
certain awards that vest upon the achievement of specific performance targets. There are 30.3 million shares authorized for grant under the Plan. As of December 31, 2009, there were 8.1 million shares available for future grant under
the Plan.

We also have an Employee Stock Purchase Plan (ESPP) that allows qualified employees to purchase shares of common stock at 85% of
the fair market value on specified dates. There are 7.9 million shares authorized for purchase under the ESPP. As of December 31, 2009 there were 1.2 million shares available for future purchase under the ESPP. Our ESPP was suspended
indefinitely effective May 1, 2009 by action of our Board of Directors. Further action by the Board of Directors will be required to reinstate the ESPP.

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



|                                       |  |                          |        |      |   |        |  |   |       
|-------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                                       |  | Years Ended December 31,
|                                       |  | 2009                     |        | 2008 |   | 2007  
|                                       |  | (In thousands)          
|                                       |  | (1)                      |        | (2)  |   | (3)   
|Cost of sales                          |  | $                        | 3,463  |      | $ | 2,505  |  | $ | 1,869 
|Selling, general and administrative    |  |                          | 18,830 |      |   | 21,159 |  |   | 17,583
|Research and development               |  |                          | 8,095  |      |   | 8,899  |  |   | 8,666 
|                                       |  |                          |        |      |   |        |  |   |       
|Total stock-based compensation expense |  | $                        | 30,388 |      | $ | 32,563 |  | $ | 28,118
|                                       |  |                          |        |      |   |        |  |   |       



|(1) | Amounts include amortization expense related to stock options of $14.0 million, employee stock purchase plan of $0.9 million, and restricted stock awards of
$15.5 million. The related income tax benefit recognized in the Consolidated Statement of Operations was $8.0 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Amounts include amortization expense related to stock options of $16.8 million, employee stock purchase plan of $2.7 million, and restricted stock awards of $13.1
million. The related income tax benefit recognized in the Consolidated Statement of Operations was $8.3 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | 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. The related income tax benefit recognized in the Consolidated Statement of Operations was $7.7 million.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Total
stock-based compensation cost capitalized in inventory and deferred profit, was $0.4 million and $0.7 million as of December 31, 2009 and 2008, respectively.

Valuation and Other Assumptions for Stock Options

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

Expected Term.    The expected term of options granted represents the period of time that the options are expected to be outstanding. We estimate the expected term of options
granted based on our historical experience of exercises including post-vesting exercises and termination.

Expected
Volatility.    We estimate the volatility of our stock options at the date of grant using a combination of historical and implied volatilities. Historical volatilities are calculated based on the historical prices of our
common stock over a period at least equal to the expected term of our option grants, while implied volatilities are derived from publicly traded options of common stock.

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

Dividends.    We have never paid any cash dividends on common stock and we do not anticipate paying any cash dividends in the foreseeable future.

Forfeitures.    We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation expense only for those awards that are expected to vest.
The estimated annual forfeiture rate was 10.9% for the years ended December 31, 2009, 2008 and 2007.



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We used the following weighted-average valuation assumptions to estimate the fair value of options
granted:



|                        |  |                          |  |           |  |          
|----------------------- |  | ------------------------ |  | --------- |  | ---------
|                        |  | Years Ended December 31,
|                        |  | 2009                     |  | 2008      |  | 2007     
|Risk-free interest rate |  | 1.5%                     |  | 1.3%      |  | 3.8%     
|Expected volatility     |  | 50%                      |  | 63%       |  | 49%      
|Expected term           |  | 3.4 years                |  | 4.1 years |  | 4.4 years
|Expected dividends      |  | None                     |  | None      |  | None     

Stock Options

A summary of stock option activity is as follows:



|                                                    |                |                 |   |  |                                |       |                                                     |                |                         |   |        
|--------------------------------------------------- | -------------- | --------------- | - |  | ------------------------------ | ----- | --------------------------------------------------- | -------------- | ----------------------- | - | -------
|                                                    |                | Number ofShares |   |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractualTerm (in Years) |                | AggregateIntrinsicValue
|                                                    | (In thousands) |                 |   |  |                                |       |                                                     | (In thousands)
|Outstanding as of December 31, 2006                 |                | 22,899          |   |  | $                              | 32.16 |                                                     | 6.23           |                         | $ | 102,527
|Grants                                              |                | 1,696           |   |  |                                | 27.44 |                                                     |                |                         |   |        
|Exercises                                           |                | (1,247          | ) |  |                                | 24.51 |                                                     |                |                         |   |        
|Forfeitures or expirations                          |                | (1,574          | ) |  |                                | 35.52 |                                                     |                |                         |   |        
|                                                    |                |                 |   |  |                                |       |                                                     |                |                         |   |        
|Outstanding as of December 31, 2007                 |                | 21,774          |   |  | $                              | 31.99 |                                                     | 5.62           |                         | $ | 17,187 
|Grants                                              |                | 2,027           |   |  |                                | 13.31 |                                                     |                |                         |   |        
|Exercises                                           |                | (116            | ) |  |                                | 14.31 |                                                     |                |                         |   |        
|Forfeitures or expirations                          |                | (2,758          | ) |  |                                | 31.42 |                                                     |                |                         |   |        
|                                                    |                |                 |   |  |                                |       |                                                     |                |                         |   |        
|Outstanding as of December 31, 2008                 |                | 20,927          |   |  | $                              | 30.35 |                                                     | 5.16           |                         | $ | 12     
|Grants                                              |                | 1,259           |   |  |                                | 23.39 |                                                     |                |                         |   |        
|Exercises                                           |                | (211            | ) |  |                                | 16.34 |                                                     |                |                         |   |        
|Forfeitures or expirations                          |                | (3,942          | ) |  |                                | 28.87 |                                                     |                |                         |   |        
|                                                    |                |                 |   |  |                                |       |                                                     |                |                         |   |        
|Outstanding as of December 31, 2009                 |                | 18,033          |   |  | $                              | 30.35 |                                                     | 4.91           |                         | $ | 18,123 
|                                                    |                |                 |   |  |                                |       |                                                     |                |                         |   |        
|Vested and expected to vest as of December 31, 2009 |                | 17,341          |   |  | $                              | 30.74 |                                                     | 4.74           |                         | $ | 15,285 
|Exercisable as of December 31, 2009                 |                | 14,344          |   |  | $                              | 32.69 |                                                     | 3.90           |                         | $ | 3,732  

The aggregate intrinsic value of
options outstanding is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 2.0 million shares that had exercise prices lower than the market price of our common
stock as of December 31, 2009. The aggregate intrinsic value of the options exercised during the years ended December 31, 2009, 2008, and 2007 was $1.3 million, $0.9 million and $9.2 million, respectively, determined at the date
of exercise. The total cash received from employees as a result of stock option exercises during the years ended December 31, 2009, 2008 and 2007 was $3.5 million, $1.7 million and $32.3 million, respectively. The
weighted-average grant date fair value of options granted during the years ended December 31, 2009, 2008 and 2007 was $8.58, $6.47 and $12.13, respectively. In connection with the disqualifying dispositions of incentive stock options and
exercises of nonqualified stock options, we realized tax benefits of $0.4 million, $0.2 million and $2.6 million for the years ended December 31, 2009, 2008 and 2007, respectively. We settle employee stock option exercises with newly
issued common shares.



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As of December 31, 2009, there was $26.0 million of unrecognized compensation cost related to
unvested stock options, of which $13.8 million, $6.9 million, $3.7 million and $1.6 million is expected to be recognized in 2010, 2011, 2012, and 2013, respectively.

Restricted Stock Awards

The fair value of our restricted stock awards is
calculated based upon the fair market value of the Companys stock at the date of grant. The following table summarizes our restricted stock award activity:



|                                                         |                |                 |   |  |                                      |      
|-------------------------------------------------------- | -------------- | --------------- | - |  | ------------------------------------ | -----
|                                                         |                | Number ofShares |   |  | Weighted-AverageGrant DateFair Value
|                                                         | (In thousands) |                 |   | 
|Unvested restricted stock awards as of December 31, 2006 |                | 1,844           |   |  | $                                    | 29.56
|Granted                                                  |                | 1,236           |   |  |                                      | 26.81
|Vested                                                   |                | (142            | ) |  |                                      | 27.47
|Forfeited                                                |                | (173            | ) |  |                                      | 29.61
|                                                         |                |                 |   |  |                                      |      
|Unvested restricted stock awards as of December 31, 2007 |                | 2,765           |   |  | $                                    | 28.45
|Granted                                                  |                | 1,477           |   |  |                                      | 14.43
|Vested                                                   |                | (485            | ) |  |                                      | 26.40
|Forfeited                                                |                | (358            | ) |  |                                      | 28.06
|                                                         |                |                 |   |  |                                      |      
|Unvested restricted stock awards as of December 31, 2008 |                | 3,399           |   |  | $                                    | 22.69
|Granted                                                  |                | 1,505           |   |  |                                      | 23.04
|Vested                                                   |                | (1,037          | ) |  |                                      | 25.00
|Forfeited                                                |                | (310            | ) |  |                                      | 22.45
|                                                         |                |                 |   |  |                                      |      
|Unvested restricted stock awards as of December 31, 2009 |                | 3,557           |   |  | $                                    | 22.19
|                                                         |                |                 |   |  |                                      |      

Unvested restricted stock awards as of December 31, 2009 and 2008
include 2.9 million and 2.2 million restricted stock units, respectively.

As of December 31, 2009, there were a total of
0.5 million restricted stock awards and 0.5 million restricted stock units subject to performance conditions that will result in forfeiture if the conditions are not realized. The restricted stock units have performance conditions that
could result in the vesting of additional restricted stock units up to a maximum of 1.4 million restricted stock units. The performance conditions are based on our revenue, revenue growth and revenue growth relative to our peers.

The total fair value of restricted stock awards vested during the years ended December 31, 2009, 2008 and 2007 was $22.6 million, $7.1 million and
$4.0 million, respectively. In connection with the issuance of restricted stock awards, we realized a tax benefit of $5.9 million, $2.2 million and $1.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of
December 31, 2009 there was $49.9 million of unrecognized compensation cost related to restricted stock awards, including performance awards that are expected to vest, of which $18.3 million, $16.1 million, $10.5 million and $5.0 million is
expected to be recognized in 2010, 2011, 2012 and 2013, respectively.



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ESPP

Shares issued under our ESPP were valued using the Black-Scholes model with expected volatility calculated using a six-month historical volatility. We used the following weighted-average assumptions to
estimate the fair value of these shares:



|                        |  |                          |  |          |  |         
|----------------------- |  | ------------------------ |  | -------- |  | --------
|                        |  | Years Ended December 31,
|                        |  | 2009                     |  | 2008     |  | 2007    
|Risk-free interest rate |  | 1.1%                     |  | 2.3%     |  | 4.9%    
|Expected volatility     |  | 49%                      |  | 41%      |  | 34%     
|Expected term           |  | 6 months                 |  | 6 months |  | 6 months
|Expected dividends      |  | None                     |  | None     |  | None    

The weighted-average grant date fair
value of shares was $4.53, $6.22 and $7.49 for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, we had no unrecognized compensation costs related to our ESPP. In connection with the issuance of
shares under our ESPP, we realized a tax benefit attributed to disqualifying dispositions of $0.3 million, $0.2 million and $0.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Employee Savings and Retirement Plan

We maintain a 401(k) retirement savings plan for our full-time employees. Participants in the 401(k) plan may contribute up to 100% of their eligible pre-tax compensation, limited by the maximum dollar
amount allowed by the Internal Revenue Code. Annually, we contribute a percentage of each participating employees salary deferral contributions up to a maximum of 3% of an employees eligible compensation. Our matching contributions are
invested in Novellus common stock and become fully vested at the end of the employees third year of credited service. We recorded expense of $2.7 million, $3.7 million and $4.1 million in connection with matching contributions under
the 401(k) plan for the years ended December 31, 2009, 2008 and 2007, respectively.

Defined Benefit Pension Plans

We provide certain defined benefit pension plans to employees primarily located in countries outside of the United States. We deposit
funds for certain of these plans, consistent with the requirements of local law, with insurance companies or third-party trustees, and accrue for the unfunded portion of the obligation. The assumptions used in calculating the obligation for these
plans depend on the local economic environment. The net liability recognized related to the funded status of the plans was $6.7 million and $5.1 million as of December 31, 2009 and 2008, respectively. The projected benefit obligation was $21.0
million and $22.8 million as of December 31, 2009 and 2008, respectively. The weighted-average discount rate used to determine the projected benefit obligation as of December 31, 2009 and 2008 was 2.8% and 2.9%, respectively, and the
weighted-average salary increase was 1.5% and 1.7%, respectively. The related fair value of plan assets was $16.3 million and $17.7 million as of December 31, 2009 and 2008, respectively. Our practice is to fund the pension plans in amounts at
least sufficient to meet the minimum requirements of local laws and regulations. The assets of the plans are primarily invested in high quality fixed income investments. Our contributions were $0.5 million, $0.6 million and $0.6 million
for the years ended 2009, 2008 and 2007, respectively. Our estimated benefit payments for each of the next ten years will be $1.7 million per year in 2010 through 2014, and an aggregate of $7.5 million for years 2015 through 2019.



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Postretirement Healthcare Plan

We maintain a postretirement healthcare plan for certain retirees. Coverage continues through the duration of the lifetime of the retiree or the
retirees spouse, whichever is longer. The benefit obligation was $2.7 million and $2.3 million as of December 31, 2009 and 2008, respectively.

Other Deferred Compensation Arrangements

We have a deferred compensation
arrangement whereby certain employees may elect to defer a portion of their earnings. We also have a supplemental executive retirement plan. Amounts payable under these plans were $12.5 million and $10.3 million as of December 31, 2009 and
2008, respectively.

Note 18.    Operating Segments

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

The following is a
summary of financial data by segment:



|                              |  |                              |           |   |                             |   |         |       |  |   |           |  
|----------------------------- |  | ---------------------------- | --------- | - | --------------------------- | - | ------- | ----- |  | - | --------- | -
|                              |  | Year Ended December 31, 2009 |          
|                              |  | SemiconductorGroup           |           |   | IndustrialApplicationsGroup |   |         | Total | 
|                              |  | (In thousands)               |          
|Net sales                     |  | $                            | 569,324   |   |                             | $ | 69,870  |       |  | $ | 639,194   |  
|Operating loss                |  | $                            | (51,603   | ) |                             | $ | (24,373 | )     |  | $ | (75,976   | )
|                              |  |                              |          
|Long-lived assets             |  | $                            | 220,764   |   |                             | $ | 18,347  |       |  | $ | 239,111   |  
|All other identifiable assets |  |                              | 1,254,991 |   |                             |   | 64,876  |       |  |   | 1,319,867 |  
|                              |  |                              |           |   |                             |   |         |       |  |   |           |  
|Total assets                  |  | $                            | 1,475,755 |   |                             | $ | 83,223  |       |  | $ | 1,558,978 |  
|                              |  |                              |           |   |                             |   |         |       |  |   |           |  



|                              |  |                              |           |   |                             |   |         |       |  |   |           |  
|----------------------------- |  | ---------------------------- | --------- | - | --------------------------- | - | ------- | ----- |  | - | --------- | -
|                              |  | Year Ended December 31, 2008 |          
|                              |  | SemiconductorGroup           |           |   | IndustrialApplicationsGroup |   |         | Total | 
|                              |  | (In thousands)               |          
|Net sales                     |  | $                            | 837,651   |   |                             | $ | 173,353 |       |  | $ | 1,011,004 |  
|Operating loss                |  | $                            | (29,183   | ) |                             | $ | (82,833 | )     |  | $ | (112,016  | )
|                              |  |                              |          
|Long-lived assets             |  | $                            | 250,362   |   |                             | $ | 21,504  |       |  | $ | 271,866   |  
|All other identifiable assets |  |                              | 1,256,420 |   |                             |   | 109,241 |       |  |   | 1,365,661 |  
|                              |  |                              |           |   |                             |   |         |       |  |   |           |  
|Total assets                  |  | $                            | 1,506,782 |   |                             | $ | 130,745 |       |  | $ | 1,637,527 |  
|                              |  |                              |           |   |                             |   |         |       |  |   |           |  



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|                              |  |                              |           |                             |   |         |  |   |          
|----------------------------- |  | ---------------------------- | --------- | --------------------------- | - | ------- |  | - | ---------
|                              |  | Year Ended December 31, 2007
|                              |  | SemiconductorGroup           |           | IndustrialApplicationsGroup |   | Total  
|                              |  | (In thousands)              
|Net sales                     |  | $                            | 1,395,703 |                             | $ | 174,346 |  | $ | 1,570,049
|Operating income              |  | $                            | 246,361   |                             | $ | 23,798  |  | $ | 270,159  
|                              |  |                              |          
|Long-lived assets             |  | $                            | 296,778   |                             | $ | 23,231  |  | $ | 320,009  
|All other identifiable assets |  |                              | 1,495,665 |                             |   | 261,269 |  |   | 1,756,934
|                              |  |                              |           |                             |   |         |  |   |          
|Total assets                  |  | $                            | 1,792,443 |                             | $ | 284,500 |  | $ | 2,076,943
|                              |  |                              |           |                             |   |         |  |   |          

Three customers each separately accounted for 20%, 17% and 16% of our
consolidated net sales for the year ended December 31, 2009, and two customers each separately accounted for 15% and 11% of our consolidated net sales for the years ended December 31, 2008 and 2007, respectively. All such customer
concentration is contained exclusively within the Semiconductor Group. Net sales presented by operating segment are from unaffiliated customers.

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

The following is a summary of operations by geographic area:



|                                       |  |                              |           |   |        |   |         |      |  |   |             |   |  |              |          |   |  |   |           |  
|-------------------------------------- |  | ---------------------------- | --------- | - | ------ | - | ------- | ---- |  | - | ----------- | - |  | ------------ | -------- | - |  | - | --------- | -
|                                       |  | Year Ended December 31, 2009 |          
|                                       |  | North America                |           |   | Europe |   |         | Asia |  |   | Elimination |   |  | Consolidated |         
|                                       |  | (In thousands)               |          
|Sales to unaffiliated customers        |  | $                            | 165,004   |   |        | $ | 60,933  |      |  | $ | 413,257     |   |  | $            |         |   |  | $ | 639,194   |  
|Transfers between geographic locations |  |                              | 24,289    |   |        |   | 20,765  |      |  |   | 137,031     |   |  |              | (182,085 | ) |  | $ |          |  
|                                       |  |                              |           |   |        |   |         |      |  |   |             |   |  |              |          |   |  |   |           |  
|Total net sales                        |  | $                            | 189,293   |   |        | $ | 81,698  |      |  | $ | 550,288     |   |  | $            | (182,085 | ) |  | $ | 639,194   |  
|                                       |  |                              |           |   |        |   |         |      |  |   |             |   |  |              |          |   |  |   |           |  
|                                       |  |                              |           |   |       
|Operating loss                         |  | $                            | (25,845   | ) |        | $ | (20,749 | )    |  | $ | (29,382     | ) |  | $            |         |   |  | $ | (75,976   | )
|                                       |  |                              |           |   |       
|Long-lived assets                      |  | $                            | 221,349   |   |        | $ | 15,910  |      |  | $ | 1,852       |   |  | $            |         |   |  | $ | 239,111   |  
|All other identifiable assets          |  |                              | 963,066   |   |        |   | 62,183  |      |  |   | 294,618     |   |  |              |         |   |  |   | 1,319,867 |  
|                                       |  |                              |           |   |        |   |         |      |  |   |             |   |  |              |          |   |  |   |           |  
|Total assets                           |  | $                            | 1,184,415 |   |        | $ | 78,093  |      |  | $ | 296,470     |   |  | $            |         |   |  | $ | 1,558,978 |  
|                                       |  |                              |           |   |        |   |         |      |  |   |             |   |  |              |          |   |  |   |           |  



|                                       |  |                              |           |   |        |   |         |      |  |             |         |  |              |          |   |  |   |           |  
|-------------------------------------- |  | ---------------------------- | --------- | - | ------ | - | ------- | ---- |  | ----------- | ------- |  | ------------ | -------- | - |  | - | --------- | -
|                                       |  | Year Ended December 31, 2008 |          
|                                       |  | North America                |           |   | Europe |   |         | Asia |  | Elimination |         |  | Consolidated |         
|                                       |  | (In thousands)               |          
|Sales to unaffiliated customers        |  | $                            | 263,647   |   |        | $ | 151,928 |      |  | $           | 595,429 |  | $            |         |   |  | $ | 1,011,004 |  
|Transfers between geographic locations |  |                              | 48,561    |   |        |   | 37,765  |      |  |             | 178,055 |  |              | (264,381 | ) |  | $ |          |  
|                                       |  |                              |           |   |        |   |         |      |  |             |         |  |              |          |   |  |   |           |  
|Total net sales                        |  | $                            | 312,208   |   |        | $ | 189,693 |      |  | $           | 773,484 |  | $            | (264,381 | ) |  | $ | 1,011,004 |  
|                                       |  |                              |           |   |        |   |         |      |  |             |         |  |              |          |   |  |   |           |  
|                                       |  |                              |           |   |       
|Operating income (loss)                |  | $                            | (35,134   | ) |        | $ | (78,762 | )    |  | $           | 1,880   |  | $            |         |   |  | $ | (112,016  | )
|                                       |  |                              |           |   |       
|Long-lived assets                      |  | $                            | 249,459   |   |        | $ | 19,598  |      |  | $           | 2,809   |  | $            |         |   |  | $ | 271,866   |  
|All other identifiable assets          |  |                              | 994,432   |   |        |   | 103,516 |      |  |             | 267,713 |  |              |         |   |  |   | 1,365,661 |  
|                                       |  |                              |           |   |        |   |         |      |  |             |         |  |              |          |   |  |   |           |  
|Total assets                           |  | $                            | 1,243,891 |   |        | $ | 123,114 |      |  | $           | 270,522 |  | $            |         |   |  | $ | 1,637,527 |  
|                                       |  |                              |           |   |        |   |         |      |  |             |         |  |              |          |   |  |   |           |  



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                       |  |                              |           |        |   |         |  |             |           |  |              |          |   |  |   |          
|-------------------------------------- |  | ---------------------------- | --------- | ------ | - | ------- |  | ----------- | --------- |  | ------------ | -------- | - |  | - | ---------
|                                       |  | Year Ended December 31, 2007
|                                       |  | North America                |           | Europe |   | Asia    |  | Elimination |           |  | Consolidated
|                                       |  | (In thousands)              
|Sales to unaffiliated customers        |  | $                            | 488,438   |        | $ | 151,439 |  | $           | 930,172   |  | $            |         |   |  | $ | 1,570,049
|Transfers between geographic locations |  |                              | 344,033   |        |   | 37,130  |  |             | 232,389   |  |              | (613,552 | ) |  | $ |         
|                                       |  |                              |           |        |   |         |  |             |           |  |              |          |   |  |   |          
|Total net sales                        |  | $                            | 832,471   |        | $ | 188,569 |  | $           | 1,162,561 |  | $            | (613,552 | ) |  | $ | 1,570,049
|                                       |  |                              |           |        |   |         |  |             |           |  |              |          |   |  |   |          
|                                       |  |                              |           |        |  
|Operating income                       |  | $                            | 174,030   |        | $ | 24,992  |  | $           | 71,137    |  | $            |         |   |  | $ | 270,159  
|                                       |  |                              |           |        |  
|Long-lived assets                      |  | $                            | 295,806   |        | $ | 21,262  |  | $           | 2,941     |  | $            |         |   |  | $ | 320,009  
|All other identifiable assets          |  |                              | 1,042,670 |        |   | 258,786 |  |             | 455,478   |  |              |         |   |  |   | 1,756,934
|                                       |  |                              |           |        |   |         |  |             |           |  |              |          |   |  |   |          
|Total assets                           |  | $                            | 1,338,476 |        | $ | 280,048 |  | $           | 458,419   |  | $            |         |   |  | $ | 2,076,943
|                                       |  |                              |           |        |   |         |  |             |           |  |              |          |   |  |   |          

Revenue for each geographic area is recognized from the locations
within a designated geographic region in accordance with our revenue recognition policy. Transfers and commission arrangements between geographic areas are at prices sufficient to recover a reasonable profit. Due to the establishment of our
international headquarters in Singapore, a significant portion of North America net sales shifted to Asia in 2008.

Note
19.    Related Party Transactions

We lease an aircraft from NVLS I, LLC, a third-party entity wholly owned by
Richard S. Hill, our Chairman and Chief Executive Officer. Under the aircraft lease agreement, we incurred lease expense of $0.8 million, $0.8 million and $0.7 million for the years ended December 31, 2009, 2008 and 2007,
respectively.

Novellus employs, in non-executive positions, certain immediate family members of our executive officers. The aggregate
compensation amounts recognized for these immediate family members during the years ended December 31, 2009, 2008 and 2007 were $0.5 million, $0.6 million and $0.8 million, respectively.

Current regulations prohibit company loans to executive officers, as defined by the SEC. We have outstanding loans to non-executive vice
presidents and other key personnel. As of December 31, 2009 and 2008, the total outstanding balance of such loans was $0.6 million and $0.9 million, respectively. As of December 31, 2009, nearly all of the outstanding balance was secured
by collateral. Loans typically bear interest, except for those made for employee relocation purposes. Bad debt expense related to personnel loans has not historically been significant.

Note 20.    Quarterly Financial Data (Unaudited)



|                                              |  |                                          |         |   |              |   |         |                   |  |   |                  |   |  |   |        
|--------------------------------------------- |  | ---------------------------------------- | ------- | - | ------------ | - | ------- | ----------------- |  | - | ---------------- | - |  | - | -------
|                                              |  | Quarter Ended                           
|                                              |  | March 28,2009                            |         |   | June 27,2009 |   |         | September 26,2009 |  |   | December 31,2009
|                                              |  | (In thousands, except per share amounts)
|Net sales                                     |  | $                                        | 98,913  |   |              | $ | 119,208 |                   |  | $ | 176,879          |   |  | $ | 244,194
|Gross profit                                  |  | $                                        | 25,738  |   |              | $ | 31,006  |                   |  | $ | 70,708           |   |  | $ | 113,638
|Net income (loss)                             |  | $                                        | (66,392 | ) |              | $ | (50,008 | )                 |  | $ | (4,026           | ) |  | $ | 35,191 
|Basic net income (loss) per share             |  | $                                        | (0.69   | ) |              | $ | (0.52   | )                 |  | $ | (0.04            | ) |  | $ | 0.37   
|Diluted net income (loss) per share           |  | $                                        | (0.69   | ) |              | $ | (0.52   | )                 |  | $ | (0.04            | ) |  | $ | 0.36   
|Shares used in basic per share calculations   |  |                                          | 96,193  |   |              |   | 96,472  |                   |  |   | 96,701           |   |  |   | 96,053 
|Shares used in diluted per share calculations |  |                                          | 96,193  |   |              |   | 96,472  |                   |  |   | 96,701           |   |  |   | 97,161 



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NOVELLUS SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                              |  |                                          |         |              |   |         |                   |  |                      |         |  |   |          |  
|--------------------------------------------- |  | ---------------------------------------- | ------- | ------------ | - | ------- | ----------------- |  | -------------------- | ------- |  | - | -------- | -
|                                              |  | Quarter Ended                            |        
|                                              |  | March 29,2008                            |         | June 28,2008 |   |         | September 27,2008 |  | December 31,2008 (1) |        
|                                              |  | (In thousands, except per share amounts) |        
|Net sales                                     |  | $                                        | 314,713 |              | $ | 257,740 |                   |  | $                    | 250,098 |  | $ | 188,453  |  
|Gross profit                                  |  | $                                        | 144,940 |              | $ | 110,963 |                   |  | $                    | 111,524 |  | $ | 68,517   |  
|Net income (loss)                             |  | $                                        | 15,529  |              | $ | (2,385  | )                 |  | $                    | 1,397   |  | $ | (130,251 | )
|Basic net income (loss) per share             |  | $                                        | 0.15    |              | $ | (0.02   | )                 |  | $                    | 0.01    |  | $ | (1.36    | )
|Diluted net income (loss) per share           |  | $                                        | 0.15    |              | $ | (0.02   | )                 |  | $                    | 0.01    |  | $ | (1.36    | )
|Shares used in basic per share calculations   |  |                                          | 100,683 |              |   | 98,202  |                   |  |                      | 97,581  |  |   | 96,016   |  
|Shares used in diluted per share calculations |  |                                          | 101,375 |              |   | 98,202  |                   |  |                      | 98,348  |  |   | 96,016   |  



|(1) | The fourth quarter of 2008 results include a non-cash impairment charge of $99.5 million to reduce the carrying value of goodwill within our Industrial Applications
Group.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Novellus Systems, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders
equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a) (2). These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Novellus
Systems, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the Consolidated Financial Statements, Novellus Systems, Inc. changed its method of recognition and measurement of
other-than-temporary impairment for debt securities in connection with the adoption of new authoritative guidance as of March 29, 2009.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Novellus Systems, Inc.s internal control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2010 expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

San Jose, California

February 24, 2010



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

Not applicable.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

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

Evaluation of Disclosure Controls and Procedures

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

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

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



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Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our CEO and PFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of
December 31, 2009 based on the guidelines established in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of our evaluation, our
management concluded that our internal control over financial reporting was effective as of December 31, 2009 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external reporting purposes in accordance with Generally Accepted Accounting Principles applied in the United States.



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Report of Independent Registered Public Accounting Firm

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

We have audited Novellus Systems, Inc.s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control  Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Novellus Systems, Inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial
reporting based on our audit.

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

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

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

In our
opinion, Novellus Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Novellus Systems, Inc. as of December 31,
2009 and 2008, the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2009 of Novellus Systems, Inc., and the financial statement schedule listed
in the index at Item 15(a)(2), and our report dated February 24, 2010 expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

San Jose, California

February 24, 2010



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Limitations on Effectiveness of Controls

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



|Item 9B. | Other Information
|-------- | -----------------

Not applicable.

PART III



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

The information required by this item is included under (i) Proposal No. 1: Election of Directors as it relates to members of our Board of Directors, including our Audit
Committee and our Audit Committee financial experts, our code of ethics, any changes to procedures by which security holders may recommend nominees to our Board of Directors, (ii) Other Information  Executive Officers as
it relates to our executive officers, and (iii) Other Matters  Section 16(a) Beneficial Ownership Reporting Compliance as it relates to information concerning Section 16(a) beneficial ownership reporting
compliance, in our Proxy Statement, to be filed in connection with our 2010 Annual Meeting of Shareholders, and is incorporated herein by reference.



|Item 11. | Executive Compensation
|-------- | ----------------------

The information required by this item is included under (i) Other Information  Compensation Discussion and Analysis as it relates to compensation of our executive, (ii) Proposal No. 1:
Election of Directors as it relates to our Compensation Committee disclosure pursuant to Item 407(e)(4), and (iii) Compensation Committee Report as it relates to disclosure pursuant to Item 407(e)(5) in our Proxy
Statement, to be filed in connection with our 2010 Annual Meeting of Shareholders, and is incorporated herein by reference.



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

The information required by this item is included under (i) Other Information  Security Ownership of Certain Beneficial Owners and
Management as it relates to security ownership of certain beneficial owners and management, and (ii) Other Information  Equity Compensation Plan Information as it relates to our equity compensation plans, in our
Proxy Statement, to be filed in connection with our 2010 Annual Meeting of Shareholders, and is incorporated herein by reference.



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

The information required by this item is included under Proposal No. 1: Election of Directors and Other Information 
Certain Relationships and Related Transactions in our Proxy Statement, to be filed in connection with our 2010 Annual Meeting of Shareholders, and is incorporated herein by reference.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

The information required by this item is included under Proposal No. 2: Ratification of Appointment of Independent Registered Public Accounting Firm  Audit and Non-Audit
Fees in our Proxy Statement, to be filed in connection with our 2010 Annual Meeting of Shareholders, and is incorporated herein by reference.

PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

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

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

Consolidated Statements of Operations  Years Ended December 31,
2009, 2008, and 2007. Consolidated Balance Sheets as of December 31, 2009 and 2008. Consolidated Statements of Cash Flows  Years Ended December 31, 2009, 2008, and 2007. Consolidated Statement of Shareholders
Equity  Years Ended December 31, 2009, 2008, and 2007. Notes to Consolidated Financial Statements. Reports of Independent Registered Public Accounting Firm.

(2) Financial Statement Schedules

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

Schedule II  Valuation
and Qualifying Accounts.

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

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



|         |  |                                                                                                                                                                                                                                                    
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|3.1(1)   |  | Amended and Restated Articles of Incorporation of Novellus.                                                                                                                                                                                        
|         | 
|3.2      |  | Amended and Restated Bylaws of Novellus.                                                                                                                                                                                                           
|         | 
|10.1(2)  |  | 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(3)  |  | Environmental Agreement by and between Varian Associates, Inc. and Novellus dated May 7, 1997.                                                                                                                                                     
|         | 
|*10.3(4) |  | Novellus 1992 Stock Option Plan, together with forms of agreements thereunder.                                                                                                                                                                    
|         | 
|*10.4(5) |  | Amended and Restated 1992 Employee Stock Purchase Plan, as amended.                                                                                                                                                                                
|         | 
|*10.5(6) |  | Form of Directors and Officers Indemnification Agreement.                                                                                                                                                                                          



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|           |  |                                                                                                                                                                                                                                                                                                                      
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.6(7)   |  | GaSonics International Corporation 1994 Stock Option/Stock Issuance plan, together with forms of agreements thereunder, as assumed by Novellus.                                                                                                                                                                      
|           | 
|*10.7(8)   |  | Gamma Precision Technology, Inc. 1998 Stock Option Plan, together with forms of agreements thereunder, as assumed by Novellus.                                                                                                                                                                                       
|           | 
|*10.8(9)   |  | GaSonics International Corporation Supplemental Stock Option Plan, as assumed by Novellus.                                                                                                                                                                                                                           
|           | 
|*10.9(10)  |  | 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)  |  | 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.                                                                                                   
|           | 
|*10.17(18) |  | Amended and Restated Employment Agreement between Novellus and Richard S. Hill effective as of July 24, 2009.                                                                                                                                                                                                        
|           | 
|10.18(19)  |  | Form of Non-Employee Director Restricted Stock Bonus Agreement, as amended.                                                                                                                                                                                                                                          
|           | 
|10.19(20)  |  | Form of Resale Restriction Agreement.                                                                                                                                                                                                                                                                                
|           | 
|*10.21(21) |  | Offer Letter of Employment to Ginetto Addiego dated February 2, 2005.                                                                                                                                                                                                                                                
|           | 
|*10.22(22) |  | Offer Letter of Employment to Fusen Chen dated October 4, 2004.                                                                                                                                                                                                                                                      
|           | 
|*10.24(23) |  | Amended Executive Voluntary Deferred Compensation Plan, as amended.                                                                                                                                                                                                                                                  
|           | 
|*10.24(24) |  | Novellus 162(m) Executive Bonus Plan                                                                                                                                                                                                                                                                                 
|           | 
|10.25(25)  |  | Credit Agreement by and between Novellus Systems, Inc. and Bank of America, N.A., dated June 17, 2009.                                                                                                                                                                                                               
|           | 
|10.26(26)  |  | First Amendment to Credit Agreement by and between Novellus Systems, Inc. and Bank of America, N.A., dated September 23, 2009.                                                                                                                                                                                       
|           | 
|21.1       |  | Subsidiaries of Novellus Systems, Inc.                                                                                                                                                                                                                                                                               
|           | 
|23.1       |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                            
|           | 
|24.1       |  | Power of Attorney (see page 97).                                                                                                                                                                                                                                                                                     
|           | 
|31.1       |  | Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated February 24, 2010 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.



94



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|     |  |                                                                                                                                                                                                                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.2 |  | Certification of Jeffrey C. Benzing, Executive Vice President and Chief Administrative Officer of Novellus Systems, Inc. dated February 24, 2010 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 24, 2010 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 Jeffrey C. Benzing, Executive Vice President and Chief Administrative Officer of Novellus Systems, Inc. dated February 24, 2010 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 2.3 to Novellus Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



|(3) | 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



|(4) | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to Exhibit 10.4 filed with Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on July 31,
2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



|(9) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to Exhibit 10.9 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on July 31, 2009.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------



|(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 99.1 to Novellus Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2004.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------



95



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##### Table of Contents

|(18) | Incorporated by reference to Exhibit 10.19 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2008.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------



|(19) | 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.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------



|(20) | 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.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(21) | 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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------



|(22) | Incorporated by reference to Exhibit 10.27 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2008.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------



|(23) | Incorporated by reference to Exhibit 10.28 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on November 5, 2008.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(24) | Incorporated by reference to Exhibit 10.27 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on July 31, 2009.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------



|(25) | Incorporated by reference to Exhibit 10.28 to Novellus report on Form 10-Q filed with the Securities and Exchange Commission on July 31, 2009.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------



|(26) | Incorporated by reference to Exhibit 10.29 to Novellus report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2009.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|* | Management contracts or compensatory plans or arrangements.
|- | -----------------------------------------------------------



96



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on this 24th day of February, 2010.



NOVELLUS SYSTEMS, INC.By:

/s/    Richard S. HillRichard S. HillChairman of the Board of Directors andChief Executive Officer


POWER OF ATTORNEY

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

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



|                                             |  |                                                                                              |  |                  
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -----------------
|Signature                                    |  | Title                                                                                        |  | Date             
|                                             |  |                                                                                             
|/s/    Richard S.
Hill Richard S. Hill       |  | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) |  | February 24, 2010
|                                             |  |                                                                                             
|/s/    Jeffrey C.
Benzing Jeffrey C. Benzing |  | Executive Vice President and Chief Administrative Officer (Principal Financial Officer)      |  | February 24, 2010
|                                             |  |                                                                                             
|/s/    John D. Hertz John D. Hertz           |  | Vice President of Corporate Finance (Principal Accounting Officer)                           |  | February 24, 2010
|                                             |  |                                                                                             
|/s/    Neil R. Bonke Neil R. Bonke           |  | Director                                                                                     |  | February 24, 2010
|                                             |  |                                                                                             
|Youssef A. El-Mansy                          |  | Director                                                                                     |  |                  
|                                             |  |                                                                                             
|/s/    J. David
Litster J. David Litster     |  | Director                                                                                     |  | February 24, 2010
|                                             |  |                                                                                             
|/s/    Yoshio Nishi Yoshio Nishi             |  | Director                                                                                     |  | February 24, 2010
|                                             |  |                                                                                             
|/s/    Glen G.
Possley Glen G. Possley       |  | Director                                                                                     |  | February 24, 2010



97



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##### Table of Contents

|                                           |  |          |  |                  
|------------------------------------------ |  | -------- |  | -----------------
|Signature                                  |  | Title    |  | Date             
|                                           |  |         
|/s/    Ann D. Rhoads Ann D. Rhoads         |  | Director |  | February 24, 2010
|                                           |  |         
|/s/    William R.
Spivey William R. Spivey |  | Director |  | February 24, 2010
|                                           |  |         
|Delbert A. Whitaker                        |  | Director |  |                  



98



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##### Table of Contents

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

December 31,
2009, 2008 and 2007



|                                    |  |                            |       |           |   |            |  |   |                       |   |  |   |      
|----------------------------------- |  | -------------------------- | ----- | --------- | - | ---------- |  | - | --------------------- | - |  | - | -----
|                                    |  | Balance atBeginning ofYear |       | Additions |   | Deductions |  |   | Balance atEnd of Year
|                                    |  | (In thousands)            
|Allowance for doubtful accounts (1) |  |                            |       |           |   |            |  |   |                       |   |  |   |      
|2009                                |  | $                          | 4,057 |           | $ | 1,495      |  | $ | (2,946                | ) |  | $ | 2,606
|2008                                |  | $                          | 1,988 |           | $ | 2,686      |  | $ | (617                  | ) |  | $ | 4,057
|2007                                |  | $                          | 1,753 |           | $ | 879        |  | $ | (644                  | ) |  | $ | 1,988



|(1) | Deductions represent uncollectible accounts written off, net of recoveries and other adjustments.
|--- | -------------------------------------------------------------------------------------------------



99



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##### Table of Contents

EXHIBIT INDEX



|           |  |                                                                                                                                                                                                                                                    
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           | 
|3.1(1)     |  | Amended and Restated Articles of Incorporation of Novellus.                                                                                                                                                                                        
|           | 
|3.2        |  | Amended and Restated Bylaws of Novellus.                                                                                                                                                                                                           
|           | 
|10.1(2)    |  | 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(3)    |  | Environmental Agreement by and between Varian Associates, Inc. and Novellus dated May 7, 1997.                                                                                                                                                     
|           | 
|*10.3(4)   |  | Novellus 1992 Stock Option Plan, together with forms of agreements thereunder.                                                                                                                                                                    
|           | 
|*10.4(5)   |  | Amended and Restated 1992 Employee Stock Purchase Plan, as amended.                                                                                                                                                                                
|           | 
|*10.5(6)   |  | Form of Directors and Officers Indemnification Agreement.                                                                                                                                                                                          
|           | 
|*10.6(7)   |  | GaSonics International Corporation 1994 Stock Option/Stock Issuance plan, together with forms of agreements thereunder, as assumed by Novellus.                                                                                                    
|           | 
|*10.7(8)   |  | Gamma Precision Technology, Inc. 1998 Stock Option Plan, together with forms of agreements thereunder, as assumed by Novellus.                                                                                                                     
|           | 
|*10.8(9)   |  | GaSonics International Corporation Supplemental Stock Option Plan, as assumed by Novellus.                                                                                                                                                         
|           | 
|*10.9(10)  |  | 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)  |  | 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.                                 
|           | 
|*10.17(18) |  | Amended and Restated Employment Agreement between Novellus and Richard S. Hill effective as of July 24, 2009.                                                                                                                                      
|           | 
|10.18(19)  |  | Form of Non-Employee Director Restricted Stock Bonus Agreement, as amended.                                                                                                                                                                        
|           | 
|10.19(20)  |  | Form of Resale Restriction Agreement.                                                                                                                                                                                                              
|           | 
|*10.20(21) |  | Offer Letter of Employment to Ginetto Addiego dated February 2, 2005.                                                                                                                                                                              
|           | 
|*10.21(22) |  | Offer Letter of Employment to Fusen Chen dated October 4, 2004.                                                                                                                                                                                    
|           | 
|*10.22(23) |  | Amended Executive Voluntary Deferred Compensation Plan, as amended.                                                                                                                                                                                
|           | 
|*10.24(24) |  | Novellus 162(m) Executive Bonus Plan                                                                                                                                                                                                               
|           | 
|10.25(25)  |  | Credit Agreement by and between Novellus Systems, Inc. and Bank of America, N.A., dated June 17, 2009.                                                                                                                                             



100



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|          |  |                                                                                                                                                                                                                                                                                                                      
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|10.26(26) |  | First Amendment to Credit Agreement by and between Novellus Systems, Inc. and Bank of America, N.A., dated September 23, 2009.                                                                                                                                                                                       
|          | 
|21.1      |  | Subsidiaries of Novellus Systems Inc.                                                                                                                                                                                                                                                                                
|          | 
|23.1      |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                            
|          | 
|24.1      |  | Power of Attorney (see page 97).                                                                                                                                                                                                                                                                                     
|          | 
|31.1      |  | Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated February 24, 2010 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 Jeffrey C. Benzing, Executive Vice President and Chief Administrative Officer of Novellus Systems, Inc. dated February 24, 2010 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 24, 2010 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 Jeffrey C. Benzing, Executive Vice President and Chief Administrative Officer of Novellus Systems, Inc. dated February 24, 2010 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 2.3 to Novellus Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



|(3) | 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



|(4) | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to Exhibit 10.4 filed with Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on July 31,
2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



|(9) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



|(10) | Incorporated by reference to Exhibit 10.9 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on July 31, 2009.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------



|(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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------



101



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|(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 99.1 to Novellus Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2004.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(18) | Incorporated by reference to Exhibit 10.19 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2008.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------



|(19) | 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.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------



|(20) | 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.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(21) | 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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------



|(22) | Incorporated by reference to Exhibit 10.27 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2008.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------



|(23) | Incorporated by reference to Exhibit 10.28 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on November 5, 2008.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------



|(24) | Incorporated by reference to Exhibit 10.27 to Novellus Report on Form 10-Q filed with the Securities and Exchange Commission on July 31, 2009.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------



|(25) | Incorporated by reference to Exhibit 10.28 to Novellus report on Form 10-Q filed with the Securities and Exchange Commission on July 31, 2009.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------



|(26) | Incorporated by reference to Exhibit 10.29 to Novellus report on Form 8-Kfiled with the Securities and Exchange Commission on September 25, 2009.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------



|* | Management contracts or compensatory plans or arrangements.
|- | -----------------------------------------------------------



102