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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One)
|           |  |                                                                                         
|(X)        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2003

OR

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

For the transition period from             to

Commission File Number 000-17157

NOVELLUS SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)


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

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

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

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES     X           NO

As of May 9, 2003, 149,910,708 shares of the Registrants common stock, no par
value, were issued and outstanding.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|                              | ITEM 4: CONTROLS AND PROCEDURES                                                              
|PART II: OTHER INFORMATION   
|                              | ITEM 1: LEGAL PROCEEDINGS                                                                    
|                              | ITEM 5: OTHER INFORMATION                                                                    
|                              | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|CERTIFICATION                
|EXHIBIT INDEX                
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED MARCH 29, 2003

TABLE OF CONTENTS

|                              |                                                                                               |                                                                                                              |    |      |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | -- | ---- | - | 
|                              |                                                                                               |                                                                                                              |    | Page
|                              |                                                                                               |                                                                                                              |    |     
|Part I: Financial Information |                                                                                               |                                                                                                              |    |     
|                              | Item 1: Condensed Consolidated Financial Statements                                           |                                                                                                              |    |      |  
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the three months
ended March 29, 2003 and March 30, 2002 |    |      | 3 | 
|                              |                                                                                               | Condensed Consolidated Balance Sheets as of March 29, 2003 and
December 31, 2002                             |    |      | 4 | 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the three months
ended March 29, 2003 and March 30, 2002 |    |      | 5 | 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                         |    |      | 6 | 
|                              | Item 2: Managements Discussion and Analysis of Financial Condition and
Results of Operations |                                                                                                              |    | 13   |  
|                              | Item 3: Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                              |    | 25   |  
|                              | Item 4: Controls and Procedures                                                               |                                                                                                              |    | 25   |  
|Part II: Other Information    |                                                                                               |                                                                                                              |    |     
|                              | Item 1: Legal Proceedings                                                                     |                                                                                                              |    | 27   |  
|                              | Item 5: Other Information                                                                     |                                                                                                              |    | 29   |  
|                              | Item 6: Exhibits and Reports on Form 8-K                                                      |                                                                                                              |    | 29   |  
|Signatures                    |                                                                                               |                                                                                                              | 31 |     
|Certifications                |                                                                                               |                                                                                                              | 32 |     

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PART I: FINANCIAL INFORMATION




ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVELLUS SYSTEMS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)


|                                             |                                     |                                        |         |                    |      |           |         |        |      | 
|-------------------------------------------- | ----------------------------------- | -------------------------------------- | ------- | ------------------ | ---- | --------- | ------- | ------ | ---- | 
|                                             |                                     |                                        |         | Three Months Ended
|                                             |                                     |                                        |         |                   
|                                             |                                     |                                        |         | March 29,          |      | March 30,
|                                             |                                     |                                        |         | 2003               |      | 2002     
|                                             |                                     |                                        |         |                    |      |          
|Net sales                                    |                                     | $                                      | 238,410 |                    |      | $         | 169,679 |       
|Cost of sales                                |                                     |                                        | 128,596 |                    |      |           | 98,149  |       
|                                             |                                     |                                        |         |                    |      |           |         |       
|Gross profit                                 |                                     |                                        | 109,814 |                    |      |           | 71,530  |       
|Operating expenses:                          |                                     |                                        |         |                    |      |           |         |       
|                                             | Selling, general and administrative |                                        |         | 42,631             |      |           |         | 34,686 |     
|                                             | Research and development            |                                        |         | 57,006             |      |           |         | 54,046 |     
|                                             | Restructuring and other charges     |                                        |         |                   |      |           |         | 3,273  |     
|                                             | Bad debt recovery                   |                                        |         |                   |      |           |         | (7,662 | )   
|                                             |                                     |                                        |         |                    |      |           |         |       
|Total operating expenses                     |                                     |                                        | 99,637  |                    |      |           | 84,343  |       
|                                             |                                     |                                        |         |                    |      |           |         |       
|Operating income (loss)                      |                                     |                                        | 10,177  |                    |      |           | (12,813 | )     
|Interest and other income, net               |                                     |                                        | 5,652   |                    |      |           | 17,669  |       
|                                             |                                     |                                        |         |                    |      |           |         |       
|Income before income taxes                   |                                     |                                        | 15,829  |                    |      |           | 4,856   |       
|Provision for income taxes                   |                                     |                                        | 3,957   |                    |      |           | 1,020   |       
|                                             |                                     |                                        |         |                    |      |           |         |       
|Net income                                   |                                     | $                                      | 11,872  |                    |      | $         | 3,836   |       
|                                             |                                     |                                        |         |                    |      |           |         |       
|Net income per share:                        |                                     |                                        |         |                    |      |           |         |       
|                                             |                                     | Basic and diluted net income per share |         | $                  | 0.08 |           |         | $      | 0.03 | 
|                                             |                                     |                                        |         |                    |      |           |         |       
|Shares used in basic per share calculation   |                                     |                                        | 149,434 |                    |      |           | 144,255 |       
|                                             |                                     |                                        |         |                    |      |           |         |       
|Shares used in diluted per share calculation |                                     |                                        | 152,229 |                    |      |           | 150,624 |       
|                                             |                                     |                                        |         |                    |      |           |         |       

See accompanying notes to the condensed consolidated financial statements.

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NOVELLUS SYSTEMS, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


|                                     |                                      |                                            |         |           |             |  |              |           |           |  | 
|------------------------------------ | ------------------------------------ | ------------------------------------------ | ------- | --------- | ----------- |  | ------------ | --------- | --------- |  | 
|                                     |                                      |                                            |         |           | March 29,   |  | December 31,
|                                     |                                      |                                            |         |           | 2003        |  | 2002 *      
|                                     |                                      |                                            |         |           |             |  |             
|                                     |                                      |                                            |         |           | (unaudited) |  |              |           |          
|ASSETS                               |                                      |                                            |         |           |             |  |              |          
|Current assets:                      |                                      |                                            |         |           |             |  |              |          
|                                     | Cash and cash equivalents            |                                            | $       | 517,159   |             |  | $            | 615,844   |          
|                                     | Short-term investments               |                                            |         | 412,641   |             |  |              | 403,808   |          
|                                     | Accounts receivable, net             |                                            |         | 203,639   |             |  |              | 192,862   |          
|                                     | Inventories                          |                                            |         | 253,040   |             |  |              | 257,358   |          
|                                     | Deferred tax assets, net             |                                            |         | 120,699   |             |  |              | 119,699   |          
|                                     | Prepaid and other current assets     |                                            |         | 19,306    |             |  |              | 44,363    |          
|                                     |                                      |                                            |         |           |             |  |              |           |          
|                                     |                                      | Total current assets                       |         |           | 1,526,484   |  |              |           | 1,633,934 | 
|Property and equipment, net          |                                      |                                            | 174,301 |           |             |  | 179,926      |          
|Notes receivable                     |                                      |                                            | 397,429 |           |             |  | 397,429      |          
|Goodwill                             |                                      |                                            | 163,136 |           |             |  | 163,136      |          
|Intangible and other assets          |                                      |                                            | 114,639 |           |             |  | 119,569      |          
|                                     |                                      |                                            |         |           |             |  |              |           |          
|                                     |                                      | Total assets                               |         | $         | 2,375,989   |  |              | $         | 2,493,994 | 
|                                     |                                      |                                            |         |           |             |  |              |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY |                                      |                                            |         |           |             |  |              |          
|Current liabilities:                 |                                      |                                            |         |           |             |  |              |          
|                                     | Accounts payable                     |                                            | $       | 61,635    |             |  | $            | 71,218    |          
|                                     | Accrued payroll and related expenses |                                            |         | 27,487    |             |  |              | 36,748    |          
|                                     | Accrued warranty                     |                                            |         | 30,857    |             |  |              | 31,002    |          
|                                     | Other accrued liabilities            |                                            |         | 49,365    |             |  |              | 56,522    |          
|                                     | Income taxes payable                 |                                            |         | 6,401     |             |  |              | 14,070    |          
|                                     | Deferred profit                      |                                            |         | 60,449    |             |  |              | 55,613    |          
|                                     | Convertible subordinated debentures  |                                            |         |          |             |  |              | 116,437   |          
|                                     |                                      |                                            |         |           |             |  |              |           |          
|                                     |                                      | Total current liabilities                  |         |           | 236,194     |  |              |           | 381,610   | 
|Deferred tax liabilities             |                                      |                                            | 20,192  |           |             |  | 19,502       |          
|Other liabilities                    |                                      |                                            | 37,181  |           |             |  | 37,194       |          
|                                     |                                      |                                            |         |           |             |  |              |           |          
|                                     |                                      | Total liabilities                          |         |           | 293,567     |  |              |           | 438,306   | 
|Shareholders equity:                |                                      |                                            |         |           |             |  |              |          
|                                     | Common stock                         |                                            |         | 1,503,540 |             |  |              | 1,487,281 |          
|                                     | Retained earnings                    |                                            |         | 581,923   |             |  |              | 570,153   |          
|                                     | Accumulated other comprehensive loss |                                            |         | (3,041    | )           |  |              | (1,746    | )        
|                                     |                                      |                                            |         |           |             |  |              |           |          
|                                     |                                      | Total shareholders equity                 |         |           | 2,082,422   |  |              |           | 2,055,688 | 
|                                     |                                      |                                            |         |           |             |  |              |           |          
|                                     |                                      | Total liabilities and shareholders equity |         | $         | 2,375,989   |  |              | $         | 2,493,994 | 
|                                     |                                      |                                            |         |           |             |  |              |           |          



|* |  | Amounts as of December 31, 2002 are derived from the December 31, 2002
audited financial statements.
|- |  | ----------------------------------------------------------------------------------------------------

See accompanying notes to the condensed consolidated financial statements.

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NOVELLUS SYSTEMS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |           |            |         |         |  
|-------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------ | -------- | ------------------ | ------- | --------- | ---------- | ------- | ------- | -
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          | Three months ended
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                   
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          | March 29,          |         | March 30,
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          | 2003               |         | 2002     
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|Cash flows from operating activities:                    |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|Net income                                               |                                                                                   | $                                                                       | 11,872                                              |                                      |          | $                  | 3,836   |          
|                                                         | Adjustments to reconcile net income to
net cash provided by operating activities: |                                                                         |                                                     |                                      |          |                    |         |           |           
|                                                         |                                                                                   | Gain on sale of an investment                                           |                                                     |                                      |         |                    |         |           | (4,602     | )      
|                                                         |                                                                                   | Loss on extinguishment of debt                                          |                                                     |                                      | 616      |                    |         |           |           |        
|                                                         |                                                                                   | Depreciation and amortization                                           |                                                     |                                      | 13,376   |                    |         |           | 12,521     |        
|                                                         |                                                                                   | Deferred income taxes                                                   |                                                     |                                      | (279     | )                  |         |           | 1,187      |        
|                                                         |                                                                                   | Stock-based compensation                                                |                                                     |                                      | 790      |                    |         |           | 440        |        
|                                                         |                                                                                   | Income tax benefits from employee stock option plans                    |                                                     |                                      | 1,127    |                    |         |           | 13,352     |        
|                                                         |                                                                                   | Changes in operating assets and liabilities:                            |                                                     |                                      |          |                    |         |           |            |        
|                                                         |                                                                                   |                                                                         |                                                     | Accounts receivable                  |          |                    | (10,777 | )         |            |         | 40,541  |  
|                                                         |                                                                                   |                                                                         |                                                     | Inventories                          |          |                    | 3,736   |           |            |         | (17,843 | )
|                                                         |                                                                                   |                                                                         |                                                     | Prepaid and other current assets     |          |                    | 25,057  |           |            |         | 12,708  |  
|                                                         |                                                                                   |                                                                         |                                                     | Accounts payable                     |          |                    | (9,583  | )         |            |         | 12,697  |  
|                                                         |                                                                                   |                                                                         |                                                     | Accrued payroll and related expenses |          |                    | (9,261  | )         |            |         | (8,307  | )
|                                                         |                                                                                   |                                                                         |                                                     | Accrued warranty                     |          |                    | (145    | )         |            |         | (9,045  | )
|                                                         |                                                                                   |                                                                         |                                                     | Other accrued liabilities            |          |                    | (7,161  | )         |            |         | (1,852  | )
|                                                         |                                                                                   |                                                                         |                                                     | Income taxes payable                 |          |                    | (7,669  | )         |            |         | 3,988   |  
|                                                         |                                                                                   |                                                                         |                                                     | Deferred profit                      |          |                    | 4,836   |           |            |         | 4,371   |  
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|                                                         |                                                                                   |                                                                         | Net cash provided by operating activities           |                                      |          | 16,535             |         |           |            | 63,992  |        
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|Cash flows from investing activities:                    |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|                                                         |                                                                                   | Proceeds from sales and maturities of short-term
investments            |                                                     |                                      | 248,146  |                    |         |           | 168,384    |        
|                                                         |                                                                                   | Purchases of short-term investments                                     |                                                     |                                      | (257,336 | )                  |         |           | (167,443   | )      
|                                                         |                                                                                   | Proceeds from sales and maturities of restricted short-term
investments |                                                     |                                      |         |                    |         |           | 1,131,666  |        
|                                                         |                                                                                   | Purchases of restricted short-term investments                          |                                                     |                                      |         |                    |         |           | (1,177,170 | )      
|                                                         |                                                                                   | Capital expenditures                                                    |                                                     |                                      | (8,234   | )                  |         |           | (4,003     | )      
|                                                         |                                                                                   | Decrease (increase) in other assets                                     |                                                     |                                      | 5,016    |                    |         |           | (3,889     | )      
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|                                                         |                                                                                   |                                                                         | Net cash used in investing activities               |                                      |          | (12,408            | )       |           |            | (52,455 | )      
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|Cash flows from financing activities:                    |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|                                                         |                                                                                   | Payments of convertible subordinated debentures                         |                                                     |                                      | (117,053 | )                  |         |           |           |        
|                                                         |                                                                                   | Proceeds from employee stock compensation plans                         |                                                     |                                      | 14,280   |                    |         |           | 30,801     |        
|                                                         |                                                                                   | Payments on lines of credit, net                                        |                                                     |                                      |         |                    |         |           | (6,981     | )      
|                                                         |                                                                                   | Repurchase of common stock                                              |                                                     |                                      | (39      | )                  |         |           |           |        
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|                                                         |                                                                                   |                                                                         | Net cash (used in) provided by financing activities |                                      |          | (102,812           | )       |           |            | 23,820  |        
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|Net (decrease) increase in cash and cash equivalents     |                                                                                   |                                                                         | (98,685                                             | )                                    |          |                    | 35,357  |          
|Cash and cash equivalents at the beginning of the period |                                                                                   |                                                                         | 615,844                                             |                                      |          |                    | 550,640 |          
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          
|Cash and cash equivalents at the end of the period       |                                                                                   | $                                                                       | 517,159                                             |                                      |          | $                  | 585,997 |          
|                                                         |                                                                                   |                                                                         |                                                     |                                      |          |                    |         |          

See accompanying notes to the condensed consolidated financial statements.

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NOVELLUS SYSTEMS, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation
S-X. The interim financial information is unaudited and does not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 29, 2003 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003. For further information,
refer to the Consolidated Financial Statements and footnotes thereto included
in our Annual Report on Form 10-K for the year ended December 31, 2002.

On December 6, 2002, we acquired SpeedFam-IPEC, Inc., a global supplier of
chemical mechanical planarization (CMP) systems used in the fabrication of
advanced copper interconnects. The acquisition was accounted for as a purchase
business combination and qualifies as a tax-free reorganization under IRS
regulations. Our condensed consolidated financial statements for the
first quarter of 2003 include the financial position, results of operations and
cash flows of SpeedFam-IPEC, Inc.

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

The accompanying condensed consolidated financial statements include
our accounts and the accounts of our wholly-owned subsidiaries after
elimination of all significant intercompany account balances and transactions.
Certain amounts presented in the comparative financial statements for prior
periods have been reclassified to conform to the current periods presentation.

2. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market.
As of the balance date, inventories consisted of the following (in thousands):

|                          |                   |   |           |         |              |   |         |         | 
|------------------------- | ----------------- | - | --------- | ------- | ------------ | - | ------- | ------- | 
|                          |                   |   | March 29, |         | December 31,
|                          |                   |   | 2003      |         | 2002        
|                          |                   |   |           |         |             
|Purchased and spare parts |                   | $ | 201,044   |         |              | $ | 205,341 |        
|Work-in-process           |                   |   | 40,641    |         |              |   | 45,487  |        
|Finished goods            |                   |   | 11,355    |         |              |   | 6,530   |        
|                          |                   |   |           |         |              |   |         |        
|                          | Total inventories |   | $         | 253,040 |              |   | $       | 257,358 | 
|                          |                   |   |           |         |              |   |         |        

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3. NET INCOME PER SHARE

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

Diluted net income per share is computed using the weighted-average number of
shares of common stock outstanding, including shares of restricted common stock
subject to repurchase and, when dilutive, potential shares from stock options
to purchase common stock using the treasury stock method and from convertible
securities on an as-if-converted basis.

The following table provides a reconciliation of the numerators and
denominators of the basic and diluted per share computations (in thousands,
except for per share amounts):

|                                       |                                             |                                             |      |                    |         |           |      |         |         | 
|-------------------------------------- | ------------------------------------------- | ------------------------------------------- | ---- | ------------------ | ------- | --------- | ---- | ------- | ------- | 
|                                       |                                             |                                             |      | Three months ended
|                                       |                                             |                                             |      |                   
|                                       |                                             |                                             |      | March 29,          |         | March 30,
|                                       |                                             |                                             |      | 2003               |         | 2002     
|                                       |                                             |                                             |      |                    |         |          
|Numerator:                             |                                             |                                             |      |                    |         |           |      |        
|                                       | Net income                                  |                                             | $    | 11,872             |         |           | $    | 3,836   |        
|                                       |                                             |                                             |      |                    |         |           |      |         |        
|Denominator:                           |                                             |                                             |      |                    |         |           |      |        
|                                       | Basic weighted-average shares outstanding   |                                             |      | 149,434            |         |           |      | 144,255 |        
|                                       | Employee stock options and restricted stock |                                             |      | 2,795              |         |           |      | 6,369   |        
|                                       |                                             |                                             |      |                    |         |           |      |         |        
|                                       |                                             | Diluted weighted-average shares outstanding |      |                    | 152,229 |           |      |         | 150,624 | 
|                                       |                                             |                                             |      |                    |         |           |      |         |        
|Basic and diluted net income per share |                                             | $                                           | 0.08 |                    |         | $         | 0.03 |        
|                                       |                                             |                                             |      |                    |         |           |      |         |        

Options to purchase 12,697,000 and 1,818,000 shares of common stock at
weighted-average exercise prices of $40.03 and $52.66 per share were
outstanding as of March 29, 2003 and March 30, 2002, respectively, but were not
included in the computation of diluted net income per common share because the
respective exercise price of these options was greater than the average
respective market price of the common shares and, therefore, the effect would
be anti-dilutive.

4. COMMITMENTS AND GUARANTEES

Operating Leases

We lease nearly all of our facilities under operating leases, including
synthetic leases, which expire at various dates through 2017. Our synthetic
leases are primarily for properties in San Jose, California and Tualatin,
Oregon. A synthetic lease is a form of operating lease wherein a third party
lessor funds 100% of the acquisition and construction costs relating to one or
more properties to be leased to a lessee. The lessor is the owner of the leased
property and must provide at least 3% of the required funds in the form of
at-risk equity. The lessor generally borrows the balance of the funds necessary
to fund the acquisition and construction. Under our synthetic lease agreements,
we are obligated to lend approximately 87% of the cost of the leased asset to
the lessor upon completion of construction. The leases with this requirement
are known as defeased or self-funded transactions. In addition, our synthetic
leases require us to maintain collateral for the benefit of the lessor.

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Summary information about our synthetic lease arrangements is as follows as of
March 29, 2003 (square feet and dollar amounts in thousands):

|             |  |            |    |        |  |             |       |               |  |           |         |            |  |           |         |  |  |   |        |  |  |   |        |  |  |   |         | 
|------------ |  | ---------- | -- | ------ |  | ----------- | ----- | ------------- |  | --------- | ------- | ---------- |  | --------- | ------- |  |  | - | ------ |  |  | - | ------ |  |  | - | ------- | 
|             |  |            |    |        |  | Total       |       |               |  |           |         |            |  |           |         |  |  |   |        |  |  |   |        |  |  |  
|Property     |  | Number of  |    | Square |  | Total Lease |       | Novellus      |  | Net Lease |         | Collateral |  | Residual 
|Location     |  | Properties |    | Feet   |  | Financing   |       | Participation |  | Financing |         | Value      |  | Guarantee
|             |  |            |    |        |  |             |       |               |  |           |         |            |  |          
|San Jose, CA |  |            | 13 |        |  |             | 958   |               |  | $         | 293,183 |            |  | $         | 257,042 |  |  | $ | 36,141 |  |  | $ | 36,141 |  |  | $ | 258,220 | 
|Tualatin, OR |  |            | 1  |        |  |             | 377   |               |  |           | 163,241 |            |  |           | 140,387 |  |  |   | 22,854 |  |  |   | 22,854 |  |  |   | 140,387 | 
|             |  |            |    |        |  |             |       |               |  |           |         |            |  |           |         |  |  |   |        |  |  |   |        |  |  |   |         | 
|             |  |            | 14 |        |  |             | 1,335 |               |  | $         | 456,424 |            |  | $         | 397,429 |  |  | $ | 58,995 |  |  | $ | 58,995 |  |  | $ | 398,607 | 
|             |  |            |    |        |  |             |       |               |  |           |         |            |  |           |         |  |  |   |        |  |  |   |        |  |  |   |         | 

In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51, or FIN 46. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN
46 must be applied for the first interim or annual period beginning after June
15, 2003.

We are currently evaluating our synthetic leases and seeking additional
information from the lessor and its advisors as to whether the lessor should be
characterized as a variable interest entity. Our preliminary conclusion is that
the lessor is a variable interest entity and that we are the primary
beneficiary of the variable interest entity. As such, to the extent we do not
exercise our purchase options or renew the leases with a voting interest lessor
or a variable interest lessor where we are not the primary beneficiary, we
expect to be required to consolidate the variable interest lessor in the third
quarter of 2003. Additionally, since each of the other lessees involved with
this lessor has a variable interest in specified assets of the variable
interest lessor, we would only be required to record the specific assets and
liabilities associated with our synthetic leases in our financial statements
for the third quarter of 2003 beginning on June 29, 2003. We are currently
researching our options for refinancing our synthetic leases with a voting
interest lessor or a variable interest lessor where we are not the primary
beneficiary. Upon completion of this research we will decide to either
refinance with an entity with which we would not be required to
consolidate, consolidate our portion of the variable interest entity
or purchase the properties by exercising our purchase options.

If we consolidate our portion of the
variable interest entity, we would record a non-cash charge of
approximately $90 million to $120 million as a cumulative
effect of a change in accounting principle, which would represent
depreciation that would have been recorded had we owned these assets
from inception. In addition, our annual depreciation expense would
increase by approximately $30.0 million to $35.0 million
beginning in the third quarter of 2003, and rent expense and interest
income would each decrease by approximately $13.4 million per
year, based on current interest rates.

If we exercise options to purchase the San Jose and Tualatin properties, the
transactions would increase our property and equipment by the lower of the
purchase price or the then fair market value of the properties. As of March 29,
2003, we believe that the fair market value for each property is equal to or
greater than the purchase option price for each property. We estimate the
cumulative fair market value of all properties to be approximately $456.4
million as of March 29, 2003. If we were to purchase the properties, our notes
receivable and collateral in a total amount of $456.4 million would be returned
to us as cash or used to offset the purchase price of the properties. As a
result of the purchase, annual depreciation expense would increase by
approximately $30.0 million to $35.0 million beginning in the third quarter of
2003, and rent expense and interest income would each decrease by approximately
$13.4

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million per year, based on current interest rates. If we purchased the
properties at the end of their respective lease terms or earlier, there would
be no material impact on our liquidity, as the cash paid to purchase the
properties would be offset by the notes receivable and collateral associated
with our participation in these synthetic leases.

Product Warranty

We record the estimated cost of warranty as a component of cost of sales upon
system shipment. The estimated cost is determined by the warranty term as well
as the average historical labor and material costs for a specific product.
Should actual product failure rates or material usage differ from our estimate,
revisions to the estimated warranty liability may be required. We review the
actual product failure rates and material usage on a quarterly basis and adjust
our warranty liability as necessary. Effective December 31, 2002, we adopted
the provisions of FIN 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, including Indirect Indebtedness of Others, which requires
changes to the accounting and disclosure of guarantees, including product
warranty. Changes in our accrued warranty liability were as follows (in
thousands):

|                             |                                       |   |              |         |               |   |        |         |  
|---------------------------- | ------------------------------------- | - | ------------ | ------- | ------------- | - | ------ | ------- | -
|                             |                                       |   | Three
Months |         | Twelve
Months
|                             |                                       |   | Ended        |         | Ended        
|                             |                                       |   | March 29,    |         | December 31, 
|                             |                                       |   | 2003         |         | 2002         
|                             |                                       |   |              |         |              
|Balance, beginning of period |                                       | $ | 31,002       |         |               | $ | 43,337 |        
|                             | Warranties issued                     |   |              | 12,914  |               |   |        | 42,723  |  
|                             | Settlements                           |   |              | (13,059 | )             |   |        | (56,322 | )
|                             | SpeedFam-IPEC warranty at acquisition |   |              |        |               |   |        | 1,264   |  
|                             |                                       |   |              |         |               |   |        |        
|Balance, end of period       |                                       | $ | 30,857       |         |               | $ | 31,002 |        
|                             |                                       |   |              |         |               |   |        |        

5. CONVERTIBLE SUBORDINATED DEBENTURES

In connection with the acquisition of SpeedFam-IPEC, we assumed SpeedFam-IPECs
$115.0 million Convertible Subordinated Notes due in 2004. The notes were
adjusted to their fair value of $116.4 million as of the acquisition date. The
notes accrued interest at a rate of 6.25%, which was payable semi-annually in
March and September. The notes were subordinated to all existing and future
senior Novellus indebtedness and could have been converted into 3.3096 shares
of Novellus common stock at a conversion price of $302.15 per $1,000 principal
amount. We exercised our right to redeem the notes on January 8, 2003 at a
redemption price of $117.1 million. The redemption price represented 101.786%
of par value. As a result, we recognized approximately $616,000 in expense for
the difference between the carrying value as of the acquisition date and the
redemption price.

6. RESTRUCTURING AND OTHER CHARGES

In September 2001, we implemented a restructuring plan in response to a decline
in sales orders due to the contraction of the semiconductor capital equipment
market. The plan addressed the need to improve our cost structure by
consolidating excess facilities. We recorded restructuring and asset impairment
charges totaling $55.0 million in the third quarter of 2001, of which $47.9
million is included in operating expense and $7.1 million is included in cost
of sales. The restructuring charges consisted of $33.8 million related to the
vacated facilities, $14.1 million of asset impairment charges and $7.1 million
of discontinued inventory write-downs. Of the $14.1 million asset impairment
charge, $9.5 million related to abandoned assets associated with the
discontinuation of certain projects and $4.6 million related to the write-off
of purchased technology.

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In connection with the acquisition of SpeedFam-IPEC, we recorded a
restructuring liability of $28.5 million in the fourth quarter of 2002 for
certain activities of SpeedFam-IPEC which we planned to exit as a result of the
purchase business combination. This amount consisted primarily of
facility-related charges of $27.0 million, severance-related charges of
$251,000 and other costs associated with exiting activities of SpeedFam-IPEC of
$1.2 million.

The following table summarizes restructuring activity for the first quarter of
2003 (in thousands):

|                             |  |            |        |           |  |       |     |       |  |   |       |   |  |   |        |  
|---------------------------- |  | ---------- | ------ | --------- |  | ----- | --- | ----- |  | - | ----- | - |  | - | ------ | -
|                             |  | Facilities |        | Severance |  | Other |     | Total
|                             |  |            |        |           |  |       |     |      
|Balance at December 31, 2002 |  | $          | 45,568 |           |  | $     | 251 |       |  | $ | 1,253 |   |  | $ | 47,072 |  
|Cash payments                |  |            | (2,319 | )         |  |       | (57 | )     |  |   | (40   | ) |  |   | (2,416 | )
|                             |  |            |        |           |  |       |     |       |  |   |       |   |  |   |        |  
|Balance at March 29, 2003    |  | $          | 43,249 |           |  | $     | 194 |       |  | $ | 1,213 |   |  | $ | 44,656 |  
|                             |  |            |        |           |  |       |     |       |  |   |       |   |  |   |        |  

7. BAD DEBT RECOVERY

In September 2001, we determined that, due to the financial difficulties facing
one of our customers, an outstanding account receivable balance was at risk for
collection. Accordingly, we recorded a write-off of $7.7 million. In the first
quarter of 2002, all amounts under this account receivable balance were paid,
resulting in a recovery of $7.7 million.

8. COMPREHENSIVE INCOME (LOSS)

The following are the components of comprehensive income (loss) (in thousands):

|                                                                                                                       |                                   |   |                    |        |           |   |        |        |  
|---------------------------------------------------------------------------------------------------------------------- | --------------------------------- | - | ------------------ | ------ | --------- | - | ------ | ------ | -
|                                                                                                                       |                                   |   | Three months ended
|                                                                                                                       |                                   |   |                   
|                                                                                                                       |                                   |   | March 29,          |        | March 30,
|                                                                                                                       |                                   |   | 2003               |        | 2002     
|                                                                                                                       |                                   |   |                    |        |          
|Net income                                                                                                             |                                   | $ | 11,872             |        |           | $ | 3,836  |       
|Foreign currency translation adjustments                                                                               |                                   |   | (1,162             | )      |           |   | (1,800 | )     
|Unrealized loss on available-for-sale securities                                                                       |                                   |   | (133               | )      |           |   | (287   | )     
|Reclassification adjustment for a realized gain on an
available-for-sale investment included in net
income, net of tax |                                   |   |                   |        |           |   | (3,636 | )     
|                                                                                                                       |                                   |   |                    |        |           |   |        |       
|                                                                                                                       | Other comprehensive income (loss) |   | $                  | 10,577 |           |   | $      | (1,887 | )
|                                                                                                                       |                                   |   |                    |        |           |   |        |       

The components of accumulated other comprehensive loss, net of related tax, are
as follows (in thousands):

|                                                 |                                      |   |           |        |              |   |        |        |  
|------------------------------------------------ | ------------------------------------ | - | --------- | ------ | ------------ | - | ------ | ------ | -
|                                                 |                                      |   | March 29, |        | December 31,
|                                                 |                                      |   | 2003      |        | 2002        
|                                                 |                                      |   |           |        |             
|Foreign currency translation adjustments         |                                      | $ | (2,623    | )      |              | $ | (1,461 | )     
|Unrealized loss on available-for-sale securities |                                      |   | (418      | )      |              |   | (285   | )     
|                                                 |                                      |   |           |        |              |   |        |       
|                                                 | Accumulated other comprehensive loss |   | $         | (3,041 | )            |   | $      | (1,746 | )
|                                                 |                                      |   |           |        |              |   |        |       

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9. STOCK-BASED COMPENSATION

Employee Stock Option Plans

We grant options to employees under several stock option plans. Our stock
option plans provide that stock options expire ten years after the date of
grant and generally vest ratably over a four-year period on the anniversary of
the date of grant or as determined by the Board of Directors. We also award
restricted stock to our employees under our 1992 Stock Option Plan and our 2001
Stock Incentive Plan. As of March 29, 2003, there were a total of 8.9 million
options available for grant and 25.6 million options outstanding under all
stock option plans with an average exercise price of $31.09 per share.

Employee Stock Purchase Plans

In May 1992, we adopted a qualified Employee Stock Purchase Plan, referred to
herein as the Purchase Plan, under Sections 421 and 423 of the Internal Revenue
Code. Under the Purchase Plan, qualified employees are entitled to purchase
shares at 85% of fair market value on specified dates. There were approximately
211,000 and 178,000 shares issued under the Purchase Plan in the quarters ended
March 29, 2003 and March 30, 2002, respectively. As of March 29, 2003,
approximately 1.1 million shares were reserved for future issuance under the
Purchase Plan.

We account for stock-based employee compensation using the intrinsic value
method under APB Opinion No. 25 and have adopted the disclosure-only provisions
of SFAS No. 123, as amended by SFAS No. 148. Accordingly, no expense has been
recognized for options granted to employees under the Plans. We amortize
deferred stock-based compensation on the graded vesting method over the vesting
periods of the applicable stock purchase rights and stock options, generally
four years. The graded vesting method provides for vesting of portions of the
overall awards at interim dates and results in greater vesting in earlier years
than the straight-line method. Had compensation expense been determined based
on the fair value at the grant date for awards, consistent with the provisions
of SFAS No. 123, our pro forma net loss and net loss per share would be as
follows (in thousands, except per share data):

|                                                   |                                                                                            |   |                    |         |           |   |         |         |  
|-------------------------------------------------- | ------------------------------------------------------------------------------------------ | - | ------------------ | ------- | --------- | - | ------- | ------- | -
|                                                   |                                                                                            |   | Three months ended
|                                                   |                                                                                            |   |                   
|                                                   |                                                                                            |   | March 29,          |         | March 30,
|                                                   |                                                                                            |   | 2003               |         | 2002     
|                                                   |                                                                                            |   |                    |         |          
|Net income as reported                             |                                                                                            | $ | 11,872             |         |           | $ | 3,836   |        
|Add:                                               |                                                                                            |   |                    |         |           |   |         |        
|                                                   | Intrinsic value method expense included in
reported net income, net of related tax effects |   |                    | 485     |           |   |         | 243     |  
|Less:                                              |                                                                                            |   |                    |         |           |   |         |        
|                                                   | Fair value method expense, net of related tax effects                                      |   |                    | (18,112 | )         |   |         | (16,751 | )
|                                                   |                                                                                            |   |                    |         |           |   |         |        
|Pro-forma net loss                                 |                                                                                            | $ | (5,755             | )       |           | $ | (12,672 | )      
|                                                   |                                                                                            |   |                    |         |           |   |         |        
|Pro-forma basic and diluted net loss per share     |                                                                                            | $ | (0.04              | )       |           | $ | (0.09   | )      
|Basic and diluted net income per share as reported |                                                                                            | $ | 0.08               |         |           | $ | 0.03    |        

The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted-average
assumptions for grants made in the quarters ended March 29, 2003 and March 30,
2002:

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|                        |  |           |           |           |  |  |           | 
|----------------------- |  | --------- | --------- | --------- |  |  | --------- | 
|                        |  | March 29, |           | March 30,
|                        |  | 2003      |           | 2002     
|                        |  |           |           |          
|Dividend yield          |  |           | None      |           |  |  | None      | 
|Expected volatility     |  |           | 0.83      |           |  |  | 0.85      | 
|Risk free interest rate |  |           | 2.8%      |           |  |  | 3.3%      | 
|Expected lives          |  |           | 3.5 years |           |  |  | 3.5 years | 

The weighted-average fair value of stock options granted during the period was
$17.31 and $23.42 for the quarters ended March 29, 2003 and March 30, 2002,
respectively. The effects of applying SFAS No. 123 on net income to determine
the pro forma disclosures are not likely to be representative of the effects on
pro forma disclosures of future years.

The pro forma net loss and net loss per share data listed above include expense
related to the Purchase Plan. The fair value of issuances under the Purchase
Plan is estimated on the date of issuance using the Black-Scholes
option-pricing model, with the following weighted-average assumptions for
issuances made in the quarters ended March 29, 2003 and March 30, 2002:

|                        |  |           |          |           |  |  |          | 
|----------------------- |  | --------- | -------- | --------- |  |  | -------- | 
|                        |  | March 29, |          | March 30,
|                        |  | 2003      |          | 2002     
|                        |  |           |          |          
|Dividend yield          |  |           | None     |           |  |  | None     | 
|Expected volatility     |  |           | 0.72     |           |  |  | 0.81     | 
|Risk free interest rate |  |           | 2.0%     |           |  |  | 3.5%     | 
|Expected lives          |  |           | 1/2 year |           |  |  | 1/2 year | 

The weighted-average fair value of purchase rights granted during the period
was $11.40 and $21.16 for the quarters ended March 29, 2003 and March 30, 2002,
respectively.

10. RELATED PARTY TRANSACTIONS

In March 2002, we began leasing an aircraft from NVLS I, LLC, a third-party
entity wholly owned by Richard S. Hill, our Chairman and Chief Executive
Officer. Under the aircraft lease agreement, we incurred lease expense of
approximately $139,000 during the first quarter of 2003.

A member of our Board of Directors, D. James Guzy, is also a member of the
Board of Directors of Intel Corporation, one of our significant customers.
Intel Corporation represented approximately 14% and 18% of net sales for the
quarters ended March 29, 2003 and March 30, 2002, respectively. Intel also
accounted for 10% and 18% of our accounts receivable as of March 29, 2003 and
December 31, 2002, respectively.

From time to time we have made secured relocation loans to our executive
officers, vice presidents and key personnel. As of March 29, 2003, we do not
have any outstanding loans to our executive officers as defined by the
Securities and Exchange Commission. However, we do have outstanding loans to
non-executive vice presidents and key personnel. As of March 29, 2003 and
December 31, 2002, the total outstanding balance of loans to certain
non-executive vice presidents and key personnel was approximately $6.8 million
and $5.7 million, respectively. Of the total loans outstanding at March 29,
2003, $6.4 million was secured by collateral.

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11. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
For most companies, SFAS No. 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations, rather than as extraordinary items, as previously required under
SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, an
amendment of APB Opinion No. 30. Extraordinary treatment will be required for
certain extinguishments as provided in APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 145 also amended SFAS No. 13, Accounting for Leases
for certain sale-leaseback transactions and sublease accounting. The adoption
of SFAS No. 145 does not have a material effect on our financial condition or
results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, rather than when the
exit or disposal plan is approved. SFAS No. 146 nullifies EITF Issue No. 94-3,
and must be applied beginning January 1, 2003. The adoption of SFAS No. 146
does not have a material effect on our financial condition or results of
operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, or FIN 45. FIN 45 will significantly
change current practice in the accounting for and disclosure of guarantees. FIN
45 requires certain guarantees to be recorded at fair value, which is different
from the current practice of recording a liability only when a loss is probable
and reasonably estimable, as those terms are defined in SFAS No. 5, Accounting
for Contingencies. FIN 45 also requires a guarantor to make significant new
disclosures, even when the likelihood of making any payments under the
guarantee is remote, which is another change from the current practice. FIN 45
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002, while the initial recognition
and initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
does not have a material impact on our results of operations and financial
condition.

12. LITIGATION

For a discussion of legal matters, see Part II: Other Information, Item 1:
Legal Proceedings.




ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. All statements included in this Quarterly Report, other than statements
that are purely historical, are forward-looking statements. Words such as
anticipates, expects, intends, plans, believes, seeks, estimates,
and similar expressions also identify forward-looking statements.
Forward-looking statements in this Quarterly Report include, without
limitation: our expectation that we may be required to consolidate a variable
interest lessor in the third quarter of 2003; our continued R&D investment
focus on improvement of our existing products and development of new products
and technologies; our expectations regarding the effect of the adoption of SFAS
145 and 146 on our financial condition or results of operations; our belief
that we would seek to refinance or exercise our purchase options for our
properties subject to synthetic leases

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in the event the leasing structures used in these synthetic leases qualify as
variable interest entities; our belief that the fair market value for each of
the properties subject to the synthetic leases equals or exceeds the purchase option
price for the property; our belief that our current cash position, cash
generated through operations and equity offerings, and available borrowings
will be sufficient to meet our needs through the next twelve months; our intent
to continue pursuing the legal defense of our proprietary technology primarily
through patent and trade secret protection; our belief that the ultimate
outcome of the Applied Materials, Inc., Semitool, Inc., Plasma Physics
Corporation, Solar Physics Corporation and Linear Technology Corporation
litigation matters and various other litigations that have arisen in the normal
course of business will not have a material adverse effect on our business,
financial condition or results of operations; and our belief that we have
meritorious claims and/or defenses in the Applied Materials and Semitool
litigation matters.

Our expectations, beliefs, objectives, anticipations, intentions and strategies
regarding the future, including, without limitation, those concerning expected
operating results, revenues and earnings and current and potential litigation
are not guarantees of future performance and are subject to risks and
uncertainties that could cause actual results to differ materially from results
contemplated by the forward-looking statements including, but not limited to:
the inaccuracy of our assumptions regarding the characterization of a lessor as
a variable interest entity; our inability to allocate substantial resources to
R&D; our failure to accurately predict the effect of our adoption of certain
accounting pronouncements; our inability to refinance or exercise our purchase
options for properties subject to synthetic leases; our failure to properly
measure the fair market value of the properties subject to synthetic leases;
our unanticipated need for additional liquid assets in the next twelve months;
our potential inability to enforce our patents and protect our trade secrets;
our failure to accurately predict the effect of the ultimate outcome of current
litigation on our business, financial condition or results of operations; and
inherent uncertainty in the outcome of litigation matters.

The forward-looking statements in this Quarterly Report on Form 10-Q are
subject to additional risks and uncertainties further discussed under Part I:
Item 2: Managements Discussion and Analysis of Financial Condition and Results
of Operations. Risk Factors beginning on page 22 of this Quarterly Report on
Form 10-K and are based on information available to us on the date hereof. We
assume no obligation to update any forward-looking statements. Readers are
cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date of this Quarterly Report on Form 10-Q. Readers should
also consult the cautionary statements and risk factors listed in our Annual
Report on Form 10-K for the year ended December 31, 2002 and in our other
filings with the Securities and Exchange Commission (SEC), including our Forms
10-Q and 8-K and our Annual Reports to Shareholders.

Critical Accounting Policies

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

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Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101,
or SAB 101, Revenue Recognition in Financial Statements and SAB 101: Revenue
Recognition in Financial Statements-Frequently Asked Questions and Answers, or
SAB 101 FAQ. We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the sellers
price is fixed or determinable and collectibility is reasonably assured.

Certain of our product sales are accounted for as multiple-element
arrangements. A multiple-element arrangement is a transaction which may involve
the delivery or performance of multiple products, services, or rights to use
assets, and performance may occur at different points in time or over different
periods of time. If we have met defined customer acceptance experience levels
with both the customer and the specific type of equipment, then we recognize
equipment revenue upon shipment and transfer of title, with the remainder
generally recognized at the later of completion of the installation services or
customer acceptance.

Installation services are not essential to the functionality of the delivered
equipment. We allocate revenue based on the residual method as a fair value has
been established for installation services. However, since the final payment is
not typically due until customer acceptance, we defer revenue for the final
payment, which is in excess of the fair value of the installation services. All
other equipment sales are recognized upon customer acceptance.

Revenue related to spare part sales is recognized upon shipment. Revenue
related to maintenance and service contracts is recognized ratably over the
duration of the contracts. Unearned maintenance and service contract revenue is
not significant and is included in other accrued liabilities.

Inventory Valuation

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

Goodwill and Other Intangible Assets

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142.
SFAS No. 142 requires that goodwill and identifiable intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values and reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Furthermore, SFAS No. 142 includes provisions on the
identification of intangible assets, reclassification of certain intangible
assets from previously reported goodwill, and reassessment of the useful lives
of existing intangible assets. Upon adoption, we reassessed the useful lives
and residual values of all acquired identifiable intangible assets to identify
any necessary amortization period adjustments and to determine whether other
intangible assets should be reclassified from goodwill. Based on that
assessment, no adjustments were made to the amortization period or residual
values of identifiable intangible assets.

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Deferred Tax Assets

We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. Our valuation allowance was
recorded as an increase to goodwill in connection with acquired net operating
loss carryforwards, which are not realizable until 2009 and beyond. We have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance. Should the
existing deferred tax asset, which is currently offset by the valuation
allowance, be realized, the benefit of such realization and the related
reversal of the valuation allowance would result in a reduction of goodwill. If
we determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the deferred tax assets
would decrease income in the period such determination was made.

Warranty Obligations

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

Restructuring and Impairment Charges

Effective January 1, 2003, we adopted SFAS No. 146, Accounting for Cost
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3. SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred, rather than when the exit or disposal plan is approved.
The adoption of SFAS No. 146 does not have a material effect on our financial
condition or results of operations.

Additionally, we account for business
combination restructurings under the provisions of EITF Issue
No. 95-3, Recognition of Liabilities in Connection with a Purchase Business
Combination and SAB No. 100, Restructuring and Impairment Charges.
Accordingly, restructuring accruals are recorded when management initiates an
exit plan that will cause us to incur costs that have no future economic
benefit. Additionally, certain restructuring charges related to asset
impairments are recorded in accordance with SFAS No. 144. The restructuring
accrual related to the vacated facilities is calculated net of estimated
sublease income. Sublease income is estimated based on current market quotes
for similar properties. If we are unable to sublet these properties on a timely
basis or if we are forced to sublet them at lower rates due to changes in
market conditions, we would adjust the accrual accordingly.

Our critical accounting policies are also discussed in our Annual Report on
Form 10-K for the year ended December 31, 2002, in the section Managements
Discussion and Analysis of Financial Condition and Results of Operations and
in Note 1 to our Consolidated Financial Statements.

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Results of Operations
(dollars in thousands)

Net Sales

|                          |  |         |         |         |  |         |         |         |  |         |         |   |  |             |    |             |  |  |    |  
|------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | - |  | ----------- | -- | ----------- |  |  | -- | -
|                          |  |         |         |         |  |         |         |         |  |         |         |   |  | Change From |    | Change From
|                          |  | Q1 2003 |         | Q1 2002 |  | Q4 2002 |         | Q1 2002 |  | Q4 2002
|                          |  |         |         |         |  |         |         |         |  |        
|Net sales                 |  | $       | 238,410 |         |  | $       | 169,679 |         |  | $       | 217,637 |   |  |             | 41 | %           |  |  | 10 | %
|International net sales % |  |         | 55      | %       |  |         | 54      | %       |  |         | 45      | % |  |             |    |             |  |  |    |  

We operate our business in the semiconductor equipment industry, which is
subject to cyclical conditions that have played a major role in the
fluctuations in our net sales. The increase in total net sales over the prior
year period is primarily due to improved market conditions during the first
quarter of 2003. Although the demand for semiconductor equipment remains
sluggish, market conditions have somewhat improved from the first quarter of
2002. The decline in demand for semiconductor equipment began in early 2001 and
continued through the early part of 2002. While we experienced a modest
increase in the second half of 2002, demand has remained relatively flat
through the first quarter of 2003. The increase in net sales over the fourth
quarter of 2002 is primarily due to the combined effect of the increase in
shipments and net sales from the operations of SpeedFam-IPEC, Inc., which we
acquired in December 2002.

The increase in international net sales as a
percentage of total net sales from the fourth quarter of 2002 results from
higher net sales in the Asia region (consisting primarily of Korea, Japan and
Taiwan). The Asia region accounted for 47% of total net sales for the quarter
ended March 29, 2003, compared to 42% and 40% for the quarters ended March 30,
2002 and December 31, 2002, respectively.

Gross Profit

|               |  |         |         |         |  |         |        |         |  |         |        |   |  |             |    |             |  |  |    |  
|-------------- |  | ------- | ------- | ------- |  | ------- | ------ | ------- |  | ------- | ------ | - |  | ----------- | -- | ----------- |  |  | -- | -
|               |  |         |         |         |  |         |        |         |  |         |        |   |  | Change From |    | Change From
|               |  | Q1 2003 |         | Q1 2002 |  | Q4 2002 |        | Q1 2002 |  | Q4 2002
|               |  |         |         |         |  |         |        |         |  |        
|Gross profit   |  | $       | 109,814 |         |  | $       | 71,530 |         |  | $       | 96,048 |   |  |             | 54 | %           |  |  | 14 | %
|% of net sales |  |         | 46      | %       |  |         | 42     | %       |  |         | 44     | % |  |             |    |             |  |  |    |  

The overall reduction in customer capital spending in response to weakened
worldwide demand for semiconductor devices has continued to affect our gross
profit margin as we are not able to fully absorb fixed overhead costs. The
increases in gross profit as a percentage of net sales from the first quarter
of 2002 and fourth quarter of 2002 are primarily due to improved absorption of
fixed overhead costs resulting from the increase in shipments.

Selling, General and Administrative (SG&A)

|               |  |         |        |         |  |         |        |         |  |         |        |   |  |             |    |             |  |  |    |  
|-------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | - |  | ----------- | -- | ----------- |  |  | -- | -
|               |  |         |        |         |  |         |        |         |  |         |        |   |  | Change From |    | Change From
|               |  | Q1 2003 |        | Q1 2002 |  | Q4 2002 |        | Q1 2002 |  | Q4 2002
|               |  |         |        |         |  |         |        |         |  |        
|SG&A expense   |  | $       | 42,631 |         |  | $       | 34,686 |         |  | $       | 36,868 |   |  |             | 23 | %           |  |  | 16 | %
|% of net sales |  |         | 18     | %       |  |         | 20     | %       |  |         | 17     | % |  |             |    |             |  |  |    |  

SG&A expense includes
compensation and benefits, travel, utilities, communications costs
and professional fees for our corporate, financial, marketing and
administrative functions. Also included are expenses for rents, depreciation and
amortization related to the assets utilized by the functions noted above. The
decrease in SG&A expense as a percentage of net sales versus the first quarter
of 2002 is primarily due to the increase in net sales. The increases in SG&A
expense in absolute dollars from the first and fourth quarter of 2002 are
primarily due to a full quarter of SpeedFam-IPEC operations being included in
our results for the first quarter of 2003, an increase in selling
expenses and expense savings

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resulting from our holiday shutdown in
the fourth quarter of 2002, which did not recur in the first quarter
of 2003. The increase
in selling expenses is due to the increase in volume and change
in product mix.

Research and Development (R&D)

|               |  |         |        |         |  |         |        |         |  |         |        |   |  |             |   |             |  |  |    |  
|-------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | - |  | ----------- | - | ----------- |  |  | -- | -
|               |  |         |        |         |  |         |        |         |  |         |        |   |  | Change From |   | Change From
|               |  | Q1 2003 |        | Q1 2002 |  | Q4 2002 |        | Q1 2002 |  | Q4 2002
|               |  |         |        |         |  |         |        |         |  |        
|R&D expense    |  | $       | 57,006 |         |  | $       | 54,046 |         |  | $       | 51,323 |   |  |             | 5 | %           |  |  | 11 | %
|% of net sales |  |         | 24     | %       |  |         | 32     | %       |  |         | 24     | % |  |             |   |             |  |  |    |  

R&D expense includes compensation
and benefits, project materials, repairs and maintenance, rent, depreciation
and amortization expenses associated with patents and purchased
technologies for our R&D functions.
The decrease in R&D expense as a percentage of net sales compared to the first
quarter of 2002 is primarily due to the increase in net sales. The increases in
R&D expense in absolute dollars over the first and fourth quarter of 2002
reflect our commitment to the continuous improvement of our current product
lines and the development of new products and technologies. We plan to continue
focusing on our R&D expenditures.

Restructuring and Other Charges

|                                |  |         |   |         |  |         |       |         |  |         |       |   |  |             |      |             |  |  |      |  
|------------------------------- |  | ------- | - | ------- |  | ------- | ----- | ------- |  | ------- | ----- | - |  | ----------- | ---- | ----------- |  |  | ---- | -
|                                |  |         |   |         |  |         |       |         |  |         |       |   |  | Change From |      | Change From
|                                |  | Q1 2003 |   | Q1 2002 |  | Q4 2002 |       | Q1 2002 |  | Q4 2002
|                                |  |         |   |         |  |         |       |         |  |        
|Restructuring and
other charges |  | $       |  |         |  | $       | 3,273 |         |  | $       | 3,194 |   |  |             | -100 | %           |  |  | -100 | %
|% of net sales                  |  |         |  |         |  |         | 2     | %       |  |         | 1     | % |  |             |      |             |  |  |      |  

The $3.3 million restructuring charge in the first quarter of 2002 consisted
primarily of severance compensation related to a workforce reduction, which was
carried out in response to the downturn in market conditions. The $3.2 million
charge in the fourth quarter of 2002 consisted of a $1.7 million charge for
severance compensation related to a workforce reduction and a $1.5 million
restructuring charge related to previously vacated facilities.

Bad Debt Recovery

|                  |  |         |   |         |  |         |        |         |  |         |   |  |  |             |      |             |  |  |   | 
|----------------- |  | ------- | - | ------- |  | ------- | ------ | ------- |  | ------- | - |  |  | ----------- | ---- | ----------- |  |  | - | 
|                  |  |         |   |         |  |         |        |         |  |         |   |  |  | Change From |      | Change From
|                  |  | Q1 2003 |   | Q1 2002 |  | Q4 2002 |        | Q1 2002 |  | Q4 2002
|                  |  |         |   |         |  |         |        |         |  |        
|Bad debt recovery |  | $       |  |         |  | $       | (7,662 | )       |  | $       |  |  |  |             | -100 | %           |  |  |  | 
|% of net sales    |  |         |  |         |  |         | 5      | %       |  |         |  |  |  |             |      |             |  |  |   | 

In September 2001, we determined that an outstanding account receivable balance
was at risk for collection because the customer was facing financial
difficulties, payment was overdue and overall industry conditions continued to
deteriorate. Accordingly, we recorded a write-off of $7.7 million in the third
quarter of 2001. However, in the first quarter of 2002, the amount owed under
this account was paid in full, resulting in a benefit to operations of $7.7
million.

Other Income, Net

|                  |  |         |       |         |  |         |        |         |  |         |       |   |  |             |     |             |  |  |     |  
|----------------- |  | ------- | ----- | ------- |  | ------- | ------ | ------- |  | ------- | ----- | - |  | ----------- | --- | ----------- |  |  | --- | -
|                  |  |         |       |         |  |         |        |         |  |         |       |   |  | Change From |     | Change From
|                  |  | Q1 2003 |       | Q1 2002 |  | Q4 2002 |        | Q1 2002 |  | Q4 2002
|                  |  |         |       |         |  |         |        |         |  |        
|Other income, net |  | $       | 5,652 |         |  | $       | 17,669 |         |  | $       | 7,328 |   |  |             | -68 | %           |  |  | -23 | %
|% of net sales    |  |         | 2     | %       |  |         | 10     | %       |  |         | 3     | % |  |             |     |             |  |  |     |  

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Other income, net, includes interest income, interest expense and other
non-operating items. The decrease in other income, net from the first quarter
of 2002 is primarily due to lower balances of interest-bearing cash and
short-term investments and lower interest rates in the first quarter of 2003.
The decline in the investment balance is primarily due to the repayment of the
$880.0 million Liquid Yield Option Notes (LYONs) in the third quarter of
2002. Additionally, we had a $4.6 million gain from the sale of an equity
investment in the first quarter of 2002.

The decrease in other income, net from the fourth quarter of 2002 is primarily
due to lower balances of interest-bearing cash and short-term investments as we
used approximately $119.3 million for repayment of the SpeedFam-IPEC
convertible debt and accrued interest. Additionally, we recorded a loss on
extinguishment of the SpeedFam-IPEC debt of $616,000, which contributed to the
reduction of other income, net, during the first quarter of 2003.

Provision for Income Taxes

Our estimated effective tax rate is 25% for the first quarter of 2003, compared
to 21% for the respective prior year period and 0% in the immediately preceding
quarter. The increases in the effective tax rate compared to the respective
prior year period and immediately preceding quarter are primarily due to higher
pre-tax income projected for the current fiscal year and reduced benefit from
R&D tax credits.

Related Party Transactions

In March 2002, we began leasing an aircraft from NVLS I, LLC, a third-party
entity wholly owned by Richard S. Hill, our Chairman and Chief Executive
Officer. Under the aircraft lease agreement, we incurred lease expense of
approximately $139,000 for the first quarter of 2003.

A member of our Board of Directors, D. James Guzy, is also a member of the
Board of Directors of Intel Corporation, one of our significant customers.
Intel Corporation represented approximately 14% and 18% of net sales for the
quarters ended March 29, 2003 and March 30, 2002, respectively. Intel also
accounted for 10% and 18% of our accounts receivable as of March 29, 2003 and
December 31, 2002, respectively.

From time to time we have made secured relocation loans to our executive
officers, vice presidents and key personnel. As of March 29, 2003, we do not
have any outstanding loans to our executive officers as defined by the
Securities and Exchange Commission. However, we do have outstanding loans to
non-executive vice presidents and key personnel. As of March 29, 2003 and
December 31, 2002, the total outstanding balance of loans to non-executive vice
presidents and key personnel was approximately $6.8 million and $5.7 million,
respectively. Of the total loans outstanding at March 29, 2003, $6.4 million
was secured by collateral.

Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
For most companies, SFAS No. 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations, rather than as extraordinary items, as previously required under
SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, an
amendment of APB Opinion No. 30. Extraordinary treatment will be required for
certain extinguishments as provided in APB Opinion No. 30,

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Reporting the Results of Operations  Reporting the Effects of Disposal of a
segment of Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 145 also amended SFAS No. 13, Accounting
for Leases for certain sale-leaseback transactions and sublease accounting. We
are required to adopt the provisions of SFAS No. 145 effective January 1, 2003.
The adoption of SFAS No. 145 does not have a material effect on our financial
condition or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, or FIN 45. FIN 45 will significantly
change current practice in the accounting for and disclosure of guarantees. FIN
45 requires certain guarantees to be recorded at fair value which is different
from the current practice of recording a liability only when a loss is probable
and reasonably estimable, as those terms are defined in SFAS No. 5, Accounting
for Contingencies. FIN 45 also requires a guarantor to make significant new
disclosures, even when the likelihood of making any payments under the
guarantee is remote, which is another change from the current practice. FIN 45
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002, while the initial recognition
and initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
does not have a material impact on our results of operations and financial
condition.

Liquidity and Capital Resources

We have historically financed our operating and capital resource requirements
through cash flows from operations, sales of equity securities and borrowings.
Our primary source of funds at March 29, 2003 consisted of $929.8 million of
cash, cash equivalents and short-term investments. This amount represents a
decrease of $90.2 million from the December 31, 2002 balance of $1.02 billion.
The decrease was due primarily to the repayment of SpeedFam-IPECs convertible
debt at a redemption price of $117.1 million and accrued interest of $2.2
million, offset by positive cash generated from operations, which included
$18.5 million from an income tax refund.

Net cash provided by operating activities during the first quarter of 2003 was
$16.5 million. This amount consisted primarily of net income, the effect of
non-cash charges and changes in working capital accounts, which include a
decrease in prepaid and other current assets of $25.1 million, an increase in
accounts receivable of $10.8 million and a combined effect of decreases in
accounts payable, accrued payroll, income tax payable and other accrued
liabilities of $33.7 million. The decrease in prepaid and other current assets
was primarily a result of an $18.5 million income tax refund received in the
first quarter of 2003.

Net cash used in investing activities during the first quarter of 2003 was
$12.4 million, which consisted primarily of capital expenditures of $8.2
million and net purchases of short-term investments of $9.2 million, offset by
a decrease in other assets of $5.0 million. As of March 29, 2003, we do not
have any significant commitments to purchase property and equipment.

Net cash used in financing activities during the first quarter of 2003 was
$102.8 million, which is primarily due to the repayment of SpeedFam-IPECs
convertible debt at a redemption price of $117.1 million, partially offset by
proceeds from employee stock compensation plans of $14.3 million.

We lease nearly all of our facilities under operating leases, including
synthetic leases, which expire at various dates through 2017. Our synthetic
leases are primarily for properties in San Jose, California and Tualatin,
Oregon. A synthetic lease is a form of operating lease wherein a third party
lessor funds 100% of the acquisition and construction costs relating to one or
more properties to be leased to a lessee. The

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lessor is the owner of the leased property and must provide at least 3% of the
required funds in the form of at-risk equity. The lessor generally borrows the
balance of the funds necessary to fund the acquisition and construction. Under
our synthetic lease agreements, we are obligated to lend approximately 87% of
the cost of the leased asset to the lessor upon completion of construction. The
leases with this requirement are known as defeased or self-funded transactions.
In addition, our synthetic leases require us to maintain collateral for the
benefit of the lessor.

Summary information about our synthetic lease arrangements is as follows as of
March 29, 2003 (square feet and dollar amounts in thousands):

|             |  |            |    |        |  |             |       |               |  |           |         |            |  |           |         |  |  |   |        |  |  |   |        |  |  |   |         | 
|------------ |  | ---------- | -- | ------ |  | ----------- | ----- | ------------- |  | --------- | ------- | ---------- |  | --------- | ------- |  |  | - | ------ |  |  | - | ------ |  |  | - | ------- | 
|             |  |            |    |        |  | Total       |       |               |  |           |         |            |  |           |         |  |  |   |        |  |  |   |        |  |  |  
|Property     |  | Number of  |    | Square |  | Total Lease |       | Novellus      |  | Net Lease |         | Collateral |  | Residual 
|Location     |  | Properties |    | Feet   |  | Financing   |       | Participation |  | Financing |         | Value      |  | Guarantee
|             |  |            |    |        |  |             |       |               |  |           |         |            |  |          
|San Jose, CA |  |            | 13 |        |  |             | 958   |               |  | $         | 293,183 |            |  | $         | 257,042 |  |  | $ | 36,141 |  |  | $ | 36,141 |  |  | $ | 258,220 | 
|Tualatin, OR |  |            | 1  |        |  |             | 377   |               |  |           | 163,241 |            |  |           | 140,387 |  |  |   | 22,854 |  |  |   | 22,854 |  |  |   | 140,387 | 
|             |  |            |    |        |  |             |       |               |  |           |         |            |  |           |         |  |  |   |        |  |  |   |        |  |  |   |         | 
|             |  |            | 14 |        |  |             | 1,335 |               |  | $         | 456,424 |            |  | $         | 397,429 |  |  | $ | 58,995 |  |  | $ | 58,995 |  |  | $ | 398,607 | 
|             |  |            |    |        |  |             |       |               |  |           |         |            |  |           |         |  |  |   |        |  |  |   |        |  |  |   |         | 

As previously noted, the FASB issued FIN 46 in January 2003. We will be
required to adopt FIN 46 in the third fiscal quarter of 2003 beginning on June
29, 2003. We are currently evaluating our synthetic leases and seeking
additional information from the lessor and its advisors with regard to whether
the lessor should be characterized as a variable interest entity. Our
preliminary conclusion is that the lessor is a variable interest entity and
that we are the primary beneficiary of the variable interest entity. As such,
to the extent we do not renew the leases with a voting interest lessor or a
variable interest lessor where we are not the primary beneficiary or exercise
our purchase option, we expect to be required to consolidate the variable
interest lessor in the third quarter of 2003. Additionally, since each of the
other lessees involved with this lessor has a variable in specified assets of
the variable interest lessor, we would only be required to record the specific
assets and liabilities associated with our synthetic leases in our financial
statements for the third quarter of 2003 beginning on June 29, 2003. We are
currently researching our options for refinancing our synthetic leases with a
voting interest lessor or a variable interest lessor where we are not the
primary beneficiary. Upon completion of this research we will decide to either
refinance with an entity with which we would not be required to
consolidate, consolidate our portion of the variable interest entity or
purchase the properties by exercising our purchase options.

If we consolidate our portion of the
variable interest entity, we would record a non-cash charge of
approximately $90 million to $120 million as a cumulative
effect of a change in accounting principle, which would represent
depreciation that would have been recorded had we owned these assets
from inception. In addition, our annual depreciation expense would
increase by approximately $30.0 million to $35.0 million
beginning in the third quarter of 2003, and rent expense and interest
income would each decrease by approximately $13.4 million per
year, based on current interest rates.

If we exercise options to purchase the San Jose and Tualatin properties, the
transactions would increase our property and equipment by the lower of the
purchase price or the then fair market value of the properties. As of March 29,
2003, we believe that the fair market value for each property is equal to or
greater than the purchase option price for each property. We estimate the
cumulative fair market value of all properties to be approximately $456.4
million as of March 29, 2003. If we were to purchase the properties, our notes
receivable and collateral in a total amount of $456.4 million would be returned
to us as cash or used to offset the purchase price of the properties. As a
result of the purchase, depreciation expense would increase by approximately
$30.0 million to $35.0 million per year beginning in the third quarter of 2003,
and rent expense and interest income would each decrease by approximately $13.4
million per year, based on current interest rates. If we purchased the
properties at the end of their respective lease terms or earlier, there would
be no material impact on our liquidity, as the cash paid to purchase the
properties would be offset by the notes receivable and collateral associated
with our participation in these synthetic leases.

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Our subsidiaries in the Asia region have available lines of credit with various
banks with total borrowing capacity of $40.1 million. The lines of credit bear
interest at various rates, expire on various dates through December 2003 and
can be used for general operating purposes. There were minimal balances
outstanding under these credit facilities as of March 29, 2003.

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

Risk Factors

Set forth below and elsewhere in this Quarterly Report on Form 10-Q, including
in Part I: Item 2: Managements Discussion and Analysis of Financial Condition
and Results of Operations, and in other documents we file with the Securities
and Exchange Commission are trends, risks and uncertainties that could cause
our actual results to differ materially from the results contemplated by the
forward-looking statements contained in this Quarterly Report on Form 10-Q.

Cyclical Downturns in the Semiconductor Industry

Our business depends predominantly on the capital expenditures of semiconductor
manufacturers, which in turn depend on current and anticipated market demand
for integrated circuits and the products that use them. The semiconductor
industry has historically been very cyclical and has experienced periodic
downturns that have had a material adverse effect on the demand for
semiconductor processing equipment, including equipment that we manufacture and
market. During periods of reduced and declining demand, we must be able to
quickly and effectively align our costs with prevailing market conditions, as
well as motivate and retain key employees. In particular, our inventory levels
during periods of reduced demand have at times reached and are now at
higher-than-necessary levels relative to the current levels of production
demand. We cannot provide any assurance that we may not be required to make
inventory valuation adjustments in future periods. During periods of rapid
growth, we must be able to acquire and/or develop sufficient manufacturing
capacity to meet customer demand, and hire and assimilate a sufficient number
of qualified people. We cannot give assurances that our net sales and operating
results will not be adversely affected if the current downturn in the
semiconductor industry continues, or if other downturns or slowdowns in the
rate of capital investment in the semiconductor industry occur in the future.

The Semiconductor Industry is Intensely Competitive and Capital-Intensive

We face substantial competition in the industry, both from potential new
entrants into the market and established competitors. Some of these companies
may have greater financial, marketing, technical or other resources than we do,
as well as broader product lines, greater customer service capabilities, or
larger and more established sales organizations and customer bases. Remaining
competitive in the market depends in part upon our ability to develop new and
enhanced systems, and to introduce them at competitive prices on a timely
basis. Our customers must incur substantial expenditures to install and
integrate capital equipment into their semiconductor production lines. Once a
manufacturer has selected another vendors capital equipment, the manufacturer
is generally reliant upon that equipment vendor for the specific production
line application in question. Accordingly, we may experience difficulty in
selling a product to a particular customer for a significant period of time
when that customer has selected a competitors product. In addition, sales of
our systems depend in significant part upon a prospective customers decision
to increase manufacturing capacity or expand current manufacturing
capacityboth of which typically involve a significant capital commitment. From
time to time, we have experienced delays in finalizing system sales following
initial system qualification. Due to these and other factors, our

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systems typically have a lengthy sales cycle, during which we may expend
substantial funds and management effort.

Rapidly Changing Technology

We devote a significant portion of our personnel and financial resources to
research and development programs, and we seek to maintain close relationships
with our customers in order to remain responsive to their product needs. As is
typical in the semiconductor capital equipment market, we have experienced
delays from time to time in the introduction of and certain technical and
manufacturing difficulties with certain of our products and product
enhancements. In addition, we may experience delays and technical and
manufacturing difficulties in future introductions or volume production of our
new systems or enhancements.

Our success in developing, introducing and selling new and enhanced systems
depends upon a variety of factors. These include 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 we
will be successful in selecting, developing, manufacturing and marketing new
products, or in enhancing our existing products. In addition, we could incur
substantial unanticipated costs to ensure the functionality and reliability of
our future product introductions early in their product life cycles. If new
products have reliability or quality problems, reduced orders, or higher
manufacturing costs, then delays in collecting accounts receivable and
additional service and warranty expenses may result. Any of these events could
materially adversely affect our business, financial condition or results of
operations.

International Operations

Export sales currently account for a significant portion of our net sales. This
trend is expected to continue in the foreseeable future. As a result, a
significant portion of our sales is subject to certain risks, including, but
not limited to:



| |  | Tariffs and other trade barriers;                                                                                                                                                                                                                   
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Challenges in staffing and managing foreign subsidiary operations;                                                                                                                                                                                  
| 
| |  | Difficulties in managing foreign distributors;                                                                                                                                                                                                      
| 
| |  | Potentially adverse tax consequences;                                                                                                                                                                                                               
| 
| |  | Imposition of legislation and regulations relating to the import or
export of semiconductor products, either by the United States or other
countries;                                                                                               
| 
| |  | Periodic economic downturns;                                                                                                                                                                                                                        
| 
| |  | Political instability; and                                                                                                                                                                                                                          
| 
| |  | Fluctuations in interest and foreign currency exchange rates, creating
the need to enter into forward foreign exchange contracts to hedge
against the short-term impact of foreign currency fluctuations,
specifically yen-denominated transactions.

There can be no assurance that any of these factors or the adoption of
restrictive policies will not have a material adverse effect on our business,
financial condition or results of operations. In addition, each region in the
global semiconductor equipment market exhibits unique market characteristics
that can cause capital equipment investment patterns to vary significantly from
period to period. We derive a substantial portion of our revenues from
customers in Asian countries. Any negative economic developments in these
countries could result in the cancellation or delay by Asian customers of
orders for our products, which could adversely affect our business, financial
condition or results of operations.

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Variability of Quarterly Operating Results

We have experienced and expect to continue experiencing significant
fluctuations in our quarterly operating results. These fluctuations are due to
a number of factors that include, but are not limited to:



| |  | Building our systems according to forecast, and not using limited backlog information, which hinders our ability to plan
production and inventory levels;                                                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Failure to receive anticipated orders in time to permit shipment during the quarter;                                                                                                                                                                                                      
| 
| |  | Customers rescheduling or canceling shipments;                                                                                                                                                                                                                                            
| 
| |  | Manufacturing difficulties;                                                                                                                                                                                                                                                               
| 
| |  | Customers deferring orders of our existing products due to new product announcements by us and/or our competitors; and                                                                                                                                                                    
| 
| |  | Overall business conditions in the semiconductor equipment industry. Variations in quarterly operating results or changes
in analysts earnings estimates may subject the price of our common stock to wide fluctuations and possible rapid increases
or decreases in a short time period.

Acquisitions

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



| |  | Difficulties in integrating the operations, technologies, products and personnel of acquired companies;                                          
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Lack of synergies or the inability to realize expected synergies;                                                                                
| 
| |  | Revenue and expense levels of acquired entities differing from those anticipated at the time of the acquisitions;                                
| 
| |  | Difficulties in managing geographically dispersed operations;                                                                                    
| 
| |  | The potential loss of key employees, customers and strategic partners of acquired companies;                                                     
| 
| |  | Diversion of managements attention from normal daily operations of the business; and                                                            
| 
| |  | The impairment of acquired intangible assets as a result of technological advancements, or worse-than-expected performance
of acquired companies.

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

A Large Portion of Net Sales is Derived from Sales to a Few Customers

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

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Intellectual Property

We intend to continue to seek legal protection, primarily through patents and
trade secrets, for our proprietary technology. There can be no assurance that
patents will be issued from any pending applications, or that any claims
allowed from existing or pending patents will be sufficiently broad to protect
our proprietary technology. There is also no guarantee that any patents we hold
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to us. We also cannot provide
assurance that the confidentiality agreements we enter into with employees,
consultants and other parties will not be breached.

We are currently involved in a number of legal disputes regarding patent and
other intellectual property rights. Except as set forth in Part II: Other
Information, Item 1: Legal Proceedings in this document, we are not aware of
any significant claim of infringement by our products of any patent or
proprietary rights of others. Adverse outcomes in current or future legal
disputes could result in the loss of our proprietary rights, subject the
company to significant liabilities to third parties, require us to seek
licenses from third parties, or prevent us from manufacturing or selling our
products. Any of these circumstances could have a material adverse effect on
our business, financial condition or results of operations.

Supply Shortages

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




ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting
Novellus, see Item 7A: Quantitative and Qualitative Disclosures about Market
Risk in our Annual Report on Form 10-K, for the fiscal year ended December 31,
2002. Our exposure related to market risk has not changed materially since
December 31, 2002.




ITEM 4: CONTROLS AND PROCEDURES

Quarterly Evaluation of Our Disclosure Controls and Internal Controls

Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures and our internal controls and procedures for financial
reporting. This controls evaluation was done under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer. Rules adopted by the Securities and Exchange Commission, or
the SEC, require that in this section of the Quarterly Report on Form 10-Q, we
present the conclusions of the CEO and the CFO about the effectiveness of our
disclosure controls and internal controls based on and as of the date of the
controls evaluation.

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CEO and CFO Certifications

Appearing immediately following the Signatures section of this Quarterly
Report on Form 10-Q, there are certifications of the Chief Executive Officer
and the Chief Financial Officer. The certifications are required in accordance
with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the
Quarterly Report on Form 10-Q is the information concerning the controls
evaluation referred to in the Section 302 certifications and this information
should be read in conjunction with the Section 302 certifications for a more
complete understanding of the topics presented.

Disclosure Controls and Internal Controls

Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, or the Exchange Act, such as this
Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. Disclosure
controls are also designed with the objective of ensuring that such information
is accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Internal controls are procedures which
are designed with the objective of providing reasonable assurance that our
transactions are properly authorized, our assets are safeguarded against
unauthorized or improper use and our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with accounting principles generally accepted in the United States
of America.

Limitations on the Effectiveness of Controls

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

Scope of the Controls Evaluation

The evaluation of our disclosure controls and our internal controls by our
Chief Executive Officer and our Chief Financial Officer included a review of
the controls implemented by the company and the effect of the controls on the
information generated for use in this Quarterly Report on Form 10-Q. In the
course of the controls evaluation, we sought to identify data errors, controls
problems or acts of fraud and to confirm that appropriate corrective action,
including process improvements, were being undertaken. This type of evaluation
will be done on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and our
Annual Report on Form 10-

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K. Our internal controls are also evaluated on an ongoing basis by our
outsourced internal audit department and by other personnel in our finance
department. The overall goals of these various evaluation activities are to
monitor our disclosure controls and our internal controls and to make
modifications as necessary; our intent in this regard is that the disclosure
controls and the internal controls will be maintained as dynamic systems that
change (including with improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to determine whether there
were any significant deficiencies or material weaknesses in the companys
internal controls, or whether the company had identified any acts of fraud
involving personnel who have a significant role in the companys internal
controls. This information was important both for the controls evaluation
generally and because items 5 and 6 in the Section 302 certifications of the
Chief Executive Officer and the Chief Financial Officer require that the Chief
Executive Officer and the Chief Financial Officer disclose that information to
our Boards Audit Committee and to our independent auditors and to report on
related matters in this section of the Quarterly Report on Form 10-Q. In the
professional auditing literature, significant deficiencies are referred to as
reportable conditions. These are control issues that could have a
significant adverse effect on the ability to record, process, summarize and
report financial data in the financial statements. A material weakness is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in the
controls evaluation, and in each case if a problem was identified, we
considered what revision, improvement and/or correction to make in accordance
with our ongoing procedures. In accordance with SEC requirements, the Chief
Executive Officer and the Chief Financial Officer note that, since the date of
the controls evaluation to the date of this Quarterly Report on Form 10-Q,
there have been no significant changes in internal controls or in other factors
that could significantly affect internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Conclusions

Based upon the controls evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that, subject to the limitations noted above,
our disclosure controls are effective to ensure that material information
relating to the company is made known to management, including the Chief
Executive Officer and the Chief Financial Officer, particularly during the
period when our periodic reports are being prepared, and that our internal
controls are effective to provide reasonable assurance that our financial
statements are fairly presented in conformity with accounting principles
generally accepted in the United States of America.




PART II: OTHER INFORMATION




ITEM 1: LEGAL PROCEEDINGS

On June 13, 1997, we agreed to purchase the Thin Film Systems (TFS) business of
Varian Associates, Inc. On the same day, Applied Materials, Inc. (Applied) sued
Varian in the United States District Court (the Court) for the Northern
District of California for alleged infringement by TFS of several of Applieds
physical vapor deposition (PVD) patents (the Applied Patents).

On June 23, 1997, we sued Applied in the United States District Court for the
Northern District of California, claiming infringement by Applied of several of
our PVD patents acquired from Varian in the TFS purchase. Applied has filed
counterclaims in this suit, alleging that we infringe Applieds patents.

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We seek an injunction against future infringement by Applied, damages for past
infringement and treble damages for willful infringement.

On July 7, 1997, Applied amended its complaint in its suit against Varian to
add Novellus as a defendant. We have requested that the Court dismiss us as a
defendant in this suit. The Court has not yet ruled on the request or required
us to file an answer in this lawsuit.

The relief requested by Applied in both suits includes a permanent injunction
against future infringement, damages for alleged past infringement and treble
damages for alleged willful infringement. Trial is currently set to commence
on June 2, 2003. Applied has recently indicated, however, that they will not
be seeking any relief against Novellus in this trial.

We believe that we have meritorious claims against Applied. We also believe,
should Applied attempt to assert claims against us, we have meritorious
defenses to any such claim, including the defense that our operations and
products (including TFS products and systems) do not infringe the Applied
Patents, and that the Applied Patents are invalid, unenforceable or both. As a
result of court rulings adverse to Applied  and in light of certain indemnity
obligations undertaken by Varian, which include reimbursement of certain legal
expenses and a portion of any losses incurred from this litigation  we do not
believe that these potential claims will have a material adverse effect on our
business, financial condition or results of operations.

Semitool, Inc.

On June 11, 2001, Semitool, Inc. sued Novellus for patent infringement in the
United States District Court for the District of Oregon. In this lawsuit,
Semitool alleges that Novellus infringes one of Semitools patents related to
copper electroplating. Semitool seeks an injunction against future
infringement by Novellus, damages for past infringement, and treble damages for
alleged willful infringement.

On November 13, 2001, we countersued Semitool for patent infringement in the
United States District Court for the District of Oregon. We allege that
Semitool infringes certain Novellus patents related to copper electroplating.
We seek an injunction against Semitool, damages for past infringement, and
treble damages for willful infringement by Semitool.

This litigation is in its early stages, and therefore is inherently difficult
to assess. We believe that we have meritorious claims against Semitool, and
that this litigation will not have a material adverse impact on our business,
financial condition or results of operations. However, the outcome of patent
disputes is often affected by uncertainty in the resolution of complex issues
of fact and law. If Semitool were to prevail against us, the adverse effect on
our business, financial condition or results of operations could be material.

Plasma Physics Corporation and Solar Physics Corporation

On June 14, 2002, certain of our customersincluding Agilent Technologies,
Inc., Micron Technology, Inc., Agere Systems, Inc., National Semiconductor
Corporation, Koninklijke Philips Electronics N.V., Texas Instruments, Inc., ST
Microelectronics, Inc., LSI Logic Corporation, International Business Machines
Corporation, Conexant Systems, Inc., Motorola, Inc., Advanced Micro Devices,
Inc. and Analog Devices Inc.were sued for patent infringement by Plasma
Physics Corporation (Plasma Physics) and Solar Physics Corporation (Solar
Physics). We have not been sued by Plasma Physics, Solar Physics, or any other
party for infringement of any Plasma Physics or Solar Physics patent. Certain
defendants in the case have notified us that they believe that we have
indemnification obligations and

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liability relating to these lawsuits. For example, Conexant has filed a
complaint against Novellus in the Superior Court for the State of California,
County of Orange, regarding these purported indemnity and other duties and
obligations allegedly owed by Novellus. This complaint has not yet been
served. We believe that these matters will not have a material adverse impact
on our financial condition or results of operations. There can be no assurance,
however, that we will not be sued in the future in connection with the
allegations of patent infringement made by Plasma Physics and Solar Physics or
that, if we are sued, we will prevail in any such lawsuit. If a party were to
file such a lawsuit and prevail against us, the adverse impact on our business,
financial condition or results of operations could be material.

Linear Technology Corporation

On March 12, 2002, Linear Technology Corporation filed a complaint against
Novellus, among other parties, in the Superior Court of the State of California
for the County of Santa Clara. The complaint seeks damages (including punitive
damages) and injunctions for causes of actions involving alleged breach of
contract, fraud, unfair competition, breach of warranty and declaratory relief.
We filed a demurrer to Linears complaint, which the court recently granted,
with leave to amend.

This litigation is in its early stages and is therefore inherently difficult to
assess. We believe that this litigation will not have a material adverse
impact on our business, financial condition or results of operations. However,
the outcome of patent disputes is often affected by uncertainty in the
resolution of complex issues of fact and law. If Linear were to prevail against
us, the adverse effect on our business, financial condition or results of
operations could be material.

Other Litigation

We are a defendant or plaintiff in various actions that have arisen in the
normal course of business. We believe that the ultimate disposition of these
matters will not have a material adverse effect on our business, financial
condition or results of operations.




ITEM 5: OTHER INFORMATION

The ratio of earnings to fixed charges for the three months ended March 29,
2003 and each of the five most recent fiscal years was as follows:

|               |  |                          |      |      |  |      |       |      |  |      |       |  |  |  |      |  |  |  |      | 
|-------------- |  | ------------------------ | ---- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ---- |  |  |  | ---- | 
|Quarter ended  |  | Years ended December 31,
|March 29, 2003 |  | 2002                     |      | 2001 |  | 2000 |       | 1999 |  | 1998
|               |  |                          |      |      |  |      |       |      |  |     
|5.13           |  |                          | 2.69 |      |  |      | 13.41 |      |  |      | 16.30 |  |  |  | 6.95 |  |  |  | 6.33 | 

The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings before income taxes and before the cumulative effect of a change
in accounting principle plus fixed charges. Fixed charges consist of interest
expense and that portion of net rental expense deemed representative of
interest.




ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

|     |  |                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.1 |  | Certification of Richard S. Hill, Chairman of the Board of Directors
and Chief Executive Officer of Novellus Systems, Inc. dated
May 12, 2003
in accordance with 18 U.S.C. 1350, as

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|     |  |                                                                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                  
|99.2 |  | Certification of Kevin S. Royal, Vice President and Chief Financial
Officer of Novellus Systems, Inc. dated May 12, 2003 in accordance with
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

(b) Reports on Form 8-K



| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 29, 2003, we filed a report on Form 8-K in order to clarify
comments made during our regular quarterly earnings conference call held on
January 28, 2003.



| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On February 19, 2003, we filed an amended report on Form 8-K/A to provide the
historical financial statements and related notes of SpeedFam-IPEC and our
pro forma financial information after giving effect to the acquisition of
SpeedFam-IPEC.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

| |  |                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------
| |  | NOVELLUS SYSTEMS, INC.                                                                                              
| |  |                                                                                                                     
| |  | By: /s/ Kevin S. Royal                                                                                              
| |  |                                                                                                                     
| |  | Kevin S. Royal
Vice President and Chief Financial Officer
(Principal Financial Officer and Chief
Accounting Officer)

May 12, 2003

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CERTIFICATION

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard S. Hill, certify that:



| | 1. | I have reviewed this quarterly report on Form 10-Q of Novellus
Systems, Inc.;                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|
| | 4. | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



| | 5. | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



| | 6. | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |     |  |                                                                               
|------------------- |  | --- |  | ------------------------------------------------------------------------------
|Dated: May 12, 2003 |  | By: |  | /s/ Richard S. Hill                                                           
|                    |  |     |  |                                                                               
|                    |  |     |  | Richard S. Hill
Chairman of the Board of Directors and
Chief Executive Officer

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CERTIFICATION

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Kevin S. Royal, certify that:



| | 1. | I have reviewed this quarterly report on Form 10-Q of Novellus
Systems, Inc.;                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|
| | 4. | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



| | 5. | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



| | 6. | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |     |  |                                                          
|------------------- |  | --- |  | ---------------------------------------------------------
|Dated: May 12, 2003 |  | By: |  | /s/ Kevin S. Royal                                       
|                    |  |     |  |                                                          
|                    |  |     |  | Kevin S. Royal
Vice President and Chief Financial Officer

33



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##### Table of Contents






EXHIBIT INDEX

|     |  |                                                                                                                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.1 |  | Certification of Richard S. Hill, Chairman of the Board of Directors and
Chief Executive Officer of Novellus Systems, Inc. dated May 12, 2003 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                                                                                                                                                                       
|99.2 |  | Certification of Kevin S. Royal, Vice President and Chief Financial
Officer of Novellus Systems, Inc. dated May 12, 2003 in accordance with 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.