<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the quarterly period ended September 25, 1999

                                       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
                                     0-17157

                             Novellus Systems, Inc.
             (Exact name of Registrant as specified in its charter)

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

4000 North First Street
  San Jose, California
 (Address of principal                                            95134
  executive offices)                                            (Zip Code)

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

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   [ ]

As of October 29, 1999 39,105,864 shares of the Registrant's common stock, no
par value, were issued and outstanding.


                                       1
<PAGE>   2

                             NOVELLUS SYSTEMS, INC.
                                    FORM 10-Q
                        QUARTER ENDED SEPTEMBER 25, 1999



                                      INDEX

<TABLE>
<CAPTION>
<S>                                                                                                    <C>
Part I:   Financial Information

          Item 1: Condensed Consolidated Financial Statements                                     Page


                         Condensed Consolidated Balance Sheets at
                         September 25, 1999 and December 31, 1998.                                     3



                         Condensed Consolidated Statements of Income
                         for the three and nine months ended September 25,
                         1999 and September 26, 1998.                                                  4



                         Condensed Consolidated Statements of Cash Flows for
                         the nine months ended September 25, 1999
                         and September 26, 1998.                                                       5



                         Notes to Condensed Consolidated Financial
                         Statements.                                                                   6


          Item 2:        Management's Discussion and Analysis of
                         Financial Condition and Results of
                         Operations.                                                                   9


          Item 3:        Quantitative and Qualitative Disclosure About
                         Market Risks.                                                                15


Part II:  Other Information


          Item 1:   Legal Proceedings                                                                 16

          Item 6:   Exhibits and Reports on Form 8-K                                                  17



Signatures                                                                                            18
</TABLE>


                                       2
<PAGE>   3

PART I:  FINANCIAL INFORMATION
ITEM 1:  FINANCIAL STATEMENTS

NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(in thousands)
-------------------------------------------------------------------------------------
                                                        September 25,    December 31,
                                                             1999          1998 (1)
Assets                                                   (unaudited)
-------------------------------------------------------------------------------------
<S>                                                       <C>             <C>
Current assets:
  Cash and cash equivalents                               $ 112,624       $  81,224
  Short-term investments                                    241,595          49,594
  Accounts receivable, net                                  184,554         173,364
  Inventories                                                93,849          69,223
  Deferred income taxes                                      18,932          21,003
  Prepaid and other current assets                           10,062           4,687
                                                          -------------------------
       Total current assets                                 661,616         399,095

Property and equipment:
  Machinery and equipment                                   132,149         113,268
  Furniture and fixtures                                      9,758           8,295
  Leasehold improvements                                     53,776          52,237
                                                          -------------------------
                                                            195,683         173,800
  Less accumulated depreciation and amortization             88,944          68,221
                                                          -------------------------
                                                            106,739         105,579
Deferred income taxes                                        15,125          17,516
Other assets                                                 49,005          29,749
                                                          -------------------------
       Total Assets                                       $ 832,485       $ 551,939
                                                          =========================
Liabilities and Shareholders' Equity
-----------------------------------------------------------------------------------
Current liabilities:
  Accounts payable                                        $  53,370       $  30,966
  Accrued payroll and related expenses                       16,615          13,138
  Accrued warranty                                           18,825          25,872
  Other accrued liabilities                                  20,788          23,720
  Income taxes payable                                        9,342           4,792
  Current obligations under lines of credit                  13,213          12,986
                                                          -------------------------
       Total current liabilities                            132,153         111,474

Long-term debt                                                 --            65,000
Commitments and contingencies
Shareholders' equity:
   Common stock                                             455,651         176,140
   Retained earnings                                        245,168         201,581
   Accumulated other comprehensive income                      (487)         (2,256)
                                                          -------------------------
       Total shareholders' equity                           700,332         375,465
                                                          -------------------------
          Total Liabilities and Shareholders' Equity      $ 832,485       $ 551,939
                                                          =========================
</TABLE>

(1) Derived from the December 31, 1998 audited financial statements. See
accompanying notes.


                                       3
<PAGE>   4

NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
------------------------------------------------------------------  -------------------
(in thousands, except per share data)          Three Months Ended    Nine Months Ended
(unaudited)                                   Sept. 25,  Sept. 26,  Sept. 25, Sept. 26,
                                                 1999      1998        1999     1998
------------------------------------------------------------------  -------------------
<S>                                           <C>        <C>        <C>       <C>
Net sales                                     $154,916   $106,704   $401,025  $412,761
Cost of sales                                   71,195     50,622    186,588   188,182
                                              --------------------  -------------------
      Gross profit                              83,721     56,082    214,437   224,579
Operating expenses
  Selling, general and administrative           24,549     21,478     71,148    74,577
  Research and development                      30,567     23,392     87,020    83,047
                                              --------------------  -------------------
      Total operating expenses                  55,116     44,870    158,168   157,624
                                              --------------------  -------------------

Operating income                                28,605     11,212     56,269    66,955
Interest income, net                             3,892        342      8,801       759
                                              --------------------  -------------------
Income before income taxes                      32,497     11,554     65,070    67,714

Provision for income taxes                      10,724      3,931     21,473    23,025
                                              --------------------  -------------------
Net income                                     $21,773     $7,623    $43,597   $44,689
                                              ====================  ===================

Basic net income per share                       $0.56      $0.22      $1.15     $1.32
                                              ====================  ===================

Diluted net income per share                     $0.54      $0.22      $1.10     $1.28
                                              ====================  ===================

Shares used in basic calculation                38,941     34,095     37,898    33,948
                                              ====================  ===================

Shares used in diluted calculation              40,646     34,659     39,568    34,854
                                              ====================  ===================
</TABLE>

See accompanying notes.


                                       4
<PAGE>   5

NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(in thousands)                                                      Nine Months Ended
(unaudited)                                                     Sept. 25,       Sept. 26,
                                                                   1999           1998
-----------------------------------------------------------------------------------------
<S>                                                             <C>             <C>
Cash flows provided by operating activities:
    Net income                                                  $  43,597       $ 44,689
    Adjustments to reconcile net income to net cash
      provided by operating activities:
    Deferred income taxes                                           4,462           (398)
    Depreciation and amortization                                  21,813         17,166
Changes in operating assets and liabilities:
    Accounts receivable                                           (11,190)       (25,038)
    Inventories                                                   (23,741)          (111)
    Prepaid and other current assets                               (5,375)         6,657
    Accounts payable                                               22,404          4,336
    Accrued payroll and related expenses                            3,477        (11,474)
    Accrued warranty                                               (7,047)        (7,406)
    Other accrued liabilities                                      (2,932)        (6,821)
    Income taxes payable                                           10,867         19,422
                                                                ------------------------
       Total adjustments                                           12,738         (3,667)
                                                                ------------------------
       Net cash provided by operating activities                   56,335         41,022
                                                                ------------------------
Cash flows from investing activities:
    Maturities and sales (purchases) of available-for-sale
      debt securities, net                                       (192,001)        (5,713)
    Capital expenditures                                          (21,939)       (28,840)
    Increase in other assets                                      (19,405)        (8,834)
                                                                ------------------------
       Net cash used for investing activities                    (233,345)       (43,387)
                                                                ------------------------
Cash flows from financing activities:
    Payments on lines of credit, net                                  227           (334)
    Repayment on long-term debt                                   (65,000)          --
    Repurchase of common stock                                        (11)          (161)
    Proceeds from sale of common stock                            273,194         10,352
                                                                ------------------------
       Net cash provided by financing activities                  208,410          9,857
                                                                ------------------------
Net increase in cash and cash equivalents                          31,400          7,492
Cash and cash equivalents at the beginning of the period           81,224         59,265
                                                                ------------------------
Cash and cash equivalents at the end of the period              $ 112,624       $ 66,757
                                                                ========================
Supplemental Disclosures Cash paid during the period for:
    Interest                                                    $   1,461       $  3,493
    Income taxes                                                $     999       $    500
Other noncash charges:
    Income tax benefits from employee stock plans               $   6,318       $  1,087
</TABLE>

See accompanying notes.


                                       5
<PAGE>   6

NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles 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 and nine month periods ended
September 25, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.

2. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
----------------------------------------------------------------
                                Sept. 25, 1999     Dec. 31, 1998
----------------------------------------------------------------
<S>                                    <C>               <C>
Purchased parts                        $66,770           $50,591
Work-in-process                         22,166            13,005
Finished goods                           4,913             5,627
                                      --------         ---------
                                       $93,849           $69,223
                                      ========         =========
</TABLE>

3. LINES OF CREDIT

The Company has lines of credit with two banks, which expire at various dates
through November 1999 under which the Company can borrow up to $13.2 million at
the banks' prime rate. This facility is available to the Company's Japanese
subsidiary, Nippon Novellus Systems K.K. Borrowings by the subsidiary are at the
banks' offshore reference rate. At September 25, 1999 and December 31, 1998, the
amounts outstanding were $13.2 million and $13.0 million, respectively, at
annual weighted average interest rates of 1.09% and 1.52%, respectively. All
borrowings outstanding under the line of credit were by Nippon Novellus K.K.

4. EARNINGS PER SHARE

In accordance with Statement on Financial Accounting Standards No. 128,
"Earnings per Share," basic earnings per common share is computed based on
weighted average common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average common and dilutive common
equivalent shares outstanding during the period. Stock options are considered
common stock equivalents and are included in the weighted average shares
computation using the treasury stock method.


                                       6
<PAGE>   7

NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED


The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                ----------------------    ---------------------
                                                  Three Months Ended        Nine Months Ended
                                                Sept. 25,    Sept. 26,    Sept. 25,   Sept. 26,
                                                  1999         1998         1999         1998
                                                ----------------------    ---------------------
<S>                                              <C>          <C>          <C>          <C>
Numerator:
     Net income                                  $21,773      $ 7,623      $43,597      $44,689

Denominator:
     Denominator for basic earnings per
         share-weighted-average shares
         outstanding                              38,941       34,095       37,898       33,948

     Employee stock options                        1,705          564        1,670          906
                                                ----------------------    ---------------------

Denominator for diluted earnings per
     share-adjusted weighted-average shares
     outstanding                                  40,646       34,659       39,568       34,854
                                                ======================    =====================

Basic earnings per share                         $  0.56      $  0.22      $  1.15      $  1.32
                                                ======================    =====================

Diluted earnings per share                       $  0.54      $  0.22      $  1.10      $  1.28
                                                ======================    =====================
</TABLE>


5. LONG-TERM DEBT

In June 1997, the Company entered into a five year $125 million Senior Credit
Facility structured as an unsecured revolving credit line. The credit line
expires in June 2002. Borrowings, at the option of the Company, bear interest at
either a base rate plus a margin or the London Interbank Offering Rate ("LIBOR")
plus a margin for interest periods of one to six months. As of September 25,
1999, borrowings of $65 million under the revolving line of credit, which were
outstanding at December 31, 1998, were repaid.

The credit facility contains certain restrictive financial covenants. At
September 25, 1999, the Company was in compliance with these covenants.


6. COMMITMENTS

The Company has lease agreements on twelve properties. The agreements are for
five years each with the option to extend for an additional two years at an
interest rate that approximates LIBOR. The lease terms expire at various dates
beginning on June 2002 through August 2003. At current interest rates the annual
lease payments total approximately $15.8 million. During the term of the leases,
the Company may elect to purchase the properties for an amount that approximates
the lessor's cost of the property and any current rent due and payable. The
guaranteed residual amount under the lease agreement is approximately $219.9
million.

These leases contain certain restrictive financial covenants. At September 25,
1999, the Company was in compliance with these covenants.


                                       7
<PAGE>   8

NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED


7. COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted the Statement on Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities and foreign currency
translation adjustments to be included in other comprehensive income. Prior to
adoption, unrealized gains or losses related to foreign currency translation
adjustments were reported as a separate component of shareholders' equity.

The following are the components of comprehensive income:

<TABLE>
<CAPTION>
                                 ----------------------     -----------------------
                                   Three Months Ended          Nine Months Ended
                                 Sept. 25,    Sept. 26,     Sept. 25,     Sept. 26,
                                    1999         1998         1999          1998
                                 ----------------------     -----------------------
<S>                               <C>          <C>           <C>          <C>
Net income                        $21,773      $ 7,623       $43,597      $ 44,689

Foreign currency translation
  adjustment                        1,999         (410)        1,769          (975)
                                 ----------------------     -----------------------

Comprehensive income              $23,772        7,213       $45,366      $ 43,714
                                 ======================     =======================
</TABLE>


The component of accumulated other comprehensive income (loss), net of related
tax is as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------
                                          Sept. 25, 1999  Dec. 31, 1998
-----------------------------------------------------------------------
<S>                                            <C>           <C>
Foreign currency translation adjustment        $(487)        $(2,256)
                                               =====         =======
</TABLE>

8. LITIGATION

See Part II, Item - Legal Proceedings


                                       8
<PAGE>   9

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Net sales for the three and nine months ended September 25, 1999 were $154.9
million and $401.0 million respectively, compared with $130.9 million for the
immediately preceding quarter. Net sales for the three and nine months ended
September 25, 1999 were $106.7 million and $412.8 million, respectively. The
increase in net sales from the same quarter in the previous year and immediately
preceding quarter reflect the strengthening of the semiconductor industry as it
appears to be in the early stages of a broad-based recovery. The increase in net
sales is attributable to both capacity and technology purchases. Consistent with
the current industry environment, bookings for the third quarter of 1999
exceeded a one to one book-to-bill ratio. The Company anticipates sequential
revenue growth and the book-to-bill ratio to exceed one to one in the fourth
quarter of 1999.

International net sales (including export sales) for the three and nine months
ended September 25, 1999, were 62.0% and 64.4%, respectively, as a percentage of
total net sales, which compares to the same periods in the prior year of 48.5%
and 51.8%, respectively, and 70.7% for the immediately preceding quarter. The
increase from the same periods in the previous year relates to higher net sales
in Europe, Korea and the Pacific Rim.

Gross profit as a percentage of net sales for the three and nine months ended
September 25, 1999 were 54.0% and 53.5%, respectively, compared with 52.6% and
54.4% for the comparable year-ago periods and 53.2% for the immediately
preceding quarter. The increase in gross profit during the third quarter, as
compared to the preceding quarter and year-ago period, was due mainly to
increased shipments and richer product mix. The increased shipment volume
resulted in higher absorption of fixed manufacturing overhead costs.

Selling, general, and administrative expenses for the three and nine months
ended September 25, 1999 were $24.5 million and $71.1 million, respectively,
compared with $21.5 million and $74.6 million, respectively, in the comparable
year-ago periods, and $24.7 million in the immediately preceding quarter.
Selling, general, and administrative expenses as a percentage of net sales for
the three and nine months ended September 25, 1999 were 15.8% and 17.7%,
respectively, compared with 20.1% and 18.1%, respectively, for the comparable
year-ago periods, and 18.9% for the immediately preceding quarter. The decrease
in selling, general, and administrative expenses as a percentage of net sales
from the comparable year-ago periods and immediately preceding quarter are due
to the Company's ongoing efforts to control and minimize selling, general and
administrative costs.

Research and development expenses for the three and nine months ended September
25, 1999 were $30.6 million and $87.0 million, respectively, compared with $23.4
million and $83.0 million for the comparable year-ago periods and $29.9 million
for the immediately preceding quarter. Research and development expenses as a
percentage of net sales for the three and nine months ended September 25, 1999
were 19.7% and 21.7%, respectively, compared with 21.9% and 20.1% for the
comparable year-ago periods, and 22.9% for the immediately preceding quarter.
The increases in research and development expenses in absolute dollars from the
comparable and immediately preceding quarter reflects the Company's continued
commitment to the development of new products, including additional Concept Two
modules, advanced PVD systems, advanced "gap fill" technology, primary conductor
metals, low K dielectric materials and additional advanced technologies for the
next generation of smaller geometry fabrication lines, as well as equipment to
process 300mm


                                       9
<PAGE>   10

wafers. However, as the Company continues to experience growth in net sales,
research and development expenses as a percentage of revenues have declined
compared to the immediately preceding and year-ago quarter.

Net interest income for the three and nine months ended September 25, 1999 was
$3.9 million and $8.8 million, respectively, compared with $342,000 and
$759,000, respectively, for the comparable year-ago periods, and $3.6 million
for the immediately preceding quarter. The increase in net interest income
compared with the comparable year-ago periods is primarily due to increased
average cash and short-term investment balances over the past year. In February
1999, the Company completed a secondary public offering of 3.86 million shares
of common stock, resulting in net proceeds to the Company of $255.3 million. In
addition, long-term borrowings of $65 million were repaid subsequent to the
stock offering, which resulted in a reduction of interest expense.

The Company's effective tax rate for the three and nine months ended September
25, 1999 was 33% compared with 34% for the comparable year-ago periods. The
decrease in the effective tax rate from the comparable year-ago periods is due
to reduced state taxes and increased benefit from the foreign sales corporation
for 1999.

Deferred tax assets were $48.1 million and $49.2 million net of valuation
allowances of $14.6 million and $16.9 million at September 25, 1999 and December
31, 1998, respectively. The Company believes that it is more likely than not
that these assets will be realized by an offset against the recognized tax
liability of $14.0 million and $11.1 million at September 25, 1999 and December
31, 1998, respectively, and by future taxable income.

Net income for the three and nine months ended September 25, 1999 was $21.8
million and $43.6 million or $0.54 and $1.10 per share, respectively, compared
with net income of $7.6 million and $44.7 million or $0.22 and $1.28 per share
for the comparable year-ago periods, and net income of $12.4 million or $0.31
per share for the immediately preceding quarter.

The number of shares used in the per share calculations for the three and nine
months ended September 25, 1999 was 40.6 million and 39.6 million, respectively,
compared with 34.7 million and 34.9 million for the comparable year-ago periods
and 40.3 million for the immediately preceding period. The increase in shares
used compared to the comparable year-ago periods is primarily due to an
increased number of common stock outstanding resulting from the common stock
offering of 3.86 million shares in February 1999.


LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations and capital resources
through cash flow from operations, sales of equity securities and borrowings.
The Company's primary sources of funds at September 25, 1999 consisted of $354.2
million of cash, cash equivalents and short-term investments. This amount
represents an increase of $223.4 million from the December 31, 1998 balance of
$130.8 million. During the first quarter of 1999, the Company completed a
secondary public offering of 3.86 million shares of common stock that resulted
in net proceeds to the Company of $255.3 million. During the second quarter of
1997, the Company entered into a five year $125 million Senior Credit Facility
structured as an unsecured revolving credit line. The borrowings, at the option
of the Company, bear interest at either a base rate plus a margin or LIBOR plus
a margin for interest periods of one to six months. During March 1999, total
borrowings of $65 million under the Senior Credit Facility were repaid. The
Senior Credit Facility requires the Company to be in compliance with certain
financial covenants. At September 25, 1999, the Company was in compliance with
these financial covenants. In addition, at September 25, 1999, there was $13.7
million available under bank lines of credit that expire at various dates
through November 1999. At September 25,


                                       10
<PAGE>   11

1999, approximately $13.2 million was outstanding under these bank lines of
credit, which bear interest at the banks' prime lending rates or offshore
reference rates.

During the nine months ended September 25, 1999, the Company's cash and cash
equivalents increased $31.4 million to $112.6 million from $81.2 million at
December 31, 1998. Net cash provided by operating activities during the first
nine months of 1999 was $56.3 million, due primarily to net income of $43.6
million, non-cash depreciation and amortization charges of $21.8 million, and
increases in accounts payable and income taxes payable of $22.4 million and
$10.9 million, respectively. These amounts were partially offset by increases in
inventories and accounts receivable of $11.2 million and $23.7 million,
respectively and a decrease in accrued warranty of $7.0 million. The increases
in inventories and accounts receivable were the result of increasing net sales
volume, coupled with additions to spare parts inventory to support new sites,
new systems at existing sites and new products in the Company's growing
installed base.

Net cash flows used for investing activities were $233.3 million during the
first nine months of 1999. During this period, the Company had net purchases of
$192.0 million of available-for-sale debt securities. In addition, the Company
had capital expenditures of $21.9 million and an increase in other assets of
$19.4 million. During July 1999, the Company acquired certain assets,
technology, and contract obligations from Fairchild Technologies USA, Inc. for
$7.6 million. The purchase price consisted of $1.1 million of assets and $6.5
million of acquired technology. The $6.5 million of acquired technology was
capitalized as an intangible asset in July 1999.

During the first nine months of 1999, net cash provided by financing activities
was $208.4 million due primarily to $273.2 million of proceeds from the sale of
common stock, the exercise of employee stock options, and the purchase of common
stock under the Company's employee stock purchase plan. Of this total, $255.3
million resulted from the secondary public offering of 3.86 million shares of
common stock in February 1999. These amounts were partially offset by a decrease
in long-term debt of $65.0 million, which was repaid from the proceeds of the
common stock offering during the first three months of 1999.

The Company expects investments in property and equipment in the current fiscal
year to approximate $42.0 million of which $21.9 million has been incurred as of
September 25, 1999. The Company intends to finance these investments from
existing cash balances and cash flows from operations.

The Company believes that its current cash position and cash generated through
operations, if any, will be sufficient to meet the Company's needs through at
least the next twelve months.


Year 2000

The Company is aware of the issues associated with the operation of information
technology ("IT") and non-information technology ("Non-IT") systems as the
millennium (year 2000) approaches. The "Year 2000" problem is pervasive and
complex, with the possibility to affect many IT and Non-IT systems, as the
result of the rollover of the two digit year value from "99" to "00". The
concern is whether such systems will properly recognize data sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or fail. In addition to
the Company's own systems, the Company relies, directly and indirectly, on
external systems of its customers, suppliers, creditors, financial
organizations, utilities providers and governmental entities, both domestic and
internationally (collectively, "Third Parties"). Consequently, the Company could
be affected through disruptions in the operations of the Third Parties with
which the Company interacts. Furthermore, the purchasing


                                       11
<PAGE>   12

frequency and volume of customers or potential customers may be affected by Year
2000 issues as companies expend significant resources to make their current
systems Year 2000 ready.

The Company is utilizing both internal and external resources to address (a) the
Company's state of readiness (including the readiness of Third Parties, with
which the Company interacts) with respect to the Year 2000 problem, (b) the
costs to the Company to address Year 2000 issues related to internal IT and
Non-IT systems, which, if uncorrected, could have a material adverse effect on
the business, financial condition or results of operations of the Company, (c)
the known risks related to the consequences of any failure to correct any Year
2000 problems identified by the Company, and (d) what contingency plans, if any,
should be adopted by the Company should any identified Year 2000 problems not be
corrected.

State of Readiness.

The following discussion broadly addresses the Company's efforts to identify and
address the Company's and applicable Third Parties' Year 2000 problems with
respect to (a) the Company's products, (b) the Company's information technology
systems, including facilities and infrastructure, and (c) the Company's
suppliers. However, it would be impracticable for the Company to attempt to
address all Year 2000 problems of Third Parties that have been or may in the
future be identified. Specifically, Year 2000 problems have been or may in the
future be identified with respect to the IT and Non-IT systems of Third Parties
having widespread national and international interactions with persons and
entities generally (for example, certain IT and Non-IT systems of governmental
agencies, utilities and telecommunications, information and financial networks)
that, if uncorrected, could have a material adverse impact on the Company's
business, financial condition or results of operations. Notwithstanding anything
set forth below, the Company is not in a position to address any such Year 2000
problems.

(a)  The Company's products.

     The Company has completed a Year 2000 evaluation of all of its products
     utilizing testing guidelines prepared by SEMATECH, a consortium of
     suppliers to the worldwide semiconductor manufacturers that assists its
     members with strategic marketing opportunities. It is the Company's plan to
     comply with SEMATECH's guidelines for Year 2000. The Company's new products
     are designed to be Year 2000 ready. However, some of the Company's older
     products will require upgrades for Year 2000 readiness. At this time,
     software upgrades have been or will be provided to all Novellus customers
     products free of charge. Any hardware needed to achieve Year 2000 on out of
     warranty systems will need to be purchased from Novellus. However,
     notwithstanding such efforts, any failure of the Company's products to
     perform, including system malfunctions due to the onset of Year 2000, could
     result in claims against the Company, which could have a material adverse
     effect on the Company's business, results of operations or financial
     condition. Moreover, the Company's customers could choose to convert to
     other Year 2000 ready products in order to avoid such malfunctions, which
     could have a material adverse effect on the Company's business, financial
     condition or results of operations.

     In June of 1997, the Company acquired the Thin Films Systems division of
     Varian Associates, Inc. (TFS). During the Company's evaluation of Year 2000
     readiness for its products, it was determined that some of the TFS products
     acquired from Varian Associates, Inc. are not, and will not be Year 2000
     ready prior to December 31, 1999. The Company has undertaken measures to
     inform by letter its applicable customers of that fact. The Company
     currently anticipates that the failure of such products to be Year 2000
     ready will not have a material adverse effect on the Company's business,
     results of operations or financial condition.


                                       12
<PAGE>   13

(b)  Information technology systems including facilities and infrastructure.

     The Company currently uses standard mass-market vendor supplied software on
     its desktop systems and laptops. These standard software applications limit
     the number of information technology vendors that Novellus must work with
     to ensure Year 2000 readiness. Many of these vendors are still implementing
     their Year 2000 programs. Novellus maintains maintenance contracts with all
     information technology vendors and will implement the Year 2000 ready
     versions of hardware and/or software as required when those solutions are
     available. Novellus believes that its mass-market vendor supplied software
     is Year 2000 ready for all of Novellus' business applications. Novellus
     also uses a third party service provider to provide electronic exchange of
     data (EDI). Novellus believes the vendor software to be Year 2000 ready,
     therefore, we do not believe we face any significant EDI Year 2000 issues.
     Novellus believes the Company's hardware for workstations, servers, and
     network routers are Year 2000 ready. However, no assurance can be provided
     that all such programs will be implemented in a timely manner or that the
     failure to so implement such programs will not have a material adverse
     effect on the Company's business, results of operations or financial
     condition.

     The Company has already assessed its Year 2000 risk with respect to
     internal building automation systems, electronic security systems, utility
     and water systems. Formal queries to landlords, local fire departments,
     water and utility providers for the Company's domestic and international
     locations were sent in March of 1999. Novellus believes that the Company's
     internal building automation systems, electronic security systems, utility
     and water systems are or will be Year 2000 ready. However, no assurance can
     be provided that all such programs will be implemented in a timely manner
     or that the failure to so implement such programs will not have a material
     adverse effect on the Company's business, results of operations or
     financial condition.

(c)  Suppliers.

     Novellus has contacted those critical suppliers that could have a material
     adverse impact on Novellus' ability to provide uninterrupted service to its
     customers should the IT or Non-IT systems of such suppliers have
     uncorrected Year 2000 problems.

     In March of 1999, these suppliers had documentation with respect to their
     Year 2000 readiness on file with Novellus. However, such documentation does
     not assure Year 2000 readiness of the IT and Non-IT systems used by such
     suppliers, but instead provides only a description of their relevant
     systems and the status of efforts, if any, by such suppliers to make such
     systems Year 2000 ready. Accordingly, no assurance can be provided that (a)
     the IT and Non-IT systems of Company suppliers (including those suppliers
     who have provided documentation to the Company regarding their Year 2000
     efforts) will be Year 2000 ready, (b) that such documentation accurately
     and fully reflects the Year 2000 readiness status of such suppliers'
     systems, or (c) that the failure by any such suppliers' systems to be Year
     2000 ready will not have a material adverse effect on the Company's
     business, results of operations or financial condition.


                                       13
<PAGE>   14

Costs to Address Year 2000 Issues.

The Company currently expects to incur total software, hardware and
systems-related costs of approximately $1.7 million in connection with
remediations of Year 2000 readiness issues. Of the estimated total costs,
approximately $1.6 million has been incurred to date. There can be no assurance
that the cost estimates associated with the Company's Year 2000 issues will
prove to be accurate or that the actual costs will not have a material adverse
effect on the Company's business, results of operations or financial condition.

Known Risks.

The Company currently anticipates that any identified Year 2000 problem
affecting its own systems or that of its significant customers, suppliers,
creditors, financial organizations and utilities providers will be either
corrected by December 31, 1999 or will not have a material adverse affect on the
Company's business, financial condition or results of operations. Moreover, the
Company is working to minimize any disruption to the business of its vendors and
suppliers due to Year 2000 problems that may have a material adverse affect on
the Company's business, financial condition or results of its operations.
However, notwithstanding the Company's efforts to identify and correct such Year
2000 problems, there can be no assurance that the Company will be successful in
addressing the year 2000 problems as they pertain to its products and its
internal systems, and that the failure to do so would not have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, notwithstanding such efforts, there can be no assurance
that the systems of third parties with which the Company interacts will not
suffer from Year 2000 problems, or that such problems would not have a material
adverse effect on the Company's business, financial condition or results of
operations. In particular, Year 2000 problems that have been or may in the
future be identified with respect to the IT and Non-IT systems of third parties
having widespread national and international interactions with persons and
entities generally (for example, certain IT and Non-IT Systems of governmental
agencies, utilities and information and financial networks) could have a
material adverse impact on the Company's business, results of operations or
financial condition.

Contingency Plans.

The Company has reviewed its Year 2000 readiness plans to determine what
contingency plans are appropriate. The Company will initiate a support team, as
required, to maintain operations during the Year 2000 rollover date. The Company
has substantially completed the preparations for the support team. There can be
no assurance that such measures will prevent the occurrence of Year 2000
problems, which could have a material adverse effect upon the Company's
business, results of operations or financial condition.

EURO CONVERSION

On January 1, 1999, several member countries of the European Union established
fixed conversion rates between their existing sovereign currencies and adopted
the Euro as their new common legal currency. As of that date, the Euro traded on
currency exchanges and the legacy currencies remain legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. During the transition period, noncash payments can be made in
the Euro, and parties can elect to pay for goods and services and transact
business using either the Euro or legacy currency. Between January 1, 1999 and
January 1, 2002 the participating countries will introduce Euro notes and coins
and withdraw all legacy currencies so that they will no longer be available. The
Euro conversion may affect cross-border competition by creating cross-border
transparency. The Company is assessing its pricing/marketing strategy in order
to ensure that it remains competitive in a


                                       14
<PAGE>   15

broader European market. The Company is also assessing its information
technology systems to allow for transactions to take place in both legacy
currencies and the Euro and the eventual elimination of the legacy currencies,
and reviewing whether certain existing contracts will need to be modified. The
Company's currency risk and risk management for operations in participating
countries may be reduced as the legacy currencies are converted to the Euro.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

Not Applicable.


The statements contained in this Report on Form 10-Q that are not purely
historical in nature are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21 E of the Securities
Exchange Act of 1934, including without limitation, statements regarding the
Company's estimations, anticipations, determinations, commitments, expectations,
plans, hopes, beliefs, intentions or strategies regarding the future. Forward
looking statements include, without limitation, the statement regarding the
apparent broad-based recovery of the semiconductor industry; the statement
regarding the Company's anticipations as to sequential revenue growth and the
book-to-bill ratio exceeding one to one in the fourth quarter of 1999, the
Company's continuing efforts to control and minimize selling, general and
administrative costs, the Company's belief as to the realization of tax assets,
the Company's expected investment in property and equipment and the Company's
intentions with respect to the financing thereof, the Company's belief that its
current cash position and cash generated through operations will be sufficient
to meet its needs, the Company's plan to comply with SEMATECH's guidelines for
Year 2000, the Company's beliefs and anticipations regarding the Year 2000
status of its products and that the failure of such products to be Year 2000
ready will not materially adversely affect the Company, vendor supplied software
and Company hardware, the Company's belief that its building automation systems,
electronic security systems, will be Year 2000 ready, the Company's expected
cost to remediate Year 2000 readiness issues, and the Company's anticipation
that any identified Year 2000 problems will be either corrected by December 31,
1999 or will not have a material adverse impact on the Company, such statements
appearing under "Part I Financial Information, Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations," the statements regarding, the Company's beliefs as to the
sufficiency of its current cash position to meet the Company's needs, the
Company's expectations as to the amount of its property and equipment
investments in the current fiscal year, and the Company's intention to finance
such investments from existing cash balances and cash flows from operations,
appearing under "Part I Financial Information, Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." These forward-looking statements involve risks and
uncertainties including, but not limited to, unanticipated changes in demand in
the semiconductor industry and domestic and international economic conditions
generally, changes in product demand and industry capacity can affect short term
demand for the Company's products, competitive products and pricing,
manufacturing efficiencies, incurring expenses in anticipation of higher
revenues which do not materialize, future profitability may be inadequate to
permit full enjoyment of deferred tax assets, changes in demand which would
reduce the Company's investment in new assets, unanticipated shortfalls in
projected cash generation from operations, the Company's assessment of its Year
2000 readiness being incorrect based on unanticipated technical problems in the
Company's products or those of vendors to the Company, and other risks indicated
in filings with the Securities and Exchange Commission (SEC). Actual results may
differ materially. Novellus assumes no obligation to update this information.
For more details, please refer to other SEC filings, including the Company's
most recent Annual Report on Form 10-K for the year ended


                                       15
<PAGE>   16

December 31, 1998 and Quarterly Reports on Form 10-Q for the quarters ended
March 27, 1999 and June 26, 1999.


PART II  OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

Applied Litigation

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

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

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

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

The Company complaint against Applied also includes requests for damages for
prior infringement and treble damages for "willful" infringement, in addition


                                       16
<PAGE>   17

to a request for a permanent injunction for further infringement. Although the
Company believes that it will prevail against Applied, there can be no assurance
that the Company will prevail in its litigation against Applied. If Applied were
to prevail against the Company Compliant, it will unlikely, but could, have a
material adverse effect on the Company's business, financial condition or
results of operations.

On July 13, 1999, in the Company lawsuit against Applied where the Company has
alleged that Applied infringes Company patents, the Court ruled on the
interpretation of the claims of the Company patents. On September 20, 1999, in
the Applied lawsuit against Varian and the Company, where Applied has alleged
that Varian and the Company infringe Applied patents, the Court ruled on the
interpretation of the claims of the Applied patents.

Semitool Litigation

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

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

On September 24, 1999, the Court ruled on the interpretation of the claims of
the Semitool patents.



ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits

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

               27.1      Financial Data Schedule

          (b)  No reports on Form 8-K have been filed by the Company during the
               quarter for which this report was filed.


                                       17
<PAGE>   18

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.
                                            ------------------------------
                                                     REGISTRANT



                                            /s/ Robert H. Smith
                                            ------------------------------
                                            Robert H. Smith
                                            Executive Vice President
                                            Finance and Administration



                                            /s/ Kevin S. Royal
                                            ------------------------------
                                            Kevin S. Royal
                                            Corporate Controller
                                            (Chief Accounting Officer)




                                            November 8, 1999
                                            ----------------
                                            Date


                                       18

<PAGE>   19
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number                             Description
-------                            -----------
<S>                 <C>
10.29               Asset Purchase Agreement by and between Fairchild
                    Technologies USA, Inc. and the Company dated July 29, 1999

27.1                Financial Data Schedule
</TABLE>

                                       19