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

                                    FORM 10-K
(Mark One)
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999

[ ]     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 0-17157

                             NOVELLUS SYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)

                  CALIFORNIA                        77-0024666
       (State or other jurisdiction of           (I.R.S. Employer
        incorporation of organization)          Identification No.)


               4000 NORTH FIRST STREET SAN JOSE, CALIFORNIA 95134
               (Address of principal executive offices) (Zip Code)

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

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

                                                   Name of Each Exchange on
        Title of Each Class                            Which Registered
                None                                          N/A

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

                                  Common Stock
                                (Title of Class)

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   [X]    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. [X]

As of February 29, 2000 the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $5,786,500,000 based on the
average of the high and low prices of the Common Stock as reported on the NASDAQ
National Market on such date. Shares of Common Stock held by officers, directors
and holders of more than 5% of the outstanding Common Stock have been excluded
from this calculation because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

The number of shares of Common Stock outstanding on February 29, 2000 was
120,466,785.

Documents Incorporated by Reference: Part II of this Report on Form 10-K
incorporates by reference to Registrant's 1999 Annual Report to Shareholders.
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's Proxy Statement for its 2000 Annual Meeting of Shareholders.



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                                     PART I

ITEM 1. BUSINESS

Novellus Systems, Inc. ("Novellus" or "the Company") was incorporated in April
1984 as a California Corporation. The Company manufactures, markets and services
advanced automated wafer fabrication systems for the deposition of thin films
within the semiconductor equipment market. The Company is a leading supplier of
high productivity deposition systems used in the fabrication of integrated
circuits. Chemical Vapor Deposition (CVD) systems employ a chemical plasma to
deposit all of the dielectric (insulating) layers and certain of the conductive
metal layers on the surface of a semiconductor wafer. Physical Vapor Deposition
(PVD) systems are used to deposit conductive metal layers by sputtering metallic
atoms from the surface of a target source via high DC power. Electrofill systems
are used for depositing copper conductive layers in a dual damascene design
architecture using an aqueous solution. The Company's strategy is to focus on
major semiconductor manufacturers, and has sold one or more of its systems to
each of the 20 largest semiconductor manufacturers in the world.

INDUSTRY BACKGROUND

The semiconductor industry has experienced significant growth over the past
decade due to increased demand for personal computers and the internet; the
expansion of the telecommunications industry (and especially wireless
communications); the emergence of new applications such as consumer electronics
products; and the increased semiconductor content in these electronics systems.
Significant performance advantages and lower prices for integrated circuits have
contributed to the growth and expansion of the semiconductor industry over time.

The semiconductor market is cyclical by nature, however, characterized by
short-term periods of either under or oversupply for both memory and logic
devices. When demand decreases, semiconductor manufacturers typically slow their
purchasing of capital equipment; conversely, when demand increases, so does
capital spending. The late 1990s also saw the emergence of a new trend, driven
by the increasingly rapid pace in which the size of the circuitry on the chip is
decreasing. When chips decrease in size, circuits can operate more quickly. With
size reduction, too, more chips can be produced on a given wafer size, and the
yield per manufacturing machine goes up. So, with decreasing chip size more
chips can be produced per machine, and there's a decreased need to build new
manufacturing plants, in particular, for pure capacity expansion. New equipment
featuring the latest technological advances, however, must often be purchased to
manufacture the smaller-sized chips, and in many cases is retrofit into existing
manufacturing facilities.

The fabrication of integrated circuits requires a number of complex and
repetitive processing steps, including deposition, photolithography and etch.
Deposition is a process in which a film of either electrically insulating or
electrically conductive material is deposited on the surface of a wafer. The
three principal methods of this film deposition are CVD, which can be used to
deposit both insulating and conductive films; PVD, which is used primarily for
sputtering conductive metals onto the wafer surface; and electrofill, a process
for depositing metal films via an electrically charged aqueous solution.

In the CVD process, wafers are typically placed in a reaction chamber and a
variety of pure and precisely metered gases are introduced while some form of
energy is added to activate a chemical reaction on the wafer surface. The result
of this reaction is the deposition of a film on the wafer. CVD processes are
used to deposit all of the dielectric films in an integrated circuit. The
dielectric layers in an integrated circuit include the initial interlayer,
portions of the interconnect layers and the final passivation layer. CVD is also
used for deposition of conductive metal layers, particularly those metals that
are more difficult to deposit in smaller line width geometry devices through
conventional PVD or other deposition technologies. CVD technology is
particularly effective for depositing blanket tungsten as a "plug" layer that
connects one conductive metal layer to another in a multi-level integrated
circuit. For such applications, tungsten is replacing aluminum, which has
certain physical properties that reduce its efficacy for the smaller
interconnect holes of devices with smaller line width geometries.

PVD, also known as "sputtering," is a process whereby ions of an inert gas,
typically argon, are electrically accelerated in a high vacuum toward a target
of pure metal, such as aluminum, tantalum, or copper. Upon impact, the argon
ions "sputter" off bits of the target material, which then deposits on the
silicon wafer to form thin conductive films which "wire" the thousands of
transistors in the computer chip together.

PVD processes are used to provide conducting liner and barrier metal layers to
prevent diffusion or reactions between metals such as tungsten and silicon
regions, and to provide underlying foundations for the nucleation of other metal
deposition layers. Aluminum PVD is also widely used at the present time as the
primary wiring material in up to six layers of device interconnect. The Company
believes, however, that PVD tantalum barrier and copper seed layers will play an
important role in enabling the transition from aluminum to copper as the primary
wiring material.

As the industry transitions to smaller and smaller line widths, a fundamental
change is occurring with the movement from aluminum to copper wires as the
primary conductors. Copper has lower resistance and capacitance values than
aluminum, the present conductive metal used in integrated circuits. Because of
this fact, copper has the potential to double the speed of an advanced
microprocessor while reducing the number of metal layers required by as much as
50%.

The electrofilling process was developed to deposit copper conductive lines. Due
to the difficulties in etching copper, the metal is filled in a structure
created within the circuit's insulating layers in a process called dual
damascene: this is the reverse of the process used with aluminum, where the
metal is deposited, etched to create lines and vias, and then filled with
insulating layers between the metal lines. The most difficult task is filling
copper into interconnect structures which can be less than 0.25 micron in width,
with aspect ratios of up to 5:1. Electrofilling employs a liquid chemistry and
electrolytic principles to deposit the copper wiring into the dielectric
structure, a simple and cost-effective process that is also highly reliable.



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Electrofill processes are used to produce the primary copper conductive layers
in advanced integrated circuits (typically circuits smaller than 0.25 micron).
The technology is believed by the Company to be extendible until at least the
0.13 micron design rule, and possibly down to 0.10 design rules; or in other
words, approximately another 5 or 6 years given the current industry evolution.

Advanced integrated circuit technology has created increased demand for more
sophisticated semiconductor processing equipment. Today's complex semiconductor
devices are being designed with line width geometries as small as 0.25 microns,
with up to six layers of interconnect circuitry. The next generation of
semiconductor devices, including 256 megabit DRAMs, will see line widths as
small as 0.18 micron, and Novellus believes there will be widespread transition
from aluminum to copper conductive lines for faster processing speeds. Each
additional interconnect layer requires three separate layers of deposition,
which include the initial metal layer, a non-conductive dielectric layer and
then a "plug" metal film to fill patterned holes in the dielectric layer that
connects the metal layers on either side of the dielectric. The Company believes
that the greater complexity and number of interconnect layers in advanced
integrated circuits will enable the markets for CVD aluminum and PVD aluminum to
grow over the short term.

Semiconductor manufacturers generally measure the cost performance of their
production equipment in terms of "cost per wafer," which is determined by
factoring in the fixed costs for acquisition and installation of the system, its
variable operating costs and its net throughput rate. A system with higher
throughput allows the semiconductor manufacturer to recover the purchase price
of the system over a greater number of wafers and thereby reduce the cost of
ownership of the system on a per wafer basis. Throughput is most accurately
measured on a net or overall basis, which takes into account the processing
speed of the system and any non-operational downtime for cleaning, maintenance
or other repairs. Yield and film quality are also significant factors to the
semiconductor manufacturer in selecting processing equipment. The increased
costs of larger and more complex semiconductor wafers have made high yields
extremely important to semiconductor manufacturers. To achieve higher yields and
better film quality, deposition systems must be capable of repeating the
original process on a consistent basis without a disqualifying level of defects.
This characteristic, known in the industry as "repeatability," is extremely
important in achieving commercially acceptable yields. Repeatability is more
easily achieved in those systems that can operate at desired throughput rates
without requiring the system to approach its critical tolerance limits.

The continuing evolution of semiconductor devices to smaller line width
geometries and more complex multi-level circuitry has significantly increased
the cost and performance requirements of the capital equipment used to
manufacture these devices. An advanced 200 mm wafer fabrication line can cost
over $1 billion, representing a substantial increase over the costs of prior
generation facilities. Increased capital depreciation costs will continue to
become a much larger percentage of the aggregate production costs for
semiconductor manufacturers relative to labor, materials and other variable
manufacturing costs. As a result, there has been an increasing focus by the
semiconductor industry on obtaining increased productivity and higher returns
from its semiconductor manufacturing equipment, thereby reducing the effective
cost of ownership of such systems.

THE NOVELLUS SOLUTION

Novellus focuses on advanced thin film deposition systems (CVD, PVD, and
electrofill) that provide high film quality while attaining the high levels of
productivity required to meet the semiconductor industry's need for high volume,
low cost wafer production. The Company's multi-station sequential processing
architecture of its PECVD and CVD tungsten products enables these systems to
address each of the following critical parameters of system performance:

CVD Solutions

    Throughput, Cost per Wafer. In contrast to CVD systems which process only
    one wafer at a time in a chamber, the Company's multi-station sequential
    deposition systems can process five, six, or even seven wafers at the same
    time in a chamber, leading to higher throughput levels. The design
    simplicity and automatic cleaning capabilities of the Company's systems
    further increase net throughput by reducing production downtime.

    Film Quality. With Novellus' unique sequential system design, each wafer
    receives a fraction of the desired film thickness at each of the five, six,
    or seven deposition stations in the process chamber. The "averaging" effect
    created by this design tends to reduce anomalies in film thickness and
    thereby improves film uniformity and quality. The Company's systems, for
    most films, can obtain within-wafer and wafer-to-wafer uniformity levels of
    +/- 1% of film thickness as measured at one standard deviation, which the
    Company believes is state-of-the-art for the industry.

    Process Repeatability. Because of the inherently higher throughput potential
    of continuous processing, the Company's systems are able to deposit
    materials at lower, more controlled rates than single wafer processing
    systems, which generally deposit at faster rates closer to the process
    performance limits to achieve production-level throughputs. Lower deposition
    rates avoid straining the system's process tolerance limits and thereby
    permit increased process control and repeatability.

PVD Solutions. Through the acquisition of Varian's Thin Film Systems division in
1997, Novellus has extended its capabilities in PVD, introducing the INOVA(TM)
system in April of 1998. PVD, a critical technology in the production of
advanced semiconductor logic and memory devices, enables Novellus to provide
metal deposition solutions for both aluminum primary conductor as well as copper
barrier/seed layers.



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Copper Electrofilling Solutions. Introduced in June 1998 after an extensive
joint development program with IBM's Microelectronics Division, the SABRE(TM)
copper electrofill tool is the industry's only production-proven machine for
depositing copper conductive layers on sub-0.25 micron circuits. SABRE employs a
patented wafer fixture to avoid backside contamination of the wafer from the
plating bath; a unique bath cell design that ensures reproducibility of the
copper fill; and a simple system architecture that ensures both high wafer
throughput and system availability. Coupled with the INOVA PVD system, Novellus
is able to offer a complete copper solution for the deposition of advanced
circuits.

STRATEGY

The Company's objective is to increase its market share in the worldwide Thin
Film Deposition market and strengthen its position as a leading supplier of
semiconductor processing equipment. The key elements of the Company's strategy
are as follows:

Emphasis on High Productivity Deposition Systems. Novellus focuses on providing
high productivity thin film deposition systems to leading semiconductor
companies. The Company addresses the needs of semiconductor manufacturers
through either its multi-chamber or unique continuous processing architecture,
which enables its systems to attain high levels of wafer throughput, yield and
film quality. The architecture's simple design also provides the Company's
systems with long up-time and smaller footprints. The Company intends to retain
its focus on productivity by leveraging its multi-chamber and continuous
processing architecture in product enhancements and new product offerings.

Leadership in dielectric and metallization deposition technologies. The
Company's strategy is to provide a family of deposition systems, which utilize
advanced CVD, PVD, and electrofilling technologies to address leading-edge wafer
processing needs. The Company's Concept One(TM) Dielectric system offers dual
frequency deposition technology to achieve results for a wide variety of films
on wafers as large as eight inches and geometries as small as 0.35 micron. The
Company's Concept One-W is used by manufacturers to connect multiple metal
layers in advanced devices; the Company believes that it is currently the only
system that provides full coverage tungsten deposition on a wafer's surface. The
Company's Concept Two(TM) system is a modular CVD system designed to address the
needs of wafer fabs that demand greater levels of wafer processing integration,
higher volume production and increased factory automation. The Company is
focusing its research and development efforts on additional Concept Two modules;
advanced PVD and electrofilling technology; "gap fill" high-density plasma (HDP)
technology; low-k dielectric materials; and additional advanced technologies for
the next generation of smaller geometry fabrication lines, as well as equipment
to process 300mm wafers. The Company's first offering in the advanced HDP
technology market, SPEED(TM) was introduced in February 1996. Novellus further
believes that the INOVA(TM) system will provide an advanced PVD system that can
deliver tantalum barriers and copper seed layers for copper metallization, as
well as Ti/Ti-nitride film quality with excellent particle performance. And
finally, the company believes that the SABRE electrofill tool is emerging as the
industry choice for the fill of copper vias and trenches using a dual damascene
process.

Focus On Major Semiconductor Manufacturers. The Company has sold one or more
deposition systems to each of the 20 largest semiconductor manufacturers in the
world. The Company's sales objective is to work closely with customers to secure
purchase orders for multiple systems as these customers expand existing
facilities; retrofit old facilities with new equipment; or build new fabs. The
Company seeks to build customer loyalty and achieve a high level of repeat
business by offering high reliability products, comprehensive field support and
a responsive parts replacement and service program.

Expansion Of Asian Market Presence. While Novellus derives a significant
percentage of its net sales from the Asian marketplace, the Company believes
that substantial additional growth potential exists in the region over the long
term. Countries such as Japan, Taiwan, and Korea continue to represent a
disproportionate share of the world's capacity for semiconductor manufacturing,
and all are now showing a rebound from the industry downturn of 1997-1999. The
Asian countries are particularly dominant in the manufacturing of memory
products, which are enabling technologies for end use consumer applications such
as the Internet. Currently, the Company's local presence in Asia includes sales
and support offices throughout Japan (via the Company's wholly owned subsidiary,
Nippon Novellus); two offices in Taiwan, and one each in Korea, China and
Singapore. Novellus believes it is an important part of its current business
strategy to aggressively build its presence in Asia to serve this strategically
significant region.

Low Manufacturing Cost Structure. Novellus utilizes an outsourcing strategy for
the manufacture of major subassemblies and performs system design, assembly and
testing in-house. Novellus believes that outsourcing enables it to minimize its
fixed costs and capital expenditures while also providing the flexibility to
increase capacity as needed. This strategy also allows the Company to focus on
product differentiation through system design and quality control. Through the
use of third party manufacturing specialists, the Company ensures that its
subsystems incorporate advanced technologies in robotics, gas panels and
microcomputers. The Company works closely with its suppliers to achieve mutual
cost reduction through joint design efforts.



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PRODUCTS

Since the introduction of its original Concept One Dielectric system in 1987,
the Company has developed and now offers a family of processing systems for the
dielectric and metal deposition markets. The Concept One Dielectric deposits a
variety of insulating or "dielectric" films on wafers including Oxide, Nitride
and TEOS. In 1990, the Company introduced a modified version of the Concept
One-Dielectric, the Concept One-W, which also uses a CVD process to deposit
blanket tungsten metal films on wafers primarily as the metal interconnect
between conductor layers in the integrated circuit layers. In November 1991, the
Company introduced the Concept Two, which is a modular, integrated production
system capable of depositing both dielectric and conductive metal layers by
combining one or more processing chambers around a common, automated robotic
wafer handler. In February 1996, the Company introduced SPEED on the Concept Two
platform, targeted at advanced inter-metal dielectric ("IMD") deposition.
Following the acquisition of Varian's Thin Film Systems Division, the Company
announced the introduction of its INOVA system, an advanced PVD system that
delivers Maxfill aluminum and Ti/Ti-nitride film quality for aluminum barrier
layer applications, as well as highly conformal tantalum barrier copper seed
layers (barrier/seed) for copper conductive layers. Most recently, in June 1998
Novellus announced the SABRE copper Electrofill(TM) system for producing copper
conductive layers. With the SABRE product announcement, Novellus can now provide
its customers with the entire set of metal and dielectric deposition processes
required for 0.25 micron devices and below.

CONCEPT ONE-DIELECTRIC

The Concept One-Dielectric is shipped in two versions: the Concept One-150,
which processes 100, 125, and 150 mm wafers (approximately 4, 5, and 6 inches in
diameter), and the Concept One-200, which processes 125, 150 and 200 mm wafers
(approximately 5, 6 and 8 inches in diameter, designed for advanced eight inch
fabrication lines).

The Concept One consists principally of two attached chambers and associated
hardware and electronics. The first chamber of the system, called the
"loadlock," isolates the process chamber from the outside environment. Depending
on the model of the Concept One-Dielectric, the loadlock accepts up to 75 wafers
sized from 100 to 200 mm, stored in cassette carriers. The operator inserts the
cassettes of wafers in batches into the loadlock, and the pressure inside the
loadlock is decreased to create a vacuum, which matches the constant pressure
level of the process chamber. A robotic arm in the center of the loadlock, the
wafer transport mechanism, transfers wafers one at a time from the cassettes to
the process chamber and, upon completion of the deposition process, returns the
finished wafers to the cassettes. The loadlock isolates the process chamber from
the fabrication environment, permitting the process chamber to remain at
constant temperature and pressure while wafers are transferred from the
clean-room to the loadlock and from the loadlock to the process chamber. These
stable process chamber conditions enhance film quality, process repeatability,
and throughput. The loadlock design also reduces particulate contamination
because the robotic arm is the only moving mechanism in the loadlock and because
the wafer cassettes are isolated from the clean-room.

The process chamber for the Concept One-Dielectric has six or eight stations,
depending on the model. One station is used as a load/unload site and the
remaining five, six, or seven stations are used for wafer deposition. Each
deposition station employs a dedicated shower head which delivers gases and
plasma energy to the wafer surface. In a six station process chamber, for
example, each wafer moves through the system and stops at each of the five
deposition stations to receive one-fifth of its preprogrammed film thickness.
Some CVD products, called "single wafer" systems, process only one wafer at a
time in a process chamber, while multistation continuous process systems, like
the Concept One, can process numerous wafers at the same time. The continuous
processing capabilities of a multistation system generally enable such systems
to attain higher throughput while using a less critical, more repeatable process
than would be required for a single wafer system at equivalent throughput
levels. This multiple deposition design also results in greater film uniformity
and improved film quality because small variations in deposition at any single
station tend to be offset by deposition of the same film at other stations.

After the entire batch of up to 75 wafers has been processed and returned to the
cassettes, an automatic cleaning cycle in the process chamber removes residual
deposition materials, which could otherwise cause particulate contamination in a
subsequent deposition process. During this cleaning cycle, the loadlock
automatically returns to atmospheric pressure, enabling the operator to remove
the cassettes of finished wafers without impacting system throughput.

The Concept One-Dielectric uses electrical radio frequency (RF) plasma energy to
enhance thermal energy, enabling the system to process wafers at a relatively
low temperature, and thus reducing the risk of heat damage to existing metal
layers during processing. The system also suppresses hillock formation by
limiting the time that the wafer is exposed to elevated temperatures prior to
deposition. The wafer is heated for 10 seconds or less in advance of deposition
in the Concept One-Dielectric, which the Company believes is one of the shortest
preheat times of any CVD system. Stress related defects are addressed through
the system by addition of a proprietary dual frequency, "stress control" option
which the Company offers. The system's vacuum loadlock reduces the level of
particles, thereby improving film quality by isolating the process chamber of
the Concept One-Dielectric from temperature and pressure fluctuations. In
addition, the automatic cleaning capability and relatively simple mechanical
design of the system reduce particulate contaminants and thereby increase yields
and film quality.

In 1995, the Company introduced an extension to its Concept One-Dielectric
system, the Concept One Maxus(TM). The Maxus extends the Company's performance
in nitride passivation by enhancing the nitride deposition rate while retaining
nitride film performance. It also enhances the gap fill capability of TEOS films
by enabling fluorinated-TEOS (F-TEOS) processing for .35 micron gap fill. F-TEOS
enables the customer to lower the dielectric constant to 3.7, an important
capability in enhancing device performance. The Maxus is also available on the
Concept Two platform.



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CONCEPT ONE-W

The Concept One-W was introduced in 1990 to address the tungsten CVD market. The
Concept One-W deposits blanket tungsten metal films, increasingly used in
advanced semiconductor devices to connect multiple metal layers in the
integrated circuit. Like the Concept One-Dielectric, the Concept One-W uses a
multistation sequential deposition design that achieves high throughput with
desirable film properties for the entire range of film thickness. The Concept
One-W also uses an approach patented by the Company to provide full-coverage
front-side tungsten deposition while preventing deposition of tungsten on the
backside of the wafer. This capability helps prevent the generation of damaging
particles on the wafer and eliminates the need for time-consuming etching on the
backside of the wafer to remove the film.

During 1993, the Concept One-W successfully completed a 21 day, 24 hour-per-day
wafer manufacturing trial at SEMATECH, a U.S. semiconductor industry consortium.
The results of this extended manufacturing trial demonstrated that the Concept
One-W achieved or surpassed all program goals, which included system
availability, film uniformity, particulates and other film properties. In 1993,
SEMATECH also announced that the Concept One-W was one of a group of U.S.
manufactured semiconductor production tools capable of producing devices with
0.35 micron geometries. The success of the Concept One-W in these SEMATECH
trials was a major milestone for the Company in attaining market acceptance for
the Concept One-W with major U.S. semiconductor manufacturers, and in enabling
the Company to penetrate certain of these important accounts.

CONCEPT TWO

The Concept Two, introduced in November 1991, is a modular, integrated
production system capable of depositing both dielectric and conductive metal
layers by combining one or more processing chambers around a common, robotic
wafer handler. The Concept Two enables the semiconductor manufacturer to
increase production throughput and system capability as needed without equipment
replacement by adding additional process modules through the Concept Two's
modular configuration. The Concept Two was initially available with a tungsten
process chamber and a PVD process module for deposition of certain metal layers.
In late 1994, a dielectric process module became available for Concept Two
systems. The Concept Two has been designed to be compatible with the modular
equipment interface standard established by the Modular Equipment Standards
Committee ("MESC"), sponsored by SEMATECH.

The Concept Two in a typical configuration incorporates a central cassette
module and wafer handler that interfaces with the clean-room, and includes
multiple interfaces for process or transport modules. The cassette module,
through its robotics, manages wafer movement between the various processing
stations that can be included in a particular Concept Two configuration.
Different cassette modules are available, depending on customer requirements. An
optional isolation chamber is also available that is connected to the cassette
module to connect high vacuum process chambers and other portions of the system.

In 1993, the Company introduced the Concept Two-ALTUS(TM), which combines the
modular architecture of the Concept Two system with an advanced tungsten CVD
process chamber. The system features a dual loadlock cassette module with full
factory automation capability to meet the high throughput requirements of high
volume, automated eight inch wafer fabs. This dual loadlock cassette handler
permits continuous operation of the process chamber with one loadlock, while a
second loadlock is simultaneously being loaded or unloaded by the operator in
the clean-room. Through its modular configuration, the Concept Two enables the
semiconductor manufacturer to combine multistation modules for slower processes
with single wafer modules for faster processes to balance the throughput of the
overall system. A dielectric version of the Concept Two ALTUS(TM), the Concept
Two SEQUEL(TM), was shipped in late 1994. This system brought the same level of
factory automation and throughput to the dielectric market as the ALTUS did to
the metals market. The Concept Two SEQUEL(TM) was initially shipped in a single
chamber version targeted at thin dielectric films used in volume 200mm
inter-metal dielectric production applications.

In 1994, the Company introduced the Concept Two-Dual ALTUS tungsten deposition
system. The Dual ALTUS features the production proven performance of Novellus'
tungsten CVD chamber in a dual chamber configuration that delivers the
throughput power to dramatically lower the cost of tungsten deposition. The
Company believes that the Dual ALTUS is a solution in the industry for very high
volume 200mm wafer fabs producing 0.35 micron semiconductor devices.

Subsequent to 1994, the Company has continued to expand its Concept Two product
offerings as follows:

CONCEPT TWO DUAL SEQUEL

This dual chamber version of the SEQUEL dielectric family is designed for high
throughput deposition of thick films, such as layers before CMP (chemical
mechanical polishing), and dual layer passivation films. The Dual SEQUEL employs
two process chambers to provide the throughput power of twelve stations,
resulting in dramatic improvements in productivity for these types of films.

CONCEPT TWO SEQUEL-S AND ALTUS-S

These enhanced versions of the SEQUEL and ALTUS systems offer improved
throughput performance for both thick and thin dielectric films, while occupying
45% less space than previous versions. They also provide a range of improved
maintainability features and design enhancements that reduce customer facilities
costs. The two products are available in both single and dual chamber versions.



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CONCEPT TWO SEQUEL EXPRESS(TM)

Introduced in June of 1999, SEQUEL EXPRESS is an advanced version of the SEQUEL
system, designed to deposit Novellus' CORAL(TM) family of low-k dielectric
films, as well as all other advanced films required for 0.18 micron and smaller
devices. With a throughput in excess of 110 wafers per hour, SEQUEL EXPRESS
delivers up to 40 percent higher capital productivity and up to 40 percent lower
cost of ownership than competing CVD systems.

CONCEPT TWO PRISM(TM)

The Prism(TM) MOCVD Ti-nitride system offers thin barrier solutions for high
aspect ratio structures with barrier properties, conformality and film
stability. This system is used to form a high quality, low cost barrier/adhesion
layer prior to depositing tungsten. The Company began shipments of this system
in 1996.

CONCEPT TWO SPEED

Introduced in February 1996, SPEED is the Company's advanced dielectric gap fill
system, the semiconductor capital equipment industry's first high density plasma
deposition solution capable of high-volume manufacturing. SPEED is targeted for
advanced IMD deposition for 0.35 micron devices and below. SPEED is offered
either as a stand alone gap fill system or integrated with the Concept Two
SEQUEL to provide a complete high-throughput, low-cost gap fill and chemical
mechanical polishing gap layer solution for logic manufacturing. SPEED is a
single wafer processing system, and uses a patented hemispherical source design
and a proprietary electrostatic chuck to provide excellent fill,
reproducibility, low damage and high throughput. In 1996 the Company received
and shipped orders for multiple production SPEED systems and announced an
enhanced version (SPEED-S) that occupies 40% less space, thus improving
throughput densities for customers.

ANTI REFLECTION LAYER

In December 1996, the Company announced a new plasma enhanced anti-reflection
layer film ("ARL"). The ARL product, PEARL(TM), achieves tighter levels of
critical dimension control with in-line and Deep UV lithography in advanced
semiconductor devices while reducing cost per wafer. Running on a Concept Two
SEQUEL, the Company believes that PEARL offers competitive throughput and low
cost of ownership for the industry. The PEARL product is currently being used in
production in customer manufacturing facilities.

CORAL(TM) LOW-K DIELECTRIC FILMS

Commensurate with the launch of SEQUEL EXPRESS in June of 1999, Novellus
introduced the CORAL family of low dielectric constant (low-k) films, designed
for the manufacture of advanced devices down to sub-0.1 micron geometries, and
in particular, copper dual damascene structures. CORAL films are carbon-doped
oxide CVD films with dielectric constants in the range of 3.3 k to less than 2.5
k. Matched with Novellus' thin films for copper barriers and etch stops, CORAL
yields an effective capacitance reduction of up to 40 percent in semiconductor
devices.

CONCEPT THREE(TM)

In December 1997, the Company introduced its Concept Three family of chemical
vapor deposition systems for dielectric and tungsten applications on 300mm
wafers. The Concept Three(TM) products include the C3-SPEED(TM), the
C3-SEQUEL(TM), and the C-3 ALTUST(TM). Because the Concept Three systems are
based on the production proven Novellus Concept Two products, the Company
believes that they should offer minimal risk to its customers in making the
transition from 200mm to 300mm volume chipmaking.

INOVA(TM) SYSTEM

Introduced in April 1998, the INOVA system is an advanced PVD system that
delivers tantalum barrier and copper seed layers required prior to copper
electrofilling, as well as Maxfill aluminum and Ti/Ti-nitride films for aluminum
liner/barrier applications. The INOVA incorporates Novellus' uniquely-designed
Hollow Cathode Magnetron ("HCM") technology, which the Company believes offers
better target utilization, extended maintenance intervals, and lower cost of
ownership in comparison with collimated and other ionized sputtering techniques.
The INOVA is a multi-chamber single wafer processing system.

SABRE

The SABRE system was introduced in July 1998 after an extensive development
program with IBM and is believed by the Company to be the most reliable and
technologically advanced copper electrofilling system available on the market.
SABRE has been proven to provide void-free copper fill of sub-0.15 micron trench
features (at 9 or 10:1 aspect ratios) and 0.25 micron vias (at 5:1 aspect
ratios). SABRE employs a proprietary electrofilling cell that eliminates the
backside wafer contamination of copper, and features a unique plating cell
design that ensures reproducibility of the copper fill, with a film uniformity
of 3 sigma, < 5% with a wafer. SABRE requires only two types of process modules
to complete the electrofill process, one for electrofilling (3 stations total)
and the other for spin/rinse/dry (another 3 stations). The resulting simplicity
of this design is key to the system's high reliability and manufacturing
availability.



                                       7
<PAGE>   8
SABRE xT

Introduced in April of 1999, the SABRE xT is a second-generation electrofill
tool designed to provide void-free fill in 0.13 micron geometries with aspect
ratios up to 10:1. The xT is a 200 mm/300 mm "bridge tool" (i.e., capable of
processing either 200 or 300 mm wafers) that incorporates process enhancements
in the areas of electrical waveforms, advanced bath chemistries, and automated
chemical monitoring and control using Novellus' proprietary SmartDose(TM)
algorithm. Up to 75 wafers per hour can be processed by the SABRE xT. Within
wafer uniformity performance of <2% 1 sigma and wafer-to-wafer uniformity of <1%
1 sigma has been achieved with the SABRE xT in a production environment.

MARKETING, SALES AND SERVICE

Novellus markets its products worldwide to manufacturers of semiconductors,
including both captive fabrication lines (which produce semiconductors primarily
for internal consumption) and merchant semiconductor manufacturers (which
produce semiconductors primarily for sales to third party customers). In North
America, the Company sells products primarily through a direct sales force. The
Company's U.S. sales and support offices are located in Salem, New Hampshire;
Orlando, Florida; Austin and Dallas, Texas; Phoenix, Arizona; Hopewell Junction,
New York; Williston, Vermont; Bath, Pennsylvania; Manassas, Virginia; Vancouver,
Washington, and Newport Beach, California. In Europe, the Company's products are
predominantly sold through a wholly owned subsidiary, Novellus Systems, Ltd.,
which has sales and support facilities outside London, England, and in Scotland.
The Company also has sales and services support offices in The Netherlands,
France, Germany, Ireland and Israel. In Asia, the Company sells its products
through wholly owned subsidiaries in Japan, Korea, Taiwan, Singapore and China.
The Company's Japanese subsidiary maintains its headquarters near Tokyo and has
eight sales offices throughout Japan.

The ability to provide prompt and effective field support is critical to the
Company's sales efforts, due to the substantial operational and financial
commitments made by customers that purchase a deposition system. The Company's
strategy of supporting its installed base through both its customer support and
research and development groups has served to encourage use of the Company's
systems in production applications and has accelerated penetration of certain
key accounts. The Company believes that its marketing efforts are enhanced by
the technical expertise of its research and development personnel who provide
customer process support and participate in a number of industry forums, such as
conferences and publications.

The Company believes that its ability to service its customers is enhanced by
the design simplicity of its systems. The Company generally warrants its
products against defects in design, materials, and workmanship. In 1992, the
Company became the first semiconductor equipment manufacturer to extend its
warranty to 24 months from shipment and in 1993 also included the cost of all
consumable parts in the system and preventative maintenance parts under
warranty. The Company offers maintenance contracts as an additional service to
its customers.

For the year ended December 31, 1999, one customer accounted for approximately
17% of the Company's net sales. For the years ended December 31, 1998 and 1997,
there were no individual customers who accounted for more than 10% of the
Company's net sales.

Export sales (including sales made by the Company's Japanese subsidiary) for the
year ended December 31, 1999 were approximately $394.4 million, or 67% of net
sales. Export sales for the year ended December 31, 1998 were approximately
$262.3 million, or 51% of net sales. For the year ended December 31, 1997,
export sales were approximately $250.1 million or 47% of net sales.

Historically, the Company has sold a significant proportion of its systems in
any particular period to a limited number of customers. Sales to the Company's
ten largest customers in 1999, 1998 and 1997 accounted for 65%, 57%, and 48% of
net sales, respectively. The Company expects that sales of its products to
relatively few customers will continue to account for a high percentage of its
net sales in the foreseeable future. None of the Company's customers has entered
into a long-term agreement requiring it to purchase the Company's products. The
Company believes that sales to certain of its customers will decrease in the
near future as those customers complete current purchasing requirements for new
or expanded fabrication facilities. Although the composition of the group
comprising the Company's largest customers has varied from year to year, the
loss of a significant customer or any reduction in orders from any significant
customer, including reductions due to customer departures from recent buying
patterns, market, economic or competitive conditions in the semiconductor
industry or in the industries that manufacture products utilizing integrated
circuits, could adversely affect the Company's business, financial condition and
results of operations. In addition, sales of the Company's systems depend in
significant part upon the decision of a prospective customer to increase
manufacturing capacity or to expand current manufacturing capacity, both of
which typically involve a significant capital commitment. The Company has from
time to time experienced delays in finalizing system sales following initial
system qualification. Due to these and other factors, the Company's systems
typically have a lengthy sales cycle during which the Company may expend
substantial funds and management effort.

BACKLOG

As of December 31, 1999, the Company's backlog was $329.5 million, as compared
to a backlog of $108.4 million at December 31, 1998. The Company includes in its
backlog only those customer orders for which it has accepted purchase orders and
assigned shipment dates within twelve months. All orders are subject to
cancellation or rescheduling by customers with limited or no penalties. Because
of orders received in the same quarter in which a system is shipped, possible
changes in system delivery schedules, cancellations of orders and delays in
systems shipments, the Company's backlog at any particular date is not
necessarily a reliable indicator of actual sales for any succeeding period.



                                       8
<PAGE>   9

RESEARCH AND DEVELOPMENT

The semiconductor manufacturing industry is subject to rapid technological
change and new product introductions and enhancements. The Company's ability to
remain competitive in this market will depend in part upon its ability to
develop new and enhanced systems and to introduce these systems at competitive
prices and on a timely and cost-effective basis. Accordingly, the Company
devotes a significant portion of its personnel and financial resources to
research and development programs and seeks to maintain close relationships with
its customers to remain responsive to their product needs.

The Company's current research and development efforts are directed at
development of new systems and processes and improving existing system
capabilities. The Company is focusing its research and development efforts on
additional Concept Two modules, advanced PVD systems, advanced gap fill
technology, primary conductor metals, low-K dielectric materials and additional
advanced technologies for the next generation of smaller geometry fabrication
lines, as well as equipment to process 300mm wafers.

Expenditures for research and development during 1999, 1998 and 1997 were $119.7
million, $106.5 million, and $89.8 million, respectively, or approximately 20%,
21%, and 17% of net sales, respectively. The amount and percentage of sales in
1997 for research and development exclude the in-process research and
development charge of $119.2 million related to the acquisition of Varian's Thin
Film Systems business (TFS). The Company expects in future years that research
and development expenditures will continue to represent a substantial percentage
of net sales.

The success of the Company in developing, introducing and selling new and
enhanced systems depends upon a variety of factors, including product selection,
timely and efficient completion of product design and development, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. There can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing its existing products.
As is typical in the semiconductor capital equipment market, the Company has
experienced delays from time to time in the introduction of, and certain
technical and manufacturing difficulties with, certain of its systems and
enhancements and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. The Company's inability to complete the development or meet the
technical specifications of any of its new systems or enhancements or to
manufacture and ship these systems or enhancements in volume in a timely manner
would materially adversely affect the Company's business, financial condition
and results of operations. In addition, the Company may incur substantial
unanticipated costs to ensure the functionality and reliability of its future
product introductions early in the product's life cycle. If new products have
reliability or quality problems, reduced orders or higher manufacturing costs,
delays in collecting accounts receivable and additional service and warranty
expense may result. Any of these events could materially adversely affect the
Company's business, financial condition and results of operations.

MANUFACTURING

The Company's manufacturing activities consist primarily of assembling and
testing components and subassemblies which are acquired from third party vendors
and then integrated into a finished system by the Company. The Company utilizes
an outsourcing strategy for the manufacture of major subassemblies and performs
system design, assembly and testing in-house. Novellus believes that outsourcing
enables it to minimize its fixed costs and capital expenditures while also
providing the flexibility to increase production capacity. This strategy also
allows the Company to focus on product differentiation through system design and
quality control. Through the use of manufacturing specialists, the Company
believes that its subsystems incorporate advanced technologies in robotics, gas
panels and microcomputers. The Company works closely with its suppliers on
achieving mutual cost reduction through joint design efforts.

The Company manufactures its system units in clean-room environments, which are
similar to the clean rooms used by semiconductor manufacturers for wafer
fabrication. This procedure is intended to reduce the amount of particulates and
other contaminants in the final assembled system, which in turn improves yield
and reduces the level of contaminants at the customer level. Following assembly,
the completed system is packaged in a plastic shrink wrap to maintain clean-room
standards during shipment.

The Company uses numerous suppliers to supply parts, components and
subassemblies (collectively, "parts") for the manufacture and support of its
products. Although the Company makes reasonable efforts to ensure that parts are
available from multiple suppliers, this is not always possible; accordingly,
certain key parts are obtained from a single supplier or a limited group of
suppliers. These suppliers are, in some cases, thinly capitalized, independent
companies that generate significant portions of their business from the Company
and/or a small group of other companies in the semiconductor industry. Although
the Company seeks to reduce its dependence on these limited source suppliers,
disruption or termination of certain of these sources could occur and such
disruptions could have at least a temporary adverse effect on the Company's
operations. Moreover, a prolonged inability to obtain certain components could
have a material adverse effect on the Company's business, financial condition
and results of operations and could result in damage to customer relationships.

COMPETITION

Significant competitive factors in the semiconductor equipment market include
system performance and flexibility, cost, the size of each manufacturer's
installed customer base, capability for customer support and breadth of product
line. The Company believes that it competes favorably in the deposition
equipment marketplace primarily on the basis of system performance and
flexibility, cost and customer support capability. In addition, the Company
believes that the acquisition of TFS and its 1998 announcements of a copper
primary conductor product will allow the Company to develop and compete
successfully in the PVD and copper electrofill areas of the market,
respectively.



                                       9
<PAGE>   10

However, the semiconductor equipment industry is highly competitive and
characterized by increasingly rapid technological changes. The Company faces
substantial competition in the market in which it competes from both established
competitors and potential new entrants. In the CVD and PVD areas of the market,
the Company's principal competitor is Applied Materials, Inc., which is a major
supplier of CVD and PVD systems and has established a substantial base of CVD,
PVD and other equipment in large semiconductor manufacturers. In the copper
electrofill area of the market, the Company's principal competitors are Semitool
(which has a large installed base of R&D tools), EEJA, a Japanese company with
ties to the chemistry supplier Enthone-OMI, and Applied Materials, which entered
the market with an electroplating tool in April of 1999. Certain of the
Company's competitors have greater financial, marketing, technical or other
resources, broader product lines, greater customer service capabilities and
larger and more established sales organizations and customer bases than the
Company. The Company may also face future competition from new market entrants
from other overseas and domestic sources. The Company expects its competitors to
continue to improve the design and performance of their products. There can be
no assurance that the Company's competitors will not develop enhancements to or
future generations of competitive products that will offer price or performance
features. In addition, a substantial investment is required by customers to
install and integrate capital equipment into a semiconductor production line. As
a result, once a semiconductor manufacturer has selected a particular vendor's
capital equipment, the Company believes that the manufacturer will be generally
reliant upon that equipment for the specific production line application.
Accordingly, the Company may experience difficulty in selling a product line to
a particular customer for a significant period of time if that customer selects
a competitor's product. Increased competitive pressure could lead to lower
prices for the Company's products, thereby materially adversely affecting the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to compete successfully in the
future.


PATENTS AND PROPRIETARY RIGHTS

The Company intends to continue to pursue the legal protection of its technology
primarily through patent and trade secret protection. The Company currently
holds over 100 patents and intends to file additional patent applications as
appropriate. There can be no assurance that patents will be issued from any of
these pending applications or that any claims allowed from existing or pending
patents will be sufficiently broad to protect the Company's technology. While
the Company intends to protect its intellectual property rights vigorously,
there can be no assurance that any patents held by the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to the Company (see Item 3 "Legal
Proceedings"). The Company also relies on trade secrets and proprietary
technology that it seeks to protect, in part, through confidentiality agreements
with employees, consultants and other parties. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known to or independently developed by others.

There has also been substantial litigation regarding patent and other
intellectual property rights in semiconductor related industries. The Company is
currently involved in such litigation (see Item 3 "Legal Proceedings"), and,
although, except as set forth in Item 3 , "Legal Proceedings," it is not aware
of any claim of infringement by its products of any patent or proprietary rights
of others, it could become involved in additional litigation in the future.
Although the Company does not believe the outcome of the current litigation will
have a material impact on the Company's business, financial condition or results
of operations, no assurances can be given that this litigation or future
litigation will not have such an impact. In addition to the current litigation,
the Company's operations, including the further commercialization of the
Company's products, could provoke additional claims of infringement from third
parties. In the future, litigation may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company or to
defend the Company against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Any such
litigation could result in substantial cost and diversion of effort by the
Company, which by itself could have a material adverse effect on the Company's
financial condition and operating results. Further, adverse determinations in
such litigation could result in the Company's loss of proprietary rights,
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.


EMPLOYEES

 At December 31, 1999, the Company had 1,749 full time and temporary employees.

The success of the Company's future operations depends in large part on the
Company's ability to recruit and retain engineers and technicians, as well as
marketing, sales, service and other key personnel, who in each case are in great
demand. There can be no assurance that the Company will be successful in
retaining or recruiting key personnel.

None of the Company's employees is represented by a labor union and the Company
has never experienced a work stoppage, slowdown, or strike. The Company
currently considers its employee relations to be good.



                                       10
<PAGE>   11
The Company's success depends to a significant extent upon a limited number of
key employees and other members of senior management of the Company. The loss of
the service of one or more of these key employees could have a material adverse
effect on the Company. Although the Company has recently experienced significant
growth in net sales, there can be no assurance that the Company will be able to
continue to maintain or increase the level of net sales in future periods. This
growth has placed, and is expected to continue to place, a significant strain on
the Company's management and operations. The Company's inability to effectively
manage growth, or to attract and retain the personnel it requires, could have a
material adverse effect on the Company's business, financial condition and
results of operations.


The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of section 27A of
the Securities Act of 1993 and Section 21E of the Securities Exchange Act of
1934, including, without limitation, statements regarding the Company's
expectations, objectives, anticipations, plans, hopes, beliefs, intentions or
strategies regarding the future. Forward-looking statements include, without
limitation, the discussion of the Company's strategy to focus on major
semiconductor manufacturers, under the heading "Item 1, Business;" the
statements regarding (a) the Company's belief that PVD, tantalum barrier and
copper seed layers may play an important role in replacing aluminum with copper
as the primary wiring material, (b) the Company's belief that electrofill
process technology will be extendible to at least the 0.13 micron design rule,
and possibly down to 0.10 design rules; or, in other words, approximately
another 5 or 6 years given the current industry evolution; (c) Novellus' belief
that there will be widespread transition from aluminum to copper conductive
lines for faster processing speeds, and (d) the Company's belief regarding the
greater complexity and number of interconnect layers in advanced integrated
circuits, (e) the effect of the evolution of semiconductor devices to smaller
line width geometries and more complex multi-level circuitry on the cost and
performance requirements of capital equipment used to manufacture these devices,
under the heading "Item 1, Business - Industry Background;" the Company's
beliefs regarding Throughput, Cost per Wafer and Film Quality, the Company's
belief that within-wafer and wafer-to-wafer uniformity levels of +/- 1% of film
thickness as measured at one standard deviation are state-of-the-art for the
industry, under the heading "Item 1, Business - The Novellus Solution;" the
discussion of the Company's strategies under the heading "Item 1, Business -
Strategy;" the Company's belief that the 10-second heating period in advance of
deposition in the Concept One - Dielectric is one of the shortest preheat times
of any CVD system, under the heading "Item 1, Business - Products - Concept One
- Dielectric:" the Company's belief that the Dual ALTUS offers a solution in
the industry for very high volume 200 mm wafer fabs producing 0.35 micron
semiconductor devices, under the heading "Item 1, Business - Products - Concept
Two;" the Company's belief that ARL offers competitive throughput and low cost
of ownership for the industry, under the heading "Item 1, Business - Products -
Anti Reflection Layer," the Company's belief that the Concept Three family of
systems should offer minimal risks to its customers in making the transition
from 200 mm to 300 mm volume chipmaking, under the heading "Item 1, Business -
Products - Concept Three;" the Company's belief that HCM technology offers
better target utilization, extended maintenance intervals, and lower cost of
ownership in comparison with collimated and other ionized sputtering techniques,
under the heading "Item 1, Business - Products -Inova System;" the Company's
belief that the SABRE system is the most reliable and technologically advanced
electrofilling system available on the market, under the heading "Item 1,
Business Products - SABRE." Forward-looking statements also include (a) the
Company's belief that its marketing efforts are enhanced by the technical
expertise of its research and development personnel, (b) belief that its service
to its customers is enhanced by the design simplicity of its systems, (c) the
expectation that sales of its products to relatively few customers will continue
to account for a high percentage of its net sales in the foreseeable future, and
(d) the Company's belief that sales to certain customers will decrease in the
future; under the heading "Item 1, Business - Marketing, Sales and Service"; the
Company's expectation that research and development expenditures will continue
to represent a substantial percentage of sales, under the heading "Item 1,
Business - Research and Development"; the Company's belief as to its favorable
competitiveness in the deposition equipment marketplace and the Company's belief
that the acquisition of TFS and its 1998 announcement of a copper primary
conductor product will allow the Company to develop and compete successfully in
the PVD and copper electrofill areas of the market and that manufacturers will
be generally reliant upon specific equipment, under the heading "Item 1,
Business - Competition"; the Company's belief that its current properties will
be sufficient to meet the Company's requirements for the foreseeable future,
under heading "Item 2, Properties"; the Company's belief that there are
meritorious defenses in the Applied and Semitool litigations, and the Company's
beliefs with respect to the outcomes of the Applied Materials and Semitool
litigations and current patent infringement inquiries, under the heading "Item
3, Legal Proceedings." All forward-looking statements included in this document
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. It
is important to note that the Company's actual results could differ materially
from those included in such forward-looking statements. The reader should also
consult the cautionary statements and risk factors listed from time to time in
the Company's Reports on Forms 10-Q, 8-K, 10-K and Annual Report to
Shareholders.

See Part II, Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations.


                                       11
<PAGE>   12
ITEM 2. PROPERTIES

The Company's operations are conducted primarily in eight buildings in the North
San Jose, California area and one building in Wilsonville, Oregon. The San Jose
buildings are leased by the Company and consist of 558,613 square feet. The
leases expire in 2002 and provide for an extension to 2005. The buildings house
two Manufacturing operations, a Research and Development facility, various
Administrative and Customer Support offices, an Applications Demonstration Lab,
Corporate Headquarters, and a new state of the art Customer Demonstration Lab.

The Wilsonville, Oregon building is a leased facility and consists of 26,900
square feet of Manufacturing, Research and Development, and Customer Support
space. The Wilsonville lease expires in August 2001 and provides for a 5 year
option to renew the lease.

Additionally, the Company subleases four buildings on and adjacent to the
Novellus campus, consisting of 270,000 square feet, to third party users on
leases expiring 2001 and 2002.

The Company also operates a facility near Tokyo, Japan, which serves as Nippon
Novellus Headquarters, Sales Office, Service, Technology and Customer
Demonstration center. The facility near Tokyo is operated under a five year
lease expiring in 2001. In addition, the Company maintains eight sales offices
throughout Japan.

The Company leases various smaller facilities worldwide which are used as sales
and customer service centers.

The Company currently believes that its current properties will be sufficient to
meet the Company's requirements for the foreseeable future.


ITEM 3. LEGAL PROCEEDINGS

Applied Materials, Inc. vs. Varian Associates Inc. (Case No. C-97-20523 RMW) and
Novellus Systems, Inc. v. Applied Materials, Inc. (Case No. C-97-20551 RMW).

On July 7, 1997, prior to the consummation of the purchase of the Thin Film
Systems Business ("TFS") of Varian Associates ("Varian"), Applied Materials,
Inc. ("Applied") filed a complaint (the "Applied Complaint") against Varian in
the United States District Court for the Northern District of California San
Jose Division, Civil Action No. C-97-20523 RMW, alleging, among other things,
infringement by Varian (including the making, using, selling and/or offering for
sale of certain products and systems made by TFS) of United States Patent Nos.
5,171,412, 5,186,718, 5,496,455 and 5,540,821 (the "Applied Patents"), which
patents are owned by Applied.

Immediately after consummation of the TFS purchase, the Company filed a
complaint (the "Company Complaint") against Applied in the same Court, Civil
Action No. C-97-20551 RMW, alleging infringement by Applied (including the
making, using, selling and/or offering for sale of certain products and systems)
of United States Patent Nos. 5,314,597, 5,330,628, and 5,635,036 (the "Company
Patents"), which patents the Company acquired from Varian in the TFS purchase.
In the Company Complaint, the Company also alleged that it is entitled to
declarations from Applied that the Company does not infringe the Applied Patents
and/or that the Applied Patents are invalid and/or unenforceable. Applied has
filed counterclaims alleging that the Company infringes the Applied Patents.

Also after consummation of the TFS purchase, but some time after the Company
filed the Company Complaint, Applied amended the Applied Complaint to add the
Company as a defendant. The Company has requested that the Court dismiss the
Company as a defendant in Applied's lawsuit against Varian. The Court has not
yet required the Company to file an answer to the Applied Complaint.

In addition to a request for a permanent injunction against further
infringement, the Applied Complaint and Applied's counterclaims to the Company
Complaint include requests for damages for alleged prior infringement and treble
damages for alleged "willful" infringement. In connection with the consummation
of the TFS purchase, Varian agreed, under certain circumstances, to reimburse
the Company for certain of its legal and other expenses in connection with the
defense and prosecution of this litigation, and to indemnify the Company for a
portion of any losses incurred by the Company arising from this litigation
(including losses resulting from a permanent injunction). The Company and Varian
believe that there are meritorious defenses to Applied's allegations, including
among other things, that the Company's operations (including TFS products and
systems) do not infringe the Applied Patents and/or that the Applied Patents are
invalid and/or unenforceable. However, the resolution of intellectual property
disputes is often fact intensive and, therefore, inherently uncertain. Although
the Company believes that the ultimate outcome of the dispute with Applied will
not have a material adverse effect on the Company's business or results of
operations (taking into account both the defenses available to the Company and
Varian's reimbursement and indemnity obligations), there can be no assurances
that Applied will not ultimately prevail in this dispute and that, in such an
event, Varian's reimbursement and indemnity obligations will not be sufficient
to fully reimburse the Company for its losses. If Applied were to prevail in
this dispute, it could have a material adverse effect on the Company's business,
financial condition or results of operations.



                                       12
<PAGE>   13

The Company Complaint against Applied also includes requests for damages for
prior infringement and treble damages for "willful" infringement, in addition to
a request for a permanent injunction for further infringement. Although the
Company believes that it will prevail against Applied, there can be no
assurances that the Company will prevail in its litigation against Applied. If
Applied were to prevail against the Company Complaint, it could have a material
adverse effect on the Company's business, financial condition or results of
operations.

On July 13, 1999, in the Company lawsuit against Applied where the Company has
alleged that Applied infringes Company patents, the Court ruled on the
interpretation of the claims of the Company patents. On September 20, 1999, in
the Applied lawsuit against Varian and the Company, where Applied has alleged
that Varian and the Company infringe Applied patents, the Court ruled on the
interpretation of the claims of the Applied patents. On January 14, 2000,
Applied withdrew its U.S. Patent No. 5,496,455 from the lawsuits against the
Company and Varian.

Semitool, Inc. v. Novellus Systems, Inc. (Case No. C-98-3089 DLJ)

On August 10, 1998, Semitool sued the Company for patent infringement in the
United States District Court for the Northern District of California. Semitool
alleges that the Company's SABRE(TM) copper deposition system infringes two
Semitool patents, U.S. Patent No. 5,222,310, issued June 29, 1993, entitled
"Single Wafer Processor with a Frame," and U.S. Patent No. 5,377,708, issued
January 3, 1995, entitled "Multi-Station Semiconductor Processor with
Volatilization." Semitool seeks an injunction against the Company's manufacture
and sale of SABRE(TM) systems, and seeks damages for past infringement. Semitool
also seeks trebled damages for alleged willful infringement. Semitool also seeks
its attorneys' fees and costs, and interest on any judgement.

On September 24, 1999, the Court ruled on the interpretation of the claims of
the Semitool patents. On December 18, 1999, Novellus filed a motion for summary
judgement of non-infringement. On February 18, 2000, the Court heard oral
arguments on Novellus' motion. The parties await a decision on Novellus' motion.

On March 17, 2000, the Court granted the Company's motion for summary judgement
of non-infringement. The Court ruled that the Company's SABRE and SABRE xT
systems do not infringe on the two patents asserted by Semitool. Therefore, the
Company believes that the dispute with Semitool will not have a material adverse
affect on the Company's business, financial condition and results of operations.

Plasma Physics Litigation

On December 28, 1999, Plasma Physics Corporation and Solar Physics Corporation
filed a patent infringement lawsuit against many of the Company's Japanese and
Korean customers. The suit is entitled Plasma Physics Corp v. Fujitsu, Ltd., 99
Civ. 8593, and is pending in the United States District Court for the Eastern
District of New York. Plasma Physics has asserted U.S. Patent Nos. 4,226,897,
5,470,784, and 5,543,634. Many of the defendants have notified the Company that
they believe that the Company has indemnification obligations and liability for
the lawsuit. Plasma Physics has not yet identified what, if any, of the
Company's equipment used by the customers is accused of infringement.

Plasma Physics seeks an injunction against the defendants' alleged infringement
of the '784 and '634 patents (the '897 patent has expired). Plasma Physics also
seeks trebled damages for alleged willful infringement. Plasma Physics also
seeks its attorneys' fees and costs, and interest on any judgement.

The Company believes that there are meritorious defenses to Plasma Physics'
allegations, including among other things, that the defendants' use of the
Company's equipment does not infringe the Plasma Physics patents and/or that the
Plasma Physics patents are invalid and/or unenforceable. But the resolution of
intellectual property disputes is often fact intensive and, like most other
litigation matters, inherently uncertain. Although the Company believes that the
ultimate outcome of the dispute with Plasma Physics will not have a material
adverse effect on the Company's business, financial condition, or results of
operations (taking into account the defenses available to the Company), there
can be no assurances that Plasma Physics will not ultimately prevail in this
dispute and that the Company will not have any indemnity obligations or
liability. If Plasma Physics were to prevail in the dispute, it could have a
material adverse effect on the Company's business, financial condition or
results of operations.

Other Litigation

In addition, in the normal course of business the Company from time to time
receives inquiries with regard to possible other patent infringements. The
Company believes it is unlikely that the outcome of the patent infringement
inquiries will have a material adverse effect on the Company's financial
position or results of operations.

There has been substantial litigation regarding patent and other intellectual
property rights in semiconductor-related industries. Although the Company is not
aware of any infringement by its products of any patents or proprietary rights
of others except as claimed by Applied and Semitool, further commercialization
of the Company's products could provoke claims of infringement from third
parties. In the future, litigation may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company or to
defend the Company against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Any such
litigation could result in substantial cost and diversion of effort by the
Company, which by itself could have a material adverse effect on the Company's
financial condition and operating results. Further, adverse determinations in
such litigation could result in the Company's loss of proprietary rights,
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.




                                       13
<PAGE>   14

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The information required by this item is included under "Stock Information" on
page 28 of the Company's 1999 Annual Report to Shareholders and incorporated
herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The information required by this item is included under "Selected Consolidated
Financial Data" on page 17 of the Company's 1999 Annual Report to Shareholders
and incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information required by this item is included under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 18-25 of
the Company's 1999 Annual Report to Shareholders and incorporated herein by
reference.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is included under "Quantitative and
Qualitative Disclosures About Market Risk" on pages 26-28 of the Company's 1999
Annual Report to Shareholders and incorporated herein by reference.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included on pages 29-46 of the
Company's 1999 Annual Report to Shareholders and incorporated herein by
reference. Such information is listed under Item 14 of Part IV of this Report on
Form 10-K.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is included under "Proposal No. 1:
Election of Directors," "Other Information - Executive Officers" and "Compliance
with Section 16(a) of the Exchange Act" in the Company's Proxy Statement to be
filed in connection with its 2000 Annual Meeting of Shareholders and is
incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is included under "Other Information -
Executive Compensation" in the Company's Proxy Statement to be filed in
connection with its 2000 Annual Meeting of Shareholders and is incorporated
herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is included under "Other Information -
Security Ownership of Certain Beneficial Owners and Management" in the Company's
Proxy Statement to be filed in connection with its 2000 Annual Meeting of
Shareholders and is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is included under "Other Information -
Certain Transactions" in the Company's Proxy Statement to be filed in connection
with its 2000 Annual Meeting of Shareholders and is incorporated herein by
reference.





                                       14
<PAGE>   15

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

(a)     The following documents are incorporated by reference:

        (1)          Financial Statements.

                     The following financial statements and schedules of the
                     Registrant are contained on pages 29-46 of the Company's
                     1999 Annual Report to Shareholders and are incorporated
                     herein by reference:

                     Consolidated Statements of Operations - Years Ended
                     December 31, 1999, 1998 and 1997

                     Consolidated Balance Sheets at December 31, 1999 and 1998

                     Consolidated Statements of Cash Flows - Years Ended
                     December 31, 1999, 1998 and 1997

                     Consolidated Statement of Shareholders' Equity - Years
                     Ended December 31, 1999, 1998 and 1997

                     Notes to Consolidated Financial Statements

                     Report of Ernst & Young LLP, Independent Auditors

        (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          Amended and Restated Articles of Incorporation of
                     Registrant.

        3.2(9)       Form of Bylaws of Registrant as amended

        3.2.1(8)     Bylaws Section 2.5 as amended in 1995 re Election and Term
                     of Office.

        3.2.2(8)     Bylaws Section 2.2 as amended in 1997 re Number of
                     Directors.

        10.1(5)      Asset Purchase Agreement by and between Varian Associates,
                     Inc. and the Company dated May 7, 1997.

        10.2(5)      First Amendment to Asset Purchase Agreement by and between
                     Varian Associates, Inc. and the Company dated June 20,
                     1997.

        10.3(5)      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 the Company
                     dated May 7, 1997.

        10.4(5)      Sublease (Portion of Unit 9, Palo Alto) by and between
                     Varian Associates, Inc. and the Company dated May 7, 1997.

        10.6(5)      Environmental Agreement by and between Varian Associates,
                     Inc. and the Company dated May 7, 1997.

        10.7(5)      Cross License Agreement by and between Varian Associates,
                     Inc. and the Company dated May 7, 1997.

        10.8(5)      Parts Supply Agreement by and between Varian Associates,
                     Inc. and the Company dated May 7, 1997.




                                       15
<PAGE>   16

        10.9(6)      Settlement Agreement by and between Applied Materials, Inc.
                     and the Company dated May 7, 1997. Confidential treatment
                     has been granted with respect to portions of this Exhibit.

        10.10(6)     Credit Agreement by and among ABN AMRO Bank, N.V., as
                     agent, the lenders named therein, and the Company dated May
                     7, 1997.

        10.11(6)     Participation Agreement by and among Lease Plan North
                     America, Inc. the Company and ABN AMRO Bank, N.V., as agent
                     for the participations named therein, dated June 9, 1997.

        10.11.1(7)   Letter Amendment, dated June 20, 1997, to the Participation
                     Agreement by and among Lease Plan North America, Inc., the
                     Company and ABN AMRO Bank, N.V., as agent for the
                     participants named therein, dated June 9, 1997.

        10.11.2(7)   Amendment no. 1, dated August 28, 1997, to the
                     Participation Agreement by and among Lease Plan North
                     America, Inc., the Company and ABN AMRO Bank, N.V., as
                     agent for the participants named therein, dated June 9,
                     1997.

        10.11.3(7)   Amendment no. 2, dated September 26, 1997, to the
                     Participation Agreement by and among Lease Plan North
                     America, Inc., the Company and ABN AMRO Bank, N.V., as
                     agent for the participants named therein, dated June 9,
                     1997.

        10.12(7)     Amendment no. 1, dated August 28, 1997, to the Facility 2
                     Lease Agreement, Construction Deed of Trust With Assignment
                     of Rents, Security Agreement and Fixture Filing by and
                     between Lease Plan North America, Inc. and the Company
                     dated June 9, 1997.

        10.13(7)     Amendment no. 2, dated September 26, 1997, to the Facility
                     2 Lease Agreement, Construction Deed of Trust With
                     Assignment of Rents, Security Agreement and Fixture Filing
                     by and between Lease Plan North America, Inc. and the
                     Company dated June 9, 1997.

        10.13(7)     Amendment no. 1, dated September 26, 1997, to the Facility
                     1 Lease Agreement, Deed of Trust With Assignment of Rents,
                     Security Agreement and Fixture Filing by and between Lease
                     Plan North America, Inc. and the Company dated June 9,
                     1997.

        10.14(7)     Participation Agreement by and among Lease Plan USA, Inc.,
                     the Company and ABN AMRO Bank, N.V., as agent for the
                     participants named therein, dated October 15, 1997.

        10.15(7)     Facility 1 Lease Agreement, Deed of Trust With Assignment
                     of Rents, Security Agreement and Fixture Filing by and
                     between Lease Plan USA, Inc. and the Company dated October
                     15, 1997.

        10.16(7)     Facility 2 Lease Agreement, Construction Deed of Trust With
                     Assignment of Rents, Security Agreement and Fixture Filing
                     by and between Lease Plan USA, Inc. and the Company dated
                     October 15, 1997.

        *10.20(2)    Registrant's Amended and Restated 1984 Stock Option Plan,
                     together with forms of agreements thereunder

        *10.21(4)    Registrant's 1992 Stock Option Plan, together with forms of
                     agreements thereunder

        *10.21.1     Form of Restated Stock Purchase Agreement dated December
                     16, 1999 between Registrant and Jeff Benzing Wilbert van
                     den Hoek and certain other employees of Registrant

        *10.22(3)    Registrant's 1992 Employee Stock Purchase Plan

        *10.23(1)    Form of Agent Indemnification Agreement and amendment
                     thereto

        *10.25(3)    Employment Agreement dated June 15, 1992 between the
                     Registrant and Peter Hanley

        *10.26(4)    Offer Letter Agreement dated November 1, 1993 between
                     Registrant and Richard S. Hill

        *10.27(9)    Employment Agreement dated October 1, 1998 between
                     Registrant and Richard S. Hill

        *10.27.1     Amendment dated December 16, 1999 to Employment Agreement
                     between Registrant and Richard S. Hill

        *10.27.2     Restricted Stock Purchase Agreement dated December 16,
                     1999 between Registrant and Richard S. Hill

         10.28(10)   First Amendment to Participation Agreement dated June 4,
                     1999

         10.29(11)   Asset Purchase Agreement by and between Fairchild
                     Technologies USA, Inc. and the Company dated July 29, 1999.

                                        16
<PAGE>   17
        13.1         Registrant's 1999 Annual Report to Shareholders (only
                     portions of this document specifically incorporated herein
                     by reference are included in this exhibit)

        21.1         Subsidiaries of Registrant

        23.1         Consent of Ernst & Young LLP, Independent Auditors

        24.1         Power of Attorney (see page 18)

        27.1         Financial Data Schedule



----------------

(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-23011, which was declared
effective August 11, 1988.

(2) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 30, 1992.

(3) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on February 26,
1993.

(4) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on February 18,
1994.

(5) Incorporated by reference to the Exhibit 2.1 to the Company's Form 8-K filed
with the Securities and Exchange Commission on July 7, 1997.

(6) Incorporated by reference to the Exhibit 10.1 to the Company's Form 10-Q
filed with the Securities and Exchange Commission on August 11, 1997.

(7) Incorporated by reference to the Exhibit 10.4 to the Company's Form 10-Q
filed with the Securities and Exchange Commission on November 10, 1997.

(8)  Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 9, 1998.

(9) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 10, 1999.

(10) Incorporated by reference to Exhibit 10.28 filed with Registrant's Form
10-Q filed with the Securities and Exchange Commission on August 9, 1999.

(11) Incorporated by reference to Exhibit 10.29 filed with Registrant's Form
10-Q filed with the Securities and Exchange Commission on November 8, 1999.



* Management contracts or compensatory plans or arrangements.




                                       17
<PAGE>   18

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in San Jose,
California on the 24th day of March, 2000.



                                  NOVELLUS SYSTEMS, INC.


                                  By:  /s/ Robert H. Smith
                                       -----------------------------------------
                                       Robert H. Smith
                                       EXECUTIVE VICE PRESIDENT,
                                       FINANCE AND ADMINISTRATION,
                                       PRINCIPAL FINANCIAL OFFICER AND SECRETARY



                                  By:  /s/ Kevin S. Royal
                                       -----------------------------------------
                                       Kevin S. Royal
                                       CORPORATE CONTROLLER,
                                       PRINCIPAL ACCOUNTING OFFICER



POWER OF ATTORNEY

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.


<TABLE>
<CAPTION>
SIGNATURE                                            CAPACITY                                    DATE
---------                                            --------                                    ----
<S>                                  <C>                                                  <C>
/s/Richard S. Hill                   Chairman of the Board of Directors,                     March 24, 2000
------------------------------       President and Chief Executive Officer
Richard S. Hill                      (Principal Executive Officer)


/s/Robert H. Smith                   Executive Vice President,                               March 24, 2000
------------------------------       Finance and Administration,
Robert H. Smith                      Chief Financial Officer and Secretary
                                     (Principal Financial Officer)


/s/D. James Guzy                     Director                                                March 24, 2000
------------------------------
D. James Guzy


/s/Tom Long                          Director                                                March 24, 2000
------------------------------
Tom Long


/s/Glen Possley                      Director                                                March 24, 2000
------------------------------
Glen Possley


/s/J. David Litster                  Director                                                March 24, 2000
------------------------------
J. David Litster


/s/William R. Spivey                 Director                                                March 24, 2000
------------------------------
William R. Spivey
</TABLE>





                                       18
<PAGE>   19
                                  SCHEDULE II
                             NOVELLUS SYSTEMS, INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                          BALANCE AT                                   BALANCE AT
                                          BEGINNING    CHARGED TO                         END
DESCRIPTION                               OF PERIOD     EXPENSE        DEDUCTIONS      OF PERIOD
                                          ---------     -------        ----------      ---------
<S>                                       <C>          <C>             <C>             <C>
Year Ended December 31, 1997
     Allowance for Doubtful Accounts       $ 2,777       $16,370       $15,600(1)       $ 3,547

Year Ended December 31, 1998
     Allowance for Doubtful Accounts       $ 3,547       $   452       $   864          $ 3,135

Year Ended December 31, 1999
     Allowance for Doubtful Accounts       $ 3,135       $   586       $    --          $ 3,721
</TABLE>



(1)     $15.6 million write-off of the outstanding amount from Submicron
        Technology, Inc., total charge $17.7 million. See Note 7, Notes to the
        Consolidated Financial Statements.
<PAGE>   20

                                 Exhibit Index

(a)     The following documents are incorporated by reference:

<TABLE>
<S>             <C>
  (1)           Financial Statements.

                The following financial statements and schedules of the
                Registrant are contained on pages 29-46 of the Company's 1999
                Annual Report to Shareholders and are incorporated herein by
                reference:

                Consolidated Statements of Operations - Years Ended December 31,
                1999, 1998 and 1997

                Consolidated Balance Sheets at December 31, 1999 and 1998

                Consolidated Statements of Cash Flows - Years Ended December 31,
                1999, 1998 and 1997

                Consolidated Statement of Shareholders' Equity - Years Ended
                December 31, 1999, 1998 and 1997

                Notes to Consolidated Financial Statements

                Report of Ernst & Young LLP, Independent Auditors

  (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           Amended and Restated Articles of Incorporation of Registrant.

  3.2(9)        Form of Bylaws of Registrant as amended

  3.2.1(8)      Bylaws Section 2.5 as amended in 1995 re Election and Term
                of Office.

  3.2.2(8)      Bylaws Section 2.2 as amended in 1997 re Number of
                Directors.

  10.1(5)       Asset Purchase Agreement by and between Varian Associates,
                Inc. and the Company dated May 7, 1997.

  10.2(5)       First Amendment to Asset Purchase Agreement by and between
                Varian Associates, Inc. and the Company dated June 20, 1997.

  10.3(5)       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 the Company dated May 7,
                1997.

  10.4(5)       Sublease (Portion of Unit 9, Palo Alto) by and between Varian
                Associates, Inc. and the Company dated May 7, 1997.

</TABLE>
<PAGE>   21
<TABLE>
<S>             <C>
  10.6(5)       Environmental Agreement by and between Varian Associates, Inc.
                and the Company dated May 7, 1997.

  10.7(5)       Cross License Agreement by and between Varian Associates, Inc.
                and the Company dated May 7, 1997.

  10.8(5)       Parts Supply Agreement by and between Varian Associates, Inc.
                and the Company dated May 7, 1997.

  10.9(6)       Settlement Agreement by and between Applied Materials, Inc. and
                the Company dated May 7, 1997. Confidential treatment has been
                granted with respect to portions of this Exhibit.

  10.10(6)      Credit Agreement by and among ABN AMRO Bank, N.V., as agent,
                the lenders named therein, and the Company dated May 7, 1997.

  10.11(6)      Participation Agreement by and among Lease Plan North America,
                Inc. the Company and ABN AMRO Bank, N.V., as agent for the
                participations named therein, dated June 9, 1997.

  10.11.1(7)    Letter Amendment, dated June 20, 1997, to the Participation
                Agreement by and among Lease Plan North America, Inc., the
                Company and ABN AMRO Bank, N.V., as agent for the participants
                named therein, dated June 9, 1997.

  10.11.2(7)    Amendment no. 1, dated August 28, 1997, to the Participation
                Agreement by and among Lease Plan North America, Inc., the
                Company and ABN AMRO Bank, N.V., as agent for the participants
                named therein, dated June 9, 1997.

  10.11.3(7)    Amendment no. 2, dated September 26, 1997, to the Participation
                Agreement by and among Lease Plan North America, Inc., the
                Company and ABN AMRO Bank, N.V., as agent for the participants
                named therein, dated June 9, 1997.

  10.12(7)      Amendment no. 1, dated August 28, 1997, to the Facility 2 Lease
                Agreement, Construction Deed of Trust With Assignment of Rents,
                Security Agreement and Fixture Filing by and between Lease Plan
                North America, Inc. and the Company dated June 9, 1997.

  10.13(7)      Amendment no. 2, dated September 26, 1997, to the Facility 2
                Lease Agreement, Construction Deed of Trust With Assignment of
                Rents, Security Agreement and Fixture Filing by and between
                Lease Plan North America, Inc. and the Company dated June 9,
                1997.

  10.13(7)      Amendment no. 1, dated September 26, 1997, to the Facility 1
                Lease Agreement, Deed of Trust With Assignment of Rents,
                Security Agreement and Fixture Filing by and between Lease Plan
                North America, Inc. and the Company dated June 9, 1997.

  10.14(7)      Participation Agreement by and among Lease Plan USA, Inc., the
                Company and ABN AMRO Bank, N.V., as agent for the participants
                named therein, dated October 15, 1997.

  10.15(7)      Facility 1 Lease Agreement, Deed of Trust With Assignment of
                Rents, Security Agreement and Fixture Filing by and between
                Lease Plan USA, Inc. and the Company dated October 15, 1997.

  10.16(7)      Facility 2 Lease Agreement, Construction Deed of Trust With
                Assignment of Rents, Security Agreement and Fixture Filing by
                and between Lease Plan USA, Inc. and the Company dated October
                15, 1997.

 *10.20(2)      Registrant's Amended and Restated 1984 Stock Option Plan,
                together with forms of agreements thereunder

 *10.21(4)      Registrant's 1992 Stock Option Plan, together with forms of
                agreements thereunder

 *10.21.1       Form of Restated Stock Purchase Agreement dated December 16,
                1999 between Registrant and Jeff Benzing, Wilbert van den Hoek
                and certain other employees of Registrant

 *10.22(3)      Registrant's 1992 Employee Stock Purchase Plan

 *10.23(1)      Form of Agent Indemnification Agreement and amendment thereto

 *10.25(3)      Employment Agreement dated June 15, 1992 between the Registrant
                and Peter Hanley

 *10.26(4)      Offer Letter Agreement dated November 1, 1993 between Registrant
                and Richard S. Hill

 *10.27(9)      Employment Agreement dated October 1, 1998 between Registrant
                and Richard S. Hill

 *10.27.1      Amendment dated December 16, 1999 to Employment Agreement
               between Registrant and Richard S. Hill

 *10.27.2      Restricted Stock Purchase Agreement dated December 16, 1999
               between Registrant and Richard S. Hill

</TABLE>
<PAGE>   22

<TABLE>
<S>             <C>
  10.28(10)     First Amendment to Participation Agreement dated June 4, 1999

  10.29(11)     Asset Purchase Agreement by and between Fairchild Technologies
                USA, Inc. and the Company dated July 29, 1999.

  13.1          Registrant's 1999 Annual Report to Shareholders (only portions
                of this document specifically incorporated herein by reference
                are included in this exhibit)

  21.1          Subsidiaries of Registrant

  23.1          Consent of Ernst & Young LLP, Independent Auditors

  24.1          Power of Attorney (see page 18)

  27.1          Financial Data Schedule
</TABLE>

  ----------------

  (1) Incorporated by reference to the exhibit filed with Registrant's
  Registration Statement on Form S-1, File No. 33-23011, which was declared
  effective August 11, 1988.

  (2) Incorporated by reference to the exhibit filed with Registrant's Report on
  Form 10-K filed with the Securities and Exchange Commission on March 30, 1992.

  (3) Incorporated by reference to the exhibit filed with Registrant's Report on
  Form 10-K filed with the Securities and Exchange Commission on February 26,
  1993.

  (4) Incorporated by reference to the exhibit filed with Registrant's Report on
  Form 10-K filed with the Securities and Exchange Commission on February 18,
  1994.

  (5) Incorporated by reference to the Exhibit 2.1 to the Company's Form 8-K
  filed with the Securities and Exchange Commission on July 7, 1997.

  (6) Incorporated by reference to the Exhibit 10.1 to the Company's Form 10-Q
  filed with the Securities and Exchange Commission on August 11, 1997.

  (7) Incorporated by reference to the Exhibit 10.4 to the Company's Form 10-Q
  filed with the Securities and Exchange Commission on November 10, 1997.

  (8) Incorporated by reference to the exhibit filed with Registrant's Report
  on Form 10-K filed with the Securities and Exchange Commission on March 9,
  1998.

  (9) Incorporated by reference to the exhibit filed with Registrant's Report
  on Form 10-K filed with the Securities and Exchange Commission on March 10,
  1999.

  (10) Incorporated by reference to Exhibit 10.28 filed with Registrant's Form
  10-Q filed with the Securities and Exchange Commission on August 9, 1999.

  (11) Incorporated by reference to Exhibit 10.29 filed with Registrant's Form
  10-Q filed with the Securities and Exchange Commission on November 8, 1999.

  *    Management contracts or compensatory plans or arrangements.