##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 27, 2010

OR



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

For the transition period from  to

Commission File Number 000-17157

NOVELLUS SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)



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

(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  þ    No   ̈

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

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



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

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

As of April 30, 2010, there were 96,049,896 shares of the Registrants common stock, no par value, issued and outstanding.









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NOVELLUS SYSTEMS, INC.

FORM 10-Q

QUARTER ENDED MARCH 27, 2010

TABLE OF CONTENTS



|                              |  |               |  |                                                                                                              |  |     
|----------------------------- |  | ------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                              |  |               |  |                                                                                                              |  | Page
|Part I: Financial Information |  |              
|                              |  | Item 1:       |  | Condensed Consolidated Financial Statements                                                                  |  | 3   
|                              |  |               |  | Condensed Consolidated Statements of Operations for the three months ended March 27, 2010 and March 28, 2009 |  | 3   
|                              |  |               |  | Condensed Consolidated Balance Sheets as of March 27, 2010 and December 31, 2009                             |  | 4   
|                              |  |               |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 27, 2010 and March 28, 2009 |  | 5   
|                              |  |               |  | Notes to Condensed Consolidated Financial Statements                                                         |  | 6   
|                              |  | Item 2:       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                        |  | 21  
|                              |  | Item 3:       |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 28  
|                              |  | Item 4:       |  | Controls and Procedures                                                                                      |  | 28  
|Part II: Other Information    |  |              
|                              |  | Item 1:       |  | Legal Proceedings                                                                                            |  | 29  
|                              |  | Item 1A:      |  | Risk Factors                                                                                                 |  | 30  
|                              |  | Item 2:       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                  |  | 38  
|                              |  | Item 6:       |  | Exhibits                                                                                                     |  | 38  
|Signatures                    |  | 39           
|                              |  | EXHIBIT 10.27 |  |                                                                                                             
|                              |  | EXHIBIT 10.28 |  |                                                                                                             
|                              |  | EXHIBIT 31.1  |  |                                                                                                             
|                              |  | EXHIBIT 31.2  |  |                                                                                                             
|                              |  | EXHIBIT 32.1  |  |                                                                                                             
|                              |  | EXHIBIT 32.2  |  |                                                                                                             



2



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##### Table of Contents

PART I: FINANCIAL INFORMATION



|ITEM 1: | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|------- | -------------------------------------------

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                              |  |                                          |         |                   |   |         |  
|--------------------------------------------- |  | ---------------------------------------- | ------- | ----------------- | - | ------- | -
|                                              |  | Three Months Ended                       |        
|                                              |  | March 27,    2010                        |         | March 28,    2009 |  
|                                              |  | (In thousands,
except per share amounts) |        
|Net sales                                     |  | $                                        | 276,229 |                   | $ | 98,913  |  
|Cost of sales                                 |  |                                          | 142,262 |                   |   | 73,175  |  
|                                              |  |                                          |         |                   |   |         |  
|Gross profit                                  |  |                                          | 133,967 |                   |   | 25,738  |  
|                                              |  |                                          |         |                   |   |         |  
|                                              |  |                                         
|Selling, general and administrative           |  |                                          | 45,051  |                   |   | 43,102  |  
|Research and development                      |  |                                          | 39,687  |                   |   | 35,702  |  
|Restructuring and other charges, net          |  |                                          | 206     |                   |   | 313     |  
|                                              |  |                                          |         |                   |   |         |  
|Total operating expenses                      |  |                                          | 84,944  |                   |   | 79,117  |  
|                                              |  |                                          |         |                   |   |         |  
|                                              |  |                                         
|Operating income (loss)                       |  |                                          | 49,023  |                   |   | (53,379 | )
|                                              |  |                                          |         |                   |   |         |  
|                                              |  |                                         
|Interest and other income, net                |  |                                          | 1,527   |                   |   | 1,296   |  
|                                              |  |                                          |         |                   |   |         |  
|                                              |  |                                         
|Income (loss) before income taxes             |  |                                          | 50,550  |                   |   | (52,083 | )
|                                              |  |                                         
|Provision for income taxes                    |  |                                          | 9,294   |                   |   | 14,309  |  
|                                              |  |                                          |         |                   |   |         |  
|                                              |  |                                         
|Net income (loss)                             |  | $                                        | 41,256  |                   | $ | (66,392 | )
|                                              |  |                                          |         |                   |   |         |  
|                                              |  |                                         
|Net income (loss) per share:                  |  |                                          |         |                   |   |         |  
|Basic                                         |  | $                                        | 0.43    |                   | $ | (0.69   | )
|                                              |  |                                          |         |                   |   |         |  
|Diluted                                       |  | $                                        | 0.43    |                   | $ | (0.69   | )
|                                              |  |                                          |         |                   |   |         |  
|                                              |  |                                         
|Shares used in basic per share calculations   |  |                                          | 96,000  |                   |   | 96,193  |  
|                                              |  |                                          |         |                   |   |         |  
|Shares used in diluted per share calculations |  |                                          | 96,672  |                   |   | 96,193  |  
|                                              |  |                                          |         |                   |   |         |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                 |  |                |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------ |  | -------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                 |  | March 27,2010  |           |   | December 31,2009 |  
|                                                                                                 |  | (Unaudited)    |           |   |                  |  
|                                                                                                 |  | (In thousands) |          
|ASSETS                                                                                           |  |                |           |   |                  |   |           |  
|Current assets:                                                                                  |  |                |           |   |                  |   |           |  
|Cash and cash equivalents                                                                        |  | $              | 198,670   |   |                  | $ | 142,047   |  
|Short-term investments                                                                           |  |                | 354,245   |   |                  |   | 359,323   |  
|Accounts receivable, net                                                                         |  |                | 154,735   |   |                  |   | 150,624   |  
|Inventories                                                                                      |  |                | 177,538   |   |                  |   | 162,213   |  
|Deferred tax assets, net                                                                         |  |                | 45,786    |   |                  |   | 46,900    |  
|Prepaid and other current assets                                                                 |  |                | 36,240    |   |                  |   | 36,715    |  
|                                                                                                 |  |                |           |   |                  |   |           |  
|Total current assets                                                                             |  |                | 967,214   |   |                  |   | 897,822   |  
|Property and equipment, net of accumulated depreciation of $557,542 in 2010 and $549,926 in 2009 |  |                | 231,877   |   |                  |   | 239,111   |  
|Non-current restricted cash and cash equivalents                                                 |  |                | 123,559   |   |                  |   | 133,105   |  
|Long-term investments                                                                            |  |                | 75,162    |   |                  |   | 78,763    |  
|Goodwill                                                                                         |  |                | 125,203   |   |                  |   | 126,438   |  
|Intangible and other assets                                                                      |  |                | 79,108    |   |                  |   | 83,739    |  
|                                                                                                 |  |                |           |   |                  |   |           |  
|Total assets                                                                                     |  | $              | 1,602,123 |   |                  | $ | 1,558,978 |  
|                                                                                                 |  |                |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                             |  |                |           |   |                  |   |           |  
|Current liabilities:                                                                             |  |                |           |   |                  |   |           |  
|Accounts payable                                                                                 |  | $              | 65,923    |   |                  | $ | 72,656    |  
|Accrued payroll and related expenses                                                             |  |                | 28,263    |   |                  |   | 21,566    |  
|Accrued warranty                                                                                 |  |                | 18,793    |   |                  |   | 17,014    |  
|Other accrued liabilities                                                                        |  |                | 51,663    |   |                  |   | 49,571    |  
|Income taxes payable                                                                             |  |                | 7,528     |   |                  |   | 1,580     |  
|Deferred profit                                                                                  |  |                | 13,811    |   |                  |   | 9,094     |  
|Current debt obligations                                                                         |  |                | 1,585     |   |                  |   | 13        |  
|                                                                                                 |  |                |           |   |                  |   |           |  
|Total current liabilities                                                                        |  |                | 187,566   |   |                  |   | 171,494   |  
|Long-term debt obligations                                                                       |  |                | 106,227   |   |                  |   | 114,147   |  
|Long-term income taxes payable                                                                   |  |                | 48,686    |   |                  |   | 48,332    |  
|Other non-current liabilities                                                                    |  |                | 42,847    |   |                  |   | 45,228    |  
|                                                                                                 |  |                |           |   |                  |   |           |  
|Total liabilities                                                                                |  |                | 385,326   |   |                  |   | 379,201   |  
|                                                                                                 |  |                |           |   |                  |   |           |  
|Commitments and contingencies (Note 13)                                                          |  |                |           |   |                  |   |           |  
|Shareholders equity:                                                                            |  |                |           |   |                  |   |           |  
|Common stock                                                                                     |  |                | 1,182,469 |   |                  |   | 1,179,220 |  
|Retained earnings                                                                                |  |                | 39,811    |   |                  |   | 5,226     |  
|Accumulated other comprehensive loss                                                             |  |                | (5,483    | ) |                  |   | (4,669    | )
|                                                                                                 |  |                |           |   |                  |   |           |  
|Total shareholders equity                                                                       |  |                | 1,216,797 |   |                  |   | 1,179,777 |  
|                                                                                                 |  |                |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                       |  | $              | 1,602,123 |   |                  | $ | 1,558,978 |  
|                                                                                                 |  |                |           |   |                  |   |           |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                         |  |                    |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                         |  | Three Months Ended |        
|                                                                                         |  | March 27,    2010  |         |   | March 28,    2009 |  
|                                                                                         |  | (In thousands)     |        
|Cash flows from operating activities:                                                    |  |                    |         |   |                   |   |         |  
|Net income (loss)                                                                        |  | $                  | 41,256  |   |                   | $ | (66,392 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                    |         |   |                   |   |         |  
|Depreciation and amortization                                                            |  |                    | 11,038  |   |                   |   | 11,994  |  
|Deferred income taxes                                                                    |  |                    | 1,340   |   |                   |   | 13,182  |  
|Stock-based compensation                                                                 |  |                    | 7,701   |   |                   |   | 7,677   |  
|Excess tax benefit from stock-based compensation                                         |  |                    | (100    | ) |                   |   |        |  
|Other non-cash charges, net                                                              |  |                    | 1,821   |   |                   |   | 2,058   |  
|Changes in operating assets and liabilities:                                             |  |                    |         |   |                   |   |         |  
|Accounts receivable, net                                                                 |  |                    | (4,546  | ) |                   |   | 70,342  |  
|Inventories                                                                              |  |                    | (16,223 | ) |                   |   | 17,996  |  
|Prepaid and other assets                                                                 |  |                    | 323     |   |                   |   | 11,138  |  
|Accounts payable                                                                         |  |                    | (6,454  | ) |                   |   | (10,906 | )
|Accrued payroll and related expenses                                                     |  |                    | 9,631   |   |                   |   | (6,986  | )
|Accrued warranty                                                                         |  |                    | 2,606   |   |                   |   | (8,167  | )
|Income taxes payable                                                                     |  |                    | 6,229   |   |                   |   | (168    | )
|Deferred profit                                                                          |  |                    | 4,844   |   |                   |   | (6,426  | )
|Other liabilities                                                                        |  |                    | 2,582   |   |                   |   | (12,750 | )
|                                                                                         |  |                    |         |   |                   |   |         |  
|Net cash provided by operating activities                                                |  |                    | 62,048  |   |                   |   | 22,592  |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|Cash flows from investing activities:                                                    |  |                    |         |   |                   |   |         |  
|Proceeds from sales of investments                                                       |  |                    | 20,460  |   |                   |   | 50,719  |  
|Proceeds from maturities of investments                                                  |  |                    | 37,625  |   |                   |   | 3,536   |  
|Purchases of investments                                                                 |  |                    | (50,324 | ) |                   |   | (59,964 | )
|Capital expenditures                                                                     |  |                    | (3,693  | ) |                   |   | (1,652  | )
|Decrease in restricted cash and cash equivalents                                         |  |                    | 4,896   |   |                   |   | 3,903   |  
|Purchase of intangible assets                                                            |  |                    |        |   |                   |   | (2,000  | )
|Proceeds from the sale of property and equipment                                         |  |                    |        |   |                   |   | 1,267   |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|Net cash provided by (used in) investing activities                                      |  |                    | 8,964   |   |                   |   | (4,191  | )
|                                                                                         |  |                    |         |   |                   |   |         |  
|Cash flows from financing activities:                                                    |  |                    |         |   |                   |   |         |  
|Proceeds from employee stock compensation plans                                          |  |                    | 1,238   |   |                   |   |        |  
|Proceeds from lines of credit, net                                                       |  |                    | 1,597   |   |                   |   | 1,552   |  
|Repurchases of common stock                                                              |  |                    | (15,369 | ) |                   |   |        |  
|Excess tax benefit from stock-based compensation                                         |  |                    | 100     |   |                   |   |        |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|Net cash provided by (used in) financing activities                                      |  |                    | (12,434 | ) |                   |   | 1,552   |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|Effects of exchange rate changes on cash and cash equivalents                            |  |                    | (1,955  | ) |                   |   | (887    | )
|                                                                                         |  |                    |         |   |                   |   |         |  
|Net increase in cash and cash equivalents                                                |  |                    | 56,623  |   |                   |   | 19,066  |  
|Cash and cash equivalents at the beginning of the period                                 |  |                    | 142,047 |   |                   |   | 184,332 |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents at the end of the period                                       |  | $                  | 198,670 |   |                   | $ | 203,398 |  
|                                                                                         |  |                    |         |   |                   |   |         |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.
Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S.
GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q within Article 10 of Regulation S-X. The interim financial information is unaudited and does not include all of the information and footnotes
required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three
months ended March 27, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any future period. The interim financial statements should be read in conjunction with the Consolidated
Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

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

The accompanying Condensed Consolidated Financial Statements include our accounts and the accounts of our subsidiaries after the elimination of all
significant intercompany account balances and transactions. Certain prior year amounts in the Condensed Consolidated Statement of Operations have been reclassified to conform to the current year presentation. These reclassifications did not affect
previously reported amounts in the Consolidated Balance Sheets or the Consolidated Statements of Cash Flows.

Recently Adopted
Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) amended the disclosure requirements for
fair value measurements with respect to recurring and nonrecurring assets and liabilities. The authoritative guidance provides for disclosure of all significant transfers of assets and liabilities between those that are actively traded in markets
(Level 1) and those that are not actively traded but have observable inputs (Level 2), and the reasons for the transfers. The authoritative guidance also provides that disclosures for assets and liabilities with significant unobservable inputs
(Level 3) should separately disclose purchases, sales, issuances and settlements. We adopted this authoritative guidance on January 1, 2010. See Note 3 for the disclosures required by this guidance.

In May 2009, the FASB issued new authoritative guidance which established general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are available to be issued. We began disclosing the date through which subsequent events had been evaluated in our Consolidated Financial Statements for the quarter ended
June 27, 2009. In February 2010, the FASB issued new authoritative guidance amending the above referenced authoritative guidance. As a result of this amendment, disclosure of the date through which subsequent events have been evaluated is no
longer required. We adopted this authoritative guidance for the three months ended March 27, 2010.

Recently Issued Accounting
Pronouncements

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



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 2. Net Income (Loss) Per Share

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

For the three months ended March 27, 2010, diluted net income per share was computed by dividing net income by the weighted-average number of common
and potential common shares outstanding during the period. Potential common shares represent the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued, which consist primarily of stock
options and unvested restricted stock awards. For purposes of computing diluted net income per share, weighted average potential common shares do not include potential common shares that are either anti-dilutive under the treasury stock method or
restricted shares subject to performance conditions that have not been met. Potential common shares of 17.1 million were excluded from the computation for the three months ended March 27, 2010.

For the three months ended March 28, 2009, diluted net loss per share excludes potential common shares, as the effect would be anti-dilutive. As
such, the denominator used in computing both basic and diluted net loss per share was the same for the three months ended March 28, 2009. The number of potential common shares that could dilute basic net income per share was 22.1 million
for the three months ended March 28, 2009.

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



|                                            |  |                                          |        |               |   |         |  
|------------------------------------------- |  | ---------------------------------------- | ------ | ------------- | - | ------- | -
|                                            |  | Three Months Ended                       |       
|                                            |  | March 27,2010                            |        | March 28,2009 |  
|                                            |  | (In thousands,
except per share amounts) |       
|Numerator:                                  |  |                                          |        |               |   |         |  
|Net income (loss)                           |  | $                                        | 41,256 |               | $ | (66,392 | )
|                                            |  |                                          |        |               |   |         |  
|Denominator:                                |  |                                          |        |               |   |         |  
|Basic weighted-average shares outstanding   |  |                                          | 96,000 |               |   | 96,193  |  
|Dilutive potential common shares            |  |                                          | 672    |               |   |        |  
|                                            |  |                                          |        |               |   |         |  
|Diluted weighted-average shares outstanding |  |                                          | 96,672 |               |   | 96,193  |  
|                                            |  |                                          |        |               |   |         |  
|Net income (loss) per share  Basic         |  | $                                        | 0.43   |               | $ | (0.69   | )
|Net income (loss) per share  Diluted       |  | $                                        | 0.43   |               | $ | (0.69   | )

Note 3. Fair Value of Financial
Instruments

Fair Value Hierarchy

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

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



| | Level 1 - | Quoted prices in active markets for identical assets or liabilities.
| | --------- | --------------------------------------------------------------------

We classify our money market funds as Level 1 instruments as they are traded in active markets with sufficient volume and frequency of
transactions.



| | Level 2 - | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or
liabilities.
| | --------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



We classify our municipal bonds, variable-rate demand notes and corporate bonds as
Level 2 instruments due to our use of observable market prices in less active markets or, when observable market prices were not available, our use of non-binding market prices that are corroborated by observable market data or quoted market prices
for similar instruments. We classify our derivative instruments as Level 2 instruments due to our use of observable inputs other than quoted prices, including interest rates and credit risk.



| | Level 3 - | Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
| | --------- | --------------------------------------------------------------------------------------------------------------------------------

We classify our auction-rate securities as Level 3 instruments as we use a cash-flow-based valuation model to measure the fair value of
these securities that requires the use of significant unobservable inputs. Our valuation of these securities incorporates our assumptions about the anticipated term and yield that a market participant would require to purchase such securities in the
marketplace. See further discussion on auction-rate securities below.

Financial Instruments Measured at Fair Value on a Recurring Basis

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



|                           |  |                                                            |         |                                             |   |                                         |  |       |        |  |   |        
|-------------------------- |  | ---------------------------------------------------------- | ------- | ------------------------------------------- | - | --------------------------------------- |  | ----- | ------ |  | - | -------
|                           |  | Fair Value Measurements as of March 27, 2010              
|                           |  | Quoted Prices inActive Marketsfor
IdenticalAssets(Level 1) |         | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservableInputs(Level
 3) |  | Total
|                           |  | (In thousands)                                            
|Assets                     |  |                                                            |         |                                             |   |                                         |  |       |        |  |   |        
|Money market funds         |  | $                                                          | 212,452 |                                             | $ |                                        |  | $     |       |  | $ | 212,452
|Municipal bonds            |  |                                                            |        |                                             |   | 310,304                                 |  |       |       |  |   | 310,304
|Variable-rate demand notes |  |                                                            |        |                                             |   | 8,320                                   |  |       |       |  |   | 8,320  
|Corporate bonds            |  |                                                            |        |                                             |   | 17,117                                  |  |       |       |  |   | 17,117 
|Auction-rate securities    |  |                                                            |        |                                             |   |                                        |  |       | 75,162 |  |   | 75,162 
|Derivative assets(1)       |  |                                                            |        |                                             |   | 218                                     |  |       |       |  |   | 218    
|                           |  |                                                            |         |                                             |   |                                         |  |       |        |  |   |        
|Total assets               |  | $                                                          | 212,452 |                                             | $ | 335,959                                 |  | $     | 75,162 |  | $ | 623,573
|                           |  |                                                            |         |                                             |   |                                         |  |       |        |  |   |        
|Liabilities                |  |                                                            |         |                                             |   |                                         |  |       |        |  |   |        
|Derivative liabilities(1)  |  | $                                                          |        |                                             | $ | 189                                     |  | $     |       |  | $ | 189    
|                           |  |                                                            |         |                                             |   |                                         |  |       |        |  |   |        



|(1) | See additional disclosures relating to our derivatives and hedging activities in Note 5.
|--- | ----------------------------------------------------------------------------------------



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



|(1) | See additional disclosures relating to our derivatives and hedging activities in Note 5.
|--- | ----------------------------------------------------------------------------------------



8



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##### Table of Contents

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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



|                                                 |  |                                                            |         |                                             |   |                                        |  |       |        |  |   |        
|------------------------------------------------ |  | ---------------------------------------------------------- | ------- | ------------------------------------------- | - | -------------------------------------- |  | ----- | ------ |  | - | -------
|                                                 |  | Fair Value Measurements as of March 27, 2010              
|                                                 |  | Quoted Prices inActive
Marketsfor IdenticalAssets(Level 1) |         | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservableInputs(Level 3) |  | Total
|                                                 |  | (In thousands)                                            
|Assets                                           |  |                                                            |         |                                             |   |                                        |  |       |        |  |   |        
|Cash and cash equivalents                        |  | $                                                          | 156,198 |                                             | $ |                                       |  | $     |       |  | $ | 156,198
|Short-term investments                           |  |                                                            |        |                                             |   | 335,741                                |  |       |       |  |   | 335,741
|Prepaid and other current assets(1)              |  |                                                            |        |                                             |   | 218                                    |  |       |       |  |   | 218    
|Non-current restricted cash and cash equivalents |  |                                                            | 56,254  |                                             |   |                                       |  |       |       |  |   | 56,254 
|Long-term investments                            |  |                                                            |        |                                             |   |                                       |  |       | 75,162 |  |   | 75,162 
|                                                 |  |                                                            |         |                                             |   |                                        |  |       |        |  |   |        
|Total assets                                     |  | $                                                          | 212,452 |                                             | $ | 335,959                                |  | $     | 75,162 |  | $ | 623,573
|                                                 |  |                                                            |         |                                             |   |                                        |  |       |        |  |   |        
|Liabilities                                      |  |                                                            |         |                                             |   |                                        |  |       |        |  |   |        
|Other accrued liabilities(1)                     |  | $                                                          |        |                                             | $ | 189                                    |  | $     |       |  | $ | 189    
|                                                 |  |                                                            |         |                                             |   |                                        |  |       |        |  |   |        



|(1) | See additional disclosures relating to our derivatives and hedging activities in Note 5.
|--- | ----------------------------------------------------------------------------------------



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



|(1) | See additional disclosures relating to our derivatives and hedging activities in Note 5.
|--- | ----------------------------------------------------------------------------------------

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



|                                            |  |                                                                      |        |   |                   |   |        |  
|------------------------------------------- |  | -------------------------------------------------------------------- | ------ | - | ----------------- | - | ------ | -
|                                            |  | Fair ValueMeasurements
UsingSignificant UnobservableInputs (Level 3) |       
|                                            |  | Three MonthsEnded                                                    |        |   | Three MonthsEnded |  
|                                            |  | March 27,    2010                                                    |        |   | March 28,    2009 |  
|                                            |  | (In thousands)                                                       |       
|Balance, beginning of period                |  | $                                                                    | 78,763 |   |                   | $ | 91,873 |  
|Realized and unrealized gains (losses), net |  |                                                                      |        |   |                   |   |        |  
|Included in other comprehensive loss        |  |                                                                      | 399    |   |                   |   | (949   | )
|Settlements                                 |  |                                                                      | (4,000 | ) |                   |   | (2,340 | )
|                                            |  |                                                                      |        |   |                   |   |        |  
|Balance, end of period                      |  | $                                                                    | 75,162 |   |                   | $ | 88,584 |  
|                                            |  |                                                                      |        |   |                   |   |        |  



9



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##### Table of Contents

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



All Level 3 financial instruments are auction-rate securities. Auction-rate securities include
auction-rate notes and auction-rate preferred shares of tax-exempt closed-end municipal bond funds. Our auction-rate notes consist of student loans that are substantially backed by the federal government. Due to auction failures in the marketplace,
we will not have access to these funds unless (a) future auctions are successful, (b) the securities are called by the issuer, (c) we sell the securities in a secondary market, or (d) the underlying notes mature. Currently, there
are no active secondary markets. As of March 27, 2010 we have recorded a cumulative temporary impairment loss of $10.3 million within OCI based upon our assessment of the fair value of these securities. We believe that this impairment is
temporary as we do not intend to sell these securities. We do not believe that we will be required to sell these securities before recovery of their amortized cost basis, and based on our credit quality assessment we expect to recover the amortized
cost basis of these securities.

Fair Value of Other Financial Instruments

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



|                            |  |                |         |                     |   |                |  |                     |         |  |   |        
|--------------------------- |  | -------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                            |  | March 27, 2010 |         | December 31, 2009  
|                            |  | Carrying Value |         | Estimated FairValue |   | Carrying Value |  | Estimated FairValue
|                            |  | (In thousands)
|Assets                      |  |                |         |                     |   |                |  |                     |         |  |   |        
|Cash                        |  | $              | 42,472  |                     | $ | 42,472         |  | $                   | 33,208  |  | $ | 33,208 
|Accrued interest receivable |  |                | 4,612   |                     |   | 4,612          |  |                     | 3,698   |  |   | 3,698  
|Other investments           |  |                | 13,891  |                     |   | 13,891         |  |                     | 13,920  |  |   | 13,920 
|Non-current restricted cash |  |                | 67,306  |                     |   | 67,306         |  |                     | 72,032  |  |   | 72,032 
|                            |  |                |         |                     |   |                |  |                     |         |  |   |        
|Total assets                |  | $              | 128,281 |                     | $ | 128,281        |  | $                   | 122,858 |  | $ | 122,858
|                            |  |                |         |                     |   |                |  |                     |         |  |   |        
|Liabilities                 |  |                |         |                     |   |                |  |                     |         |  |   |        
|Current debt obligations    |  | $              | 1,585   |                     | $ | 1,585          |  | $                   | 13      |  | $ | 13     
|Long-term debt obligations  |  |                | 106,227 |                     |   | 106,704        |  |                     | 114,147 |  |   | 114,599
|                            |  |                |         |                     |   |                |  |                     |         |  |   |        
|Total liabilities           |  | $              | 107,812 |                     | $ | 108,289        |  | $                   | 114,160 |  | $ | 114,612
|                            |  |                |         |                     |   |                |  |                     |         |  |   |        

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

See additional disclosures regarding our investments in Note 4.

Note 4. Investments

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



|                           |  |                |         |                       |   |                        |  |   |                     |   |  |   |        
|-------------------------- |  | -------------- | ------- | --------------------- | - | ---------------------- |  | - | ------------------- | - |  | - | -------
|                           |  | March 27, 2010
|                           |  | Amortized Cost |         | GrossUnrealized Gains |   | GrossUnrealized Losses |  |   | Estimated FairValue
|                           |  | (In thousands)
|Municipal bonds            |  |                | 307,147 |                       |   | 3,207                  |  |   | (50                 | ) |  |   | 310,304
|Variable-rate demand notes |  |                | 8,320   |                       |   |                       |  |   |                    |   |  |   | 8,320  
|Corporate bonds            |  |                | 17,098  |                       |   | 30                     |  |   | (11                 | ) |  |   | 17,117 
|Auction-rate securities    |  |                | 85,500  |                       |   |                       |  |   | (10,338             | ) |  |   | 75,162 
|                           |  |                |         |                       |   |                        |  |   |                     |   |  |   |        
|Total                      |  | $              | 418,065 |                       | $ | 3,237                  |  | $ | (10,399             | ) |  | $ | 410,903
|                           |  |                |         |                       |   |                        |  |   |                     |   |  |   |        



10



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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

Also included in our short-term investments balance as of
March 27, 2010 and December 31, 2009 were interest receivable of $4.6 million and $3.7 million, respectively, and other investments of $13.9 million, for each period that are excluded from the tables above.

The maturities of our investments as of March 27, 2010 are as follows:



|                             |  |                |         |            |   |        
|---------------------------- |  | -------------- | ------- | ---------- | - | -------
|                             |  | Amortized Cost |         | Fair Value
|                             |  | (In thousands)
|Due in less than one year    |  | $              | 165,194 |            | $ | 166,423
|Due in 1 to 3 years          |  |                | 159,051 |            |   | 160,998
|Due in 3 to 5 years          |  |                | 2,200   |            |   | 2,007  
|Due in 5 to 10 years         |  |                | 1,520   |            |   | 1,520  
|Due in greater than 10 years |  |                | 90,100  |            |   | 79,955 
|                             |  |                |         |            |   |        
|Total                        |  | $              | 418,065 |            | $ | 410,903
|                             |  |                |         |            |   |        

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

The breakdown of investments with unrealized losses as of March 27, 2010 is as follows:



|                        |  |                                         |        |                   |                                          |     |            |       |                   |        |  |            |         |                  |  |   |         |  |   |         |  
|----------------------- |  | --------------------------------------- | ------ | ----------------- | ---------------------------------------- | --- | ---------- | ----- | ----------------- | ------ |  | ---------- | ------- | ---------------- |  | - | ------- |  | - | ------- | -
|                        |  | In Loss Position for LessThan 12 Months |        |                   | In Loss Position for12 Months or Greater |     |            | Total |                  
|                        |  | Fair Value                              |        | Unrealized Losses |                                          |     | Fair Value |       | Unrealized Losses |        |  | Fair Value |         | UnrealizedLosses | 
|                        |  | (In thousands)                          |       
|Municipal bonds         |  | $                                       | 39,251 |                   | $                                        | (50 | )          |       | $                 |       |  | $          |        |                  |  | $ | 39,251  |  | $ | (50     | )
|Corporate bonds         |  |                                         | 8,169  |                   |                                          | (11 | )          |       |                   |       |  |            |        |                  |  |   | 8,169   |  |   | (11     | )
|Auction-rate securities |  |                                         |       |                   |                                          |    |            |       |                   | 75,162 |  |            | (10,338 | )                |  |   | 75,162  |  |   | (10,338 | )
|                        |  |                                         |        |                   |                                          |     |            |       |                   |        |  |            |         |                  |  |   |         |  |   |         |  
|Total                   |  | $                                       | 47,420 |                   | $                                        | (61 | )          |       | $                 | 75,162 |  | $          | (10,338 | )                |  | $ | 122,582 |  | $ | (10,399 | )
|                        |  |                                         |        |                   |                                          |     |            |       |                   |        |  |            |         |                  |  |   |         |  |   |         |  

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

See additional disclosures regarding the fair value of our investments in Note 3.



11



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 5. Derivative Financial Instruments

We manage our foreign currency exchange risk through foreign currency forward exchange contracts and foreign denominated floating-rate debt to hedge
against the short-term impact of currency fluctuations. We enter into foreign currency forward exchange contracts with maturities generally less than 12 months to mitigate the impact of currency fluctuations on (a) probable system sales
denominated in Japanese yen, (b) our net investment in certain foreign subsidiaries and (c) other monetary asset and liability balances denominated in foreign currencies. We utilize a portion of our foreign denominated floating-rate debt
to mitigate the economic impact of our net investment in certain foreign subsidiaries. As of March 27, 2010, 26.8 million Euros of floating-rate debt was designated as a net investment hedge. All derivatives are recorded at fair value in
either other current assets or other accrued liabilities. We report cash flows from derivative instruments in cash flows from operating activities. We use the income approach to value our derivative instruments using observable inputs other than
quoted prices, including interest rates and credit risk.

The notional amounts of outstanding hedge contracts are as follows:



|                       |  |                |        |                   |   |               |  |                |        |  |   |       
|---------------------- |  | -------------- | ------ | ----------------- | - | ------------- |  | -------------- | ------ |  | - | ------
|                       |  | March 27, 2010 |        | December 31, 2009
|                       |  | Buy Contracts  |        | Sell Contracts    |   | Buy Contracts |  | Sell Contracts
|                       |  | (In thousands)
|Japanese Yen           |  | $              | 37,739 |                   | $ | 45,583        |  | $              | 40,217 |  | $ | 46,690
|British Pound Sterling |  |                | 4,260  |                   |   | 4,262         |  |                | 4,556  |  |   | 4,558 
|Korean Won             |  |                | 3,797  |                   |   | 3,795         |  |                | 1,279  |  |   | 1,279 
|Malaysian Ringgit      |  |                | 3,307  |                   |   | 3,305         |  |                | 3,497  |  |   | 3,496 
|Chinese Renminbi       |  |                |       |                   |   |              |  |                | 3,209  |  |   | 3,687 
|Indian Rupee           |  |                | 2,098  |                   |   | 2,096         |  |                | 1,804  |  |   | 1,803 
|Taiwan Dollar          |  |                | 1,392  |                   |   | 1,390         |  |                | 1,308  |  |   | 1,306 
|Swiss Franc            |  |                |       |                   |   | 1,407         |  |                |       |  |   | 1,453 
|Israeli Shekel         |  |                | 607    |                   |   | 606           |  |                | 2,285  |  |   | 1,978 
|                       |  |                |        |                   |   |               |  |                |        |  |   |       
|Total                  |  | $              | 53,200 |                   | $ | 62,444        |  | $              | 58,155 |  | $ | 66,250
|                       |  |                |        |                   |   |               |  |                |        |  |   |       

Cash Flow Hedges.We designate and document our foreign
currency forward exchange contracts as cash flow hedges on sales transactions in which costs are denominated in U.S. dollars and the related revenues are generated in Japanese yen. We evaluate and calculate the effectiveness of each hedge at least
quarterly, using the dollar offset method, comparing the change in the forward contracts fair value on a spot-to-spot basis to the spot-to-spot change in the anticipated transaction. The effective change is recorded in OCI until the sale is
recognized. Ineffectiveness, along with the excluded time value of the forward contracts, is recorded in net sales as designated at the inception of the forward contract. In the event it becomes probable that an anticipated hedged transaction will
not occur within the specified time period, the gains or losses on the related cash flow hedges are immediately reclassified from accumulated OCI to net sales in the Condensed Consolidated Statement of Operations. No such events occurred for the
three months ended March 27, 2010 and March 28, 2009.

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

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



12



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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



|                                                              |  |                    |     |                  |   |    
|------------------------------------------------------------- |  | ------------------ | --- | ---------------- | - | ---
|                                                              |  | Three Months Ended
|                                                              |  | March 27,2010      |     | December 31,2009
|                                                              |  | (In thousands)    
|Prepaid and other current assets:                             |  |                    |     |                  |   |    
|Derivative assets designated as hedging instruments:          |  |                    |     |                  |   |    
|Cash flow hedges                                              |  | $                  | 56  |                  | $ |   
|Net investment hedges                                         |  |                    | 2   |                  |   | 3  
|Derivative assets not designated as hedging instruments:      |  |                    |     |                  |   |    
|Other foreign currency hedges                                 |  |                    | 160 |                  |   | 134
|                                                              |  |                    |     |                  |   |    
|Total derivative assets(1)                                    |  | $                  | 218 |                  | $ | 137
|                                                              |  |                    |     |                  |   |    
|Other accrued liabilities:                                    |  |                    |     |                  |   |    
|Derivative liabilities designated as hedging instruments:     |  |                    |     |                  |   |    
|Net investment hedges                                         |  |                    | 23  |                  |   | 5  
|Derivative liabilities not designated as hedging instruments: |  |                    |     |                  |   |    
|Other foreign currency hedges                                 |  |                    | 166 |                  |   | 317
|                                                              |  |                    |     |                  |   |    
|Total derivative liabilities(1)                               |  | $                  | 189 |                  | $ | 322
|                                                              |  |                    |     |                  |   |    



|(1) | See additional fair value measurement disclosures in Note 3.
|--- | ------------------------------------------------------------

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



|(a) | Cash Flow Hedges:
|--- | -----------------



|                                                                                     |  |                    |      |   |               |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------ | ---- | - | ------------- | - | ------ | -
|                                                                                     |  | Three Months Ended |     
|                                                                                     |  | March 27,2010      |      |   | March 28,2009 |  
|                                                                                     |  | (In thousands)     |     
|Accumulated loss in OCI, beginning of period                                         |  | $                  | (126 | ) |               | $ | (1,137 | )
|Gains recorded in OCI (effective portion), net                                       |  |                    | 60   |   |               |   | 7      |  
|Gains reclassified from OCI to net sales (effective portion), net                    |  |                    | 126  |   |               |   | 451    |  
|                                                                                     |  |                    |      |   |               |   |        |  
|Accumulated gain (loss) in OCI, end of period                                        |  | $                  | 60   |   |               | $ | (679   | )
|                                                                                     |  |                    |      |   |               |   |        |  
|Gains recorded in net sales related to the ineffective portion, net                  |  | $                  |     |   |               | $ | 6      |  
|Gains (losses) recorded in net sales related to the excluded time value portion, net |  | $                  | (4   | ) |               | $ | 8      |  

We anticipate reclassifying the
accumulated gain recorded as of March 27, 2010 from OCI to net sales within 12 months.



|(b) | Net Investment Hedges:
|--- | ----------------------



|                                                                                        |  |                    |       |   |               |   |      
|--------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ------------- | - | -----
|                                                                                        |  | Three Months Ended
|                                                                                        |  | March 27,2010      |       |   | March 28,2009
|                                                                                        |  | (In thousands)    
|Foreign exchange contracts:                                                             |  |                    |       |   |               |   |      
|Gains recorded in OCI (effective portion), net                                          |  | $                  | 202   |   |               | $ | 2,896
|Gains (losses) recorded in other income related to the excluded time value portion, net |  | $                  | (41   | ) |               | $ | 61   
|Foreign denominated floating-rate debt:                                                 |  |                    |       |   |               |   |      
|Gains recorded in OCI (effective portion), net                                          |  | $                  | 2,777 |   |               | $ |     



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|(c) | Other Foreign Currency Hedges:
|--- | ------------------------------



|                                       |  |                    |      |   |               |   |      |  
|-------------------------------------- |  | ------------------ | ---- | - | ------------- | - | ---- | -
|                                       |  | Three Months Ended |     
|                                       |  | March 27,2010      |      |   | March 28,2009 |  
|                                       |  | (In thousands)     |     
|Losses recognized in other income, net |  | $                  | (297 | ) |               | $ | (935 | )

Note 6. Inventories



|                          |  |                |         |                  |   |        
|------------------------- |  | -------------- | ------- | ---------------- | - | -------
|                          |  | March 27,2010  |         | December 31,2009
|                          |  | (In thousands)
|Purchased and spare parts |  | $              | 104,593 |                  | $ | 104,833
|Work-in-process           |  |                | 37,455  |                  |   | 32,002 
|Finished goods            |  |                | 35,490  |                  |   | 25,378 
|                          |  |                |         |                  |   |        
|Total inventories         |  | $              | 177,538 |                  | $ | 162,213
|                          |  |                |         |                  |   |        

Finished goods include $16.1 million and $8.0 million as of
March 27, 2010 and December 31, 2009, respectively, of evaluation systems at customer locations.

Note 7. Goodwill and Intangible
Assets

Goodwill

A
summary of changes in goodwill for the three months ended March 27, 2010 is as follows:



|                                 |  |                    |         |                             |   |        |       |  |   |         |  
|-------------------------------- |  | ------------------ | ------- | --------------------------- | - | ------ | ----- |  | - | ------- | -
|                                 |  | SemiconductorGroup |         | IndustrialApplicationsGroup |   |        | Total | 
|                                 |  | (In thousands)     |        
|Net balance, beginning of period |  | $                  | 108,431 |                             | $ | 18,007 |       |  | $ | 126,438 |  
|Foreign currency translation     |  |                    |        |                             |   | (1,235 | )     |  |   | (1,235  | )
|                                 |  |                    |         |                             |   |        |       |  |   |         |  
|Net balance, end of period       |  | $                  | 108,431 |                             | $ | 16,772 |       |  | $ | 125,203 |  
|                                 |  |                    |         |                             |   |        |       |  |   |         |  

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

Intangible Assets

Our acquired intangible assets are as follows:



|                                    |  |                                   |  |                   |        |                         |   |         |     |  |                                   |        |       |    |                         |   |        |     |   |         |   |  |   |       
|----------------------------------- |  | --------------------------------- |  | ----------------- | ------ | ----------------------- | - | ------- | --- |  | --------------------------------- | ------ | ----- | -- | ----------------------- | - | ------ | --- | - | ------- | - |  | - | ------
|                                    |  | March 27, 2010                    |  | December 31, 2009
|                                    |  | WeightedAverageAmortizationPeriod |  | Gross             |        | AccumulatedAmortization |   |         | Net |  | WeightedAverageAmortizationPeriod |        | Gross |    | AccumulatedAmortization |   |        | Net
|                                    |  | (Years)                           |  |                   |        | (In thousands)          |   |         |     |  | (Years)                           |        |       |    | (In thousands)          |   |        |    
|Patents and other intangible assets |  | 11                                |  | $                 | 18,649 |                         | $ | (5,230  | )   |  | $                                 | 13,419 |       | 11 |                         | $ | 18,658 |     | $ | (4,797  | ) |  | $ | 13,861
|Developed technology                |  | 6                                 |  |                   | 30,269 |                         |   | (28,931 | )   |  |                                   | 1,338  |       | 6  |                         |   | 31,066 |     |   | (29,114 | ) |  |   | 1,952 
|Trademark                           |  | 9                                 |  |                   | 7,176  |                         |   | (3,950  | )   |  |                                   | 3,226  |       | 10 |                         |   | 7,682  |     |   | (4,050  | ) |  |   | 3,632 
|                                    |  |                                   |  |                   |        |                         |   |         |     |  |                                   |        |       |    |                         |   |        |     |   |         |   |  |   |       
|Total intangible assets             |  | 9                                 |  | $                 | 56,094 |                         | $ | (38,111 | )   |  | $                                 | 17,983 |       | 9  |                         | $ | 57,406 |     | $ | (37,961 | ) |  | $ | 19,445
|                                    |  |                                   |  |                   |        |                         |   |         |     |  |                                   |        |       |    |                         |   |        |     |   |         |   |  |   |       



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



During the three months ended March 28, 2009, we purchased certain technology patents related to
our Semiconductor Group with a fair value of $2.0 million and a weighted average amortization period of 6 years. Our estimated amortization expense for identifiable intangible assets is $2.4 million for the three remaining quarters of 2010, and
$2.6 million, $2.6 million, $2.6 million, $2.3 million, and $1.5 million for the years ending December 31, 2011, 2012, 2013, 2014 and 2015, respectively. As of March 27, 2010, we had no recorded identifiable intangible
assets with indefinite lives.

Note 8. Product Warranty

Changes in our accrued warranty liability are as follows:



|                                                                            |  |                    |        |   |               |   |         |  
|--------------------------------------------------------------------------- |  | ------------------ | ------ | - | ------------- | - | ------- | -
|                                                                            |  | Three Months Ended |       
|                                                                            |  | March 27,2010      |        |   | March 28,2009 |  
|                                                                            |  | (In thousands)     |       
|Balance, beginning of period                                                |  | $                  | 19,611 |   |               | $ | 30,438  |  
|Warranties issued                                                           |  |                    | 9,493  |   |               |   | 7,603   |  
|Settlements                                                                 |  |                    | (5,503 | ) |               |   | (13,735 | )
|Net changes in liability for pre-existing warranties, including expirations |  |                    | (1,535 | ) |               |   | (2,192  | )
|                                                                            |  |                    |        |   |               |   |         |  
|Balance, end of period                                                      |  |                    | 22,066 |   |               |   | 22,114  |  
|Less: Long-term portion                                                     |  |                    | (3,273 | ) |               |   | (3,431  | )
|                                                                            |  |                    |        |   |               |   |         |  
|Accrued warranty, current                                                   |  | $                  | 18,793 |   |               | $ | 18,683  |  
|                                                                            |  |                    |        |   |               |   |         |  

Note 9. Restructuring Charges

In an effort to consolidate our operations, streamline product offerings and align our manufacturing operations with current business conditions, we have
implemented various restructuring plans since 2001. All restructuring activity presented below is related to the Semiconductor Group and is included in operating income as part of restructuring and other charges, net. As of March 27, 2010,
substantially all actions under our restructuring plans had been completed except for payments of future rent obligations which we estimate will be paid in cash through 2017.

The following table summarizes our restructuring activity:



|                                        |  |                    |        |   |               |   |        |  
|--------------------------------------- |  | ------------------ | ------ | - | ------------- | - | ------ | -
|                                        |  | Three Months Ended |       
|                                        |  | March 27,2010      |        |   | March 28,2009 |  
|                                        |  | (In thousands)     |       
|Balance, beginning of period            |  | $                  | 18,046 |   |               | $ | 18,178 |  
|Cash payments                           |  |                    | (1,203 | ) |               |   | (1,092 | )
|Adjustment of prior restructuring costs |  |                    | 206    |   |               |   | 313    |  
|                                        |  |                    |        |   |               |   |        |  
|Balance, end of period                  |  | $                  | 17,049 |   |               | $ | 17,399 |  
|                                        |  |                    |        |   |               |   |        |  

Note 10. Debt Obligations

As of March 27, 2010, we had $1.6 million of outstanding current debt obligations at a weighted-average interest rate of 5.0%. As of
December 31, 2009, our outstanding current debt obligations were insignificant.



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On June 17, 2009, we entered into a three-year Credit Agreement, which was amended on
September 23, 2009 (the Agreement), with Bank of America, N.A. The Agreement established a secured credit line with an aggregate committed maximum amount of 80 million Euros at an interest rate of Euro Interbank Offered Rate (EURIBOR) plus
75 basis points. The outstanding balance is due and payable on or before June 22, 2012. Upon execution of the Agreement, we borrowed 79.5 million Euros against this credit line. The proceeds of the loan were used to retire our credit
facility with JPMorgan Chase Bank, which was due and payable on June 25, 2009. The JPMorgan Credit Agreement was used to fund the acquisition of Peter Wolters AG in 2004 and for general corporate purposes. As of March 27, 2010 and
December 31, 2009, we had amounts outstanding under the Agreement of 79.5 million Euros, or $106.2 million and $114.1 million, respectively, at an effective interest rate of 1.1%. This Agreement is secured by deposits in money market funds
at a minimum of 105 percent of the outstanding balance. Amounts used to secure the debt are included within non-current restricted cash and cash equivalents on our Condensed Consolidated Balance Sheet. The Agreement contains customary
affirmative covenants, representations and warranties and events of default and limited negative covenants and financial covenants, which are subject to various exceptions and qualifications. We were in compliance with these
covenants as of March 27, 2010.

Note 11. Interest and Other Income, Net

The components of interest and other income, net are as follows:



|                               |  |                    |       |   |               |   |       |  
|------------------------------ |  | ------------------ | ----- | - | ------------- | - | ----- | -
|                               |  | Three Months Ended |      
|                               |  | March 27,2010      |       |   | March 28,2009 |  
|                               |  | (In thousands)     |      
|Interest income                |  | $                  | 2,043 |   |               | $ | 2,766 |  
|Interest expense               |  |                    | (288  | ) |               |   | (707  | )
|Foreign currency loss, net     |  |                    | (225  | ) |               |   | (497  | )
|Loss on other investments      |  |                    | (29   | ) |               |   | (511  | )
|Other, net                     |  |                    | 26    |   |               |   | 245   |  
|                               |  |                    |       |   |               |   |       |  
|Interest and other income, net |  | $                  | 1,527 |   |               | $ | 1,296 |  
|                               |  |                    |       |   |               |   |       |  

Note 12. Shareholders Equity

Other Comprehensive Income (Loss)

The components of other comprehensive income (loss), net of tax, are as follows:



|                                                        |  |                    |        |   |               |   |         |  
|------------------------------------------------------- |  | ------------------ | ------ | - | ------------- | - | ------- | -
|                                                        |  | Three Months Ended |       
|                                                        |  | March 27,2010      |        |   | March 28,2009 |  
|                                                        |  | (In thousands)     |       
|Net income (loss)                                       |  | $                  | 41,256 |   |               | $ | (66,392 | )
|Other comprehensive income (loss):                      |  |                    |        |   |               |   |         |  
|Foreign currency translation adjustments                |  |                    | (710   | ) |               |   | (311    | )
|Unrealized gain (loss) on investments                   |  |                    | (291   | ) |               |   | 808     |  
|Change in derivative instruments                        |  |                    | 187    |   |               |   | 458     |  
|Unrealized gain on minimum pension liability adjustment |  |                    |       |   |               |   | 87      |  
|                                                        |  |                    |        |   |               |   |         |  
|Comprehensive income (loss)                             |  | $                  | 40,442 |   |               | $ | (65,350 | )
|                                                        |  |                    |        |   |               |   |         |  

The components of accumulated other comprehensive loss, net of related taxes, are as follows:



|                                           |  |                    |        |   |                       |   |        |  
|------------------------------------------ |  | ------------------ | ------ | - | --------------------- | - | ------ | -
|                                           |  | March 27,     2010 |        |   | December 31,     2009 |  
|                                           |  | (In thousands)     |       
|Foreign currency translation adjustments   |  | $                  | 3,463  |   |                       | $ | 4,173  |  
|Unrealized loss on investments  temporary |  |                    | (7,161 | ) |                       |   | (6,870 | )
|Unrealized gain (loss) on cash flow hedges |  |                    | 60     |   |                       |   | (127   | )
|Unrealized loss on pension liability       |  |                    | (1,845 | ) |                       |   | (1,845 | )
|                                           |  |                    |        |   |                       |   |        |  
|Accumulated other comprehensive loss       |  | $                  | (5,483 | ) |                       | $ | (4,669 | )
|                                           |  |                    |        |   |                       |   |        |  



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Common Stock Repurchases

Our Board of Directors has authorized repurchases of our outstanding common stock. As of March 27, 2010, we had $788.3 million available for stock
repurchases under these authorizations. During the three months ended March 27, 2010, 0.7 million shares were repurchased under this plan for $15.2 million at a weighted average price of $21.50. No shares were repurchased during the three
months ended March 28, 2009.

For the majority of restricted stock awards that vest, the number of shares issued is net of shares
withheld to pay the minimum statutory withholding for income taxes on behalf of the grantee. Although shares withheld are not issued, they are treated as common stock repurchases, effectively reducing the number of shares that would otherwise have
been issued upon vesting. These withheld shares are not included within common stock repurchases under our authorized plan. During the three months ended March 27, 2010 and March 28, 2009, the value of shares withheld to satisfy the
minimum statutory withholding requirement related to the grantees tax obligations was $0.1 million.

Note 13. Litigation

Linear Technology Corporation

In March 2002, Linear Technology Corporation (Linear) filed a complaint against Novellus, among other parties, in the Superior Court of the State of
California for the County of Santa Clara (the Superior Court) seeking damages of up to $200 million (including punitive damages), declaratory relief and injunctions for causes of action involving alleged breach of contract, fraud, unfair competition
and breach of warranty.

The Superior Court dismissed Linears claims for fraud and unfair competition on October 5, 2004. The Court
of Appeal for the Sixth Appellate District affirmed this dismissal on June 18, 2007. Trial on the remaining claims began before a jury on January 19, 2010, in the Superior Court. Novellus prevailed on these claims at trial, which ended on
February 26, 2010.

Linear has filed two motions seeking entry of a judgment in its favor notwithstanding the jurys verdict, and a
new trial. We believe that Linear will file an appeal if it is unsuccessful on these motions. Although we cannot at this time predict the ultimate outcome in this case or estimate a range of any such potential loss, we believe that the ultimate
disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Other
Litigation

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

Note
14. Income Taxes

The income tax provision for the three months ended March 27, 2010 was computed based on our annual forecast of
profit and losses by jurisdiction for fiscal year 2010. Our provision for income taxes for the three months ended March 27, 2010 was $9.3 million compared to a provision of $14.3 million for the three months ended March 28, 2009. For the
three months ended March 27, 2010, our provision for income taxes was less than the federal statutory tax rate due primarily to foreign income taxed at lower rates. Our provision for income taxes for the three months ended March 27, 2009,
was more than the federal statutory tax rate due primarily to a $19.4 million charge as a result of the California Budget Act of 2009 which was signed into law in February 2009. This law revised certain provisions of the California State Tax Code,
including the option to elect an alternative method to attribute taxable income to California for years beginning on or after January 1, 2011. We expect our income subject to tax in California to be lower than under prior tax law beginning in
2011. As a result, the realization of our California deferred tax assets was no longer more likely than not.



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 15. Stock-Based Compensation

The following table summarizes the stock-based compensation expense for stock options, restricted stock awards and our employee stock purchase plan (ESPP)
in operating income:



|                                       |  |                    |       |                   |   |      
|-------------------------------------- |  | ------------------ | ----- | ----------------- | - | -----
|                                       |  | Three Months Ended
|                                       |  | March 27,2010 (1)  |       | March 28,2009 (2)
|                                       |  | (In thousands)    
|Cost of sales                          |  | $                  | 461   |                   | $ | 860  
|Selling, general and administrative    |  |                    | 4,675 |                   |   | 4,505
|Research and development               |  |                    | 2,565 |                   |   | 2,312
|                                       |  |                    |       |                   |   |      
|Total stock-based compensation expense |  | $                  | 7,701 |                   | $ | 7,677
|                                       |  |                    |       |                   |   |      



|(1) | Amounts include amortization expense related to stock options of $3.2 million and restricted stock awards of $4.5 million. The related income tax benefit recognized in
the Condensed Consolidated Statements of Operations was $2.0 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Amounts include amortization expense related to stock options of $3.5 million, ESPP of $0.7 million, and restricted stock awards of $3.5 million. The related income tax
benefit recognized in the Condensed Consolidated Statements of Operations was $1.7 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock Options

The exercise price of each stock option is the closing market price of our common stock on the date of grant. Stock options generally
vest ratably over a four-year period on the anniversary date of the grant and expire ten years after the grant date. The fair values of stock options were estimated using the Black-Scholes valuation model with the following weighted-average
assumptions:



|                        |  |                    |  |              
|----------------------- |  | ------------------ |  | -------------
|                        |  | Three Months Ended
|                        |  | March 27,2010      |  | March 28,2010
|Risk-free interest rate |  | 1.6%               |  | 1.4%         
|Volatility              |  | 48%                |  | 60%          
|Expected term           |  | 3.4 years          |  | 4.0 years    
|Dividends               |  | None               |  | None         

Our computation of volatility is
based on a combination of historical and market-based implied volatility. Our computation of expected term is based on historical exercise patterns. We base the risk-free interest rate on the implied yield in effect at the time of option grant on
U.S. Treasury zero-coupon issues with remaining terms equivalent to the expected term of the option.

A summary of stock option activity for
the three months ended March 27, 2010 is as follows:



|                                           |  |                 |   |  |                                |       |                                          |      |                          |   |       
|------------------------------------------ |  | --------------- | - |  | ------------------------------ | ----- | ---------------------------------------- | ---- | ------------------------ | - | ------
|                                           |  | Number ofShares |   |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractualTerm |      | AggregateIntrinsic Value
|                                           |  | (In thousands)  |   |  |                                |       | (In years)                               |      | (In thousands)          
|Outstanding, beginning of period           |  | 18,033          |   |  | $                              | 30.35 |                                          |      |                          |   |       
|Grants                                     |  | 10              |   |  |                                | 22.13 |                                          |      |                          |   |       
|Exercises                                  |  | (89             | ) |  |                                | 13.94 |                                          |      |                          |   |       
|Forfeitures or expirations                 |  | (247            | ) |  |                                | 36.81 |                                          |      |                          |   |       
|                                           |  |                 |   |  |                                |       |                                          |      |                          |   |       
|Outstanding, end of period                 |  | 17,707          |   |  | $                              | 30.34 |                                          | 4.68 |                          | $ | 21,818
|                                           |  |                 |   |  |                                |       |                                          |      |                          |   |       
|Vested and expected to vest, end of period |  | 17,093          |   |  | $                              | 30.70 |                                          | 4.53 |                          | $ | 18,636
|Exercisable, end of period                 |  | 14,051          |   |  | $                              | 32.72 |                                          | 3.66 |                          | $ | 3,976 



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NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The aggregate intrinsic value of options outstanding is calculated as the difference between the
exercise price of the underlying options and the market price of our common stock for the 4.3 million shares that had exercise prices lower than the market price of our common stock as of March 27, 2010. For the three months ended
March 27, 2010, the aggregate intrinsic value of options exercised, determined as of the date of exercise, was $0.9 million and the total cash received from employees as a result of stock option exercises was $1.2 million. No options were
exercised during the three months ended March 28, 2009. The weighted average grant date fair value of options granted for the three months ended March 27, 2010 and March 28, 2009 was $7.94 and $6.64, respectively. In connection with
the disqualification of incentive stock options, we realized $0.2 million in tax benefits for the three months ended March 27, 2010 and no tax benefits for the three months ended March 28, 2009. We settle employee stock option exercises
with newly issued common shares.

As of March 27, 2010, there was $22.6 million of unrecognized compensation cost related to unvested
stock options, of which $10.3 million is expected to be recognized in the three remaining quarters of 2010, and $6.9 million, $3.8 million, and $1.6 million is expected to be recognized in 2011, 2012, and 2013, respectively.

Restricted Stock Awards

Restricted stock awards include restricted stock and restricted stock units that are settled in common stock. Restricted stock awards generally vest over
three, four, or five-year periods, excluding certain awards that vest upon the achievement of specific performance targets. A summary of restricted stock award activity for the three months ended March 27, 2010 is as follows:



|                                                      |  |                 |   |  |                                      |      
|----------------------------------------------------- |  | --------------- | - |  | ------------------------------------ | -----
|                                                      |  | Number ofShares |   |  | Weighted-AverageGrant DateFair Value
|                                                      |  | (In thousands)  |   |  |                                     
|Unvested restricted stock awards, beginning of period |  | 3,557           |   |  | $                                    | 22.19
|Granted                                               |  | 162             |   |  |                                      | 21.74
|Vested                                                |  | (13             | ) |  |                                      | 20.42
|Forfeited                                             |  | (485            | ) |  |                                      | 29.97
|                                                      |  |                 |   |  |                                      |      
|Unvested restricted stock awards, end of period       |  | 3,221           |   |  | $                                    | 21.00
|                                                      |  |                 |   |  |                                      |      

Unvested restricted stock awards at March 27, 2010 and December 31, 2009 include 3.0 million and
2.9 million restricted stock units, respectively.

As of March 27, 2010, there were a total of 0.1 million restricted stock
awards and 0.6 million restricted stock units subject to performance conditions that will result in forfeiture if the conditions are not realized. The restricted stock units have performance conditions that could result in the vesting of
additional restricted stock units up to a maximum of 2.0 million restricted stock units. The majority of performance conditions are based on our revenue, revenue growth and revenue growth relative to our peers.

The total fair value of restricted stock awards vested during each of the three months ended March 27, 2010 and March 28, 2009 was $0.3
million. In connection with the issuance of restricted stock awards, we realized tax benefits of $0.1 million for each of the three months ended March 27, 2010 and March 28, 2009. As of March 27, 2010 there was $48.4 million of
unrecognized compensation cost related to restricted stock awards, including performance awards that are expected to vest, of which $15.3 million is expected to be recognized in the three remaining quarters of 2010, and $16.8 million, $11.1 million,
and $5.2 million is expected to be recognized in 2011, 2012, and 2013, respectively.



19



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##### Table of Contents

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Employee Stock Purchase Plan

Our ESPP was suspended indefinitely effective May 1, 2009 by action of our Board of Directors. Our ESPP allowed qualified employees to purchase
shares of common stock at 85 percent of the fair market value on specified dates. Shares issued under our ESPP were valued using the Black-Scholes model with the following weighted-average assumptions:



|                        |  |                   
|----------------------- |  | ------------------
|                        |  | Three Months Ended
|                        |  | March 28,2009     
|Risk-free interest rate |  | 1.1%              
|Volatility              |  | 49%               
|Expected term           |  | 6 months          
|Dividends               |  | None              

The weighted-average grant date fair
value of shares for the three months ended March 28, 2009 was $4.53. We realized an insignificant amount of tax benefits attributed to disqualifying dispositions of ESPP shares for the three months ended March 27, 2010 and
$0.1 million for the three months ended March 28, 2009.

Note 16. Operating Segments

Our operations are organized into two segments, the Semiconductor Group and the Industrial Applications Group. Our Semiconductor Group develops,
manufactures, sells and supports equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. Our Industrial Applications Group is a supplier of lapping, grinding, polishing and deburring equipment for
fine-surface optimization. The accounting policies of these segments are the same as those described in Note 2 of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Segment information is as follows:



|                                |  |                                   |           |                                   |   |        |              |  |                    |           |  |                             |           |   |              |   |        |   |  |   |           |  
|------------------------------- |  | --------------------------------- | --------- | --------------------------------- | - | ------ | ------------ |  | ------------------ | --------- |  | --------------------------- | --------- | - | ------------ | - | ------ | - |  | - | --------- | -
|                                |  | Three Months Ended March 27, 2010 |           | Three Months Ended March 28, 2009 |  
|                                |  | (In thousands)                    |          
|                                |  | SemiconductorGroup                |           | IndustrialApplicationsGroup       |   |        | Consolidated |  | SemiconductorGroup |           |  | IndustrialApplicationsGroup |           |   | Consolidated |  
|Sales to unaffiliated customers |  | $                                 | 263,675   |                                   | $ | 12,554 |              |  | $                  | 276,229   |  | $                           | 76,579    |   |              | $ | 22,334 |   |  | $ | 98,913    |  
|Operating income (loss)         |  | $                                 | 52,921    |                                   | $ | (3,898 | )            |  | $                  | 49,023    |  | $                           | (48,492   | ) |              | $ | (4,887 | ) |  | $ | (53,379   | )
|                                |  |                                  
|                                |  | March 27, 2010                    |           | December 31, 2009                 |  
|                                |  | (In thousands)                    |          
|                                |  | SemiconductorGroup                |           | IndustrialApplicationsGroup       |   |        | Consolidated |  | SemiconductorGroup |           |  | IndustrialApplicationsGroup |           |   | Consolidated |  
|Total assets                    |  | $                                 | 1,520,432 |                                   | $ | 81,691 |              |  | $                  | 1,602,123 |  | $                           | 1,475,755 |   |              | $ | 83,223 |   |  | $ | 1,558,978 |  

Note 17. Related Party
Transactions

We lease an aircraft from NVLS I, LLC, a third-party entity wholly owned by Richard S. Hill, our Chairman and Chief Executive
Officer. Under the lease agreement, we incurred expenses of $0.3 million for each of the three months ended March 27, 2010 and March 28, 2009.

We employ, in non-executive positions, certain immediate family members of our executive officers. The aggregate compensation amount recognized for these
immediate family members was $0.1 million during each of the three months ended March 27, 2010 and March 28, 2009.

Current
regulations prohibit company loans to executive officers, as defined by the SEC. We have outstanding loans to non-executive vice presidents and other key personnel. As of March 27, 2010 and December 31, 2009, the total
outstanding balance of such loans was $0.6 million. As of March 27, 2010 nearly all of the outstanding balance was secured by collateral. Loans typically bear interest, except for those made for employee relocation purposes. Bad debt expense
related to these types of loans has not historically been significant.



20



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##### Table of Contents

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

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements that are purely historical, are forward-looking statements. Words
such as anticipate, expect, intend, plan, believe, seek, estimate, could, may, and similar expressions also identify forward-looking
statements. The forward-looking statements include, without limitation:



| |  |  | our belief that the impairment related to auction-rate securities is temporary, our intent to not sell our auction-rate securities, our belief that we
will not be required to sell our auction-rate securities before recovery, and our expectation to recover the amortized cost of our auction-rate securities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our anticipation to reclassify the accumulated gain recorded as of March 27, 2010 for cash flow hedges from OCI to net sales within twelve months;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that the adoption of certain accounting pronouncements will not have a significant impact on our Condensed Consolidated Financial
Statements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our estimation of amortization expense for currently recognized identifiable intangible assets for the remaining three quarters of 2010 and for the
years ending December 31, 2011, 2012, 2013, 2014, and 2015 respectively;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that future obligations in connection with vacated facilities will be paid in cash through 2017;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that the ultimate disposition of the Linear litigation and other litigation matters that have arisen, or may arise in the future, in
the normal course of business will not have a material adverse effect on our business, financial condition or operating results;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that in years 2011 and beyond our income subject to tax in California will be lower, our expectation that our deferred tax assets are
less likely to be realized due to the recent California tax law change, our plan to continue to assess our tax valuation allowance on our California deferred tax assets in future periods;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our estimation of unrecognized compensation cost related to unvested stock options and restricted stock awards to be recognized in the three remaining
quarters of 2010 2011, 2012, and 2013;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that significant investment in research and development is required to remain competitive, our plan to continue to invest in new products
and enhance our current product lines, and our belief that our continued investment in research and development has positioned us for future growth;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that our operations will continue to be increasingly impacted by the prime wafer industry, which is characterized by intense competition and
rapidly changing technology;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our intention to continue to seek legal protection through patents and trade secrets for our proprietary technology;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | our intent to continue to work closely with our customers and make substantial investments in research and development in order to deliver innovative
products which enhance productivity for our customers to utilize the latest technology;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that chip unit growth will resume in 2010 at historic rates, and with it, spending on semiconductor equipment;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that net orders will fluctuate due to the cyclicality of the semiconductor industry;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | our plan for continued focus on operational execution and paring down our cost structure to improve operating results;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | our plan to continue managing both our variable and fixed cost structure with the objective of maximizing our cash flow from operations, and our
expectation that variable compensation expense is expected to increase to the extent that we remain profitable in 2010;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that our financial resources will be sufficient to meet our needs through the next twelve months;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | our belief that our customer base is becoming increasingly more concentrated and 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that we will continue to experience significant fluctuations in our quarterly operating results; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | our belief that future impairment charges related to goodwill or long-lived assets may be required if our future operating results do not meet current
forecasts or if we have a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Our expectations, beliefs, objectives, 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 our forward-looking statements. These risks and uncertainties include, but are not limited to:



| |  |  | unanticipated trends with respect to the cyclicality of the semiconductor industry;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | our inability to reclassify the accumulated loss for our cash flow hedges from OCI to net sales within twelve months;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | inaccuracies regarding growth potential in the Asia region over the long term;
| | - |  | ------------------------------------------------------------------------------



| |  |  | a sustained decrease in or leveling off of customer demand;
| | - |  | -----------------------------------------------------------



| |  |  | our inability to make adequate inventory valuation adjustments in a timely manner;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | our inability to manage inventory levels;
| | - |  | -----------------------------------------



| |  |  | unexpected changes in the tax regulatory environment, changes in accounting and tax standards or practices, and our inability to achieve a tax benefit
due to unexpected changes in domestic or international tax regulations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to predict the ultimate outcome of the Linear litigation and other current litigation on our business, financial conditions or operating
results;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to accurately predict the impact of new accounting pronouncements on our Condensed Consolidated Financial Statements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to accurately assess the period in which we will recognize unrecognized compensation related to unvested stock options and restricted
stock awards;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inaccuracies related to the timing and satisfaction of remaining obligations related to vacated leases;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | unexpected shipment delays which adversely impact shipment volumes;
| | - |  | -------------------------------------------------------------------



| |  |  | our inability to meet certain performance conditions that may result in forfeiture of certain restricted stock awards;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected increase in costs associated with manufacturing our products; our inability to anticipate cyclical changes in customers capacity
utilization and demand; the negative impact of higher cost of services on gross margins;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to realize efficiencies from outsourcing; inefficiencies in the allocation of funds towards our research and development efforts to our
existing and new product lines;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected complications related to timing, success and cost of our manufacturing consolidation efforts;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | unexpected difficulties in introducing new and enhanced products in a timely manner in order to remain competitive;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected changing product needs of our customers, the loss of major customers, and the need to seek new customers and diversify our customer base;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an unanticipated need for additional liquid assets in the next twelve months;
| | - |  | -----------------------------------------------------------------------------



| |  |  | our inability to enforce our patents and protect our trade secrets;
| | - |  | -------------------------------------------------------------------



| |  |  | our inability to recover the amortized cost of our investments in auction-rate securities, market changes negatively affecting auction-rate securities
and the governments inability to guarantee the underlying securities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to accurately predict customers capital spending over the long term;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | further periodic downturns in the semiconductor industry which could have a material adverse effect on the semiconductor industrys demand for
semiconductor processing equipment;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to accurately predict mega-fabrication trends in memory manufacturing and uncertainties related to the acceptance of new technology into
the memory market;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the introduction of new products by competitors;
| | - |  | ------------------------------------------------



| |  |  | our inability to gain and leverage market position during the economic downturn;
| | - |  | --------------------------------------------------------------------------------



| |  |  | unexpected shifts in market demands for both memory and logic products; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | uncertainties related to growth in the electronic industry and our inability to successfully select, develop, and market new products, or enhance
existing products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and
uncertainties set forth under the heading Risk Factors in Item 1A of Part II, 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 the filing of this Quarterly Report on Form 10-Q. Readers should also review carefully the cautionary statements listed in our Annual Report on Form 10-K
for the year ended December 31, 2009 and in our other filings with the SEC, including our Forms 10-Q and 8-K and our Annual Report to Shareholders.

Introduction

The following
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide readers with an understanding of our business. The following are included in our MD&A:



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



| |  |  | Critical Accounting Policies;
| | - |  | -----------------------------



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



| |  |  | Liquidity and Capital Resources.
| | - |  | --------------------------------

Overview of Our Business and Industry

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

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

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

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

In fiscal 2006 and 2007, our
customers grew capacity and those capacity additions outpaced the rate of demand, leading to declines in the average selling price of chips. This oversupply-driven weakness was rendered more severe in the second half of 2008 and the first quarter of
2009 by the contraction in demand for semiconductors due to the global economic crisis. Semiconductor sales have rebounded in recent quarters, leading to resumption in capacity additions by our customers; however, due to the exceptional weakness in
the first quarter of 2009, semiconductor and semiconductor capital equipment sales still declined year-over-year in 2009. Unit growth rates for chip sales are generally expected to resume throughout 2010 at historical rates, and so, we expect that
increases in spending on semiconductor equipment will follow. As demonstrated in the table below, we have seen increases in net sales in each of the last four consecutive quarters and expect that trend to continue in the second quarter of 2010.



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##### Table of Contents

Given the significant downward pressure on revenues over the past two calendar years and the historically
cyclical nature of the semiconductor industry, we have continued to focus on operational execution and paring down our cost structure to improve operating results, including the consolidation of buildings at our San Jose, California campus. During
the first quarter of 2010, we completed the consolidation of manufacturing in our Tualatin, Oregon facility and incurred $0.9 in charges related to those efforts. Of these charges, $0.5 million was in cost of sales and $0.4 million was in operating
expenses. We plan to continue managing both our variable and fixed cost structure with the objective of maximizing cash flow from operations. However, variable compensation expense is expected to increase to the extent we remain profitable in 2010.

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

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



|                                        |  |                          |         |   |               |   |         |              |  |   |               |   |  |              |         |   |  |   |         |   
|--------------------------------------- |  | ------------------------ | ------- | - | ------------- | - | ------- | ------------ |  | - | ------------- | - |  | ------------ | ------- | - |  | - | ------- | --
|                                        |  | Quarterly Financial Data |        
|                                        |  | 2010                     |         |   | 2009          |  
|                                        |  | FirstQuarter             |         |   | FourthQuarter |   |         | ThirdQuarter |  |   | SecondQuarter |   |  | FirstQuarter |        
|Net sales                               |  | $                        | 276,229 |   |               | $ | 244,194 |              |  | $ | 176,879       |   |  | $            | 119,208 |   |  | $ | 98,913  |   
|Gross profit                            |  | $                        | 133,967 |   |               | $ | 113,638 |              |  | $ | 70,708        |   |  | $            | 31,006  |   |  | $ | 25,738  |   
|Net income (loss)                       |  | $                        | 41,256  |   |               | $ | 35,191  |              |  | $ | (4,026        | ) |  | $            | (50,008 | ) |  | $ | (66,392 | ) 
|Net income (loss) per share  Diluted   |  | $                        | 0.43    |   |               | $ | 0.36    |              |  | $ | (0.04         | ) |  | $            | (0.52   | ) |  | $ | (0.69   | ) 
|Shipments                               |  | $                        | 282,816 |   |               | $ | 244,485 |              |  | $ | 165,446       |   |  | $            | 119,982 |   |  | $ | 92,130  |   
|Change in shipments from prior quarter  |  |                          | 16      | % |               |   | 48      | %            |  |   | 38            | % |  |              | 30      | % |  |   | (48     | )%
|Net orders                              |  | $                        | 321,363 |   |               | $ | 257,610 |              |  | $ | 171,548       |   |  | $            | 111,187 |   |  | $ | 77,795  |   
|Change in net orders from prior quarter |  |                          | 25      | % |               |   | 50      | %            |  |   | 54            | % |  |              | 43      | % |  |   | (6      | )%

We expect that net orders will continue
to fluctuate due to the cyclical nature of our business. The receipt of net orders in a particular quarter affects revenue in subsequent quarters. Net orders typically result in revenue either at shipment and transfer of title or upon customer
acceptance of the equipment. Our revenue recognition policy, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, addresses the distinction between the revenue recognized upon shipment and transfer of title and
the revenue recognized upon customer acceptance. Equipment generally ships within two to six months of receiving the related order, and if applicable, customer acceptance is typically received one to six months after shipment. These time lines are
general estimates and actual times may vary depending on varying circumstances.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP 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 assumptions and estimates, including those related to recognition of revenue, valuation of inventory,
valuation of goodwill and other intangible assets, valuation of deferred tax assets, adequacy of warranty obligations, measurement of restructuring and impairment charges, compliance with hedge accounting for derivatives, measurement of stock-based
compensation expense, valuation of investments, adequacy of the allowance for doubtful accounts and adequacy of loss contingencies, including those related to legal matters. We base our estimates on historical experience and on various assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We discuss our critical accounting policies in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2009. There have been no significant changes in our critical accounting policies or estimates since those reported in our Annual Report.



24



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##### Table of Contents

Results of Operations

Net Sales



|                              |  |                    |         |                     |   |               |  |        |        |  |        |    |  |     |   
|----------------------------- |  | ------------------ | ------- | ------------------- | - | ------------- |  | ------ | ------ |  | ------ | -- |  | --- | --
|                              |  | Three Months Ended |         | Q1
2010% ChangeFrom |  
|                              |  | March 27,2010      |         | December 31,2009    |   | March 28,2009 |  | Q42009 |        |  | Q12009 |   
|                              |  | (In thousands)     |         |                     |   |               |  |       
|Semiconductor Group           |  | $                  | 263,675 |                     | $ | 226,730       |  | $      | 76,579 |  | 16     | %  |  | 244 | % 
|Industrial Applications Group |  |                    | 12,554  |                     |   | 17,464        |  |        | 22,334 |  | (28    | )% |  | (44 | )%
|                              |  |                    |         |                     |   |               |  |        |        |  |        |    |  |     |   
|Net sales                     |  | $                  | 276,229 |                     | $ | 244,194       |  | $      | 98,913 |  | 13     | %  |  | 179 | % 

Semiconductor Group net sales
in the first quarter of 2010 increased by 16% and 244% compared to fourth quarter 2009 and first quarter 2009 net sales, respectively. Industrial Applications Group net sales decreased 28% and 44% compared to fourth quarter 2009 and first quarter
2009 net sales, respectively. Net sales within the Semiconductor Group have steadily recovered over the last four quarters from the lows experienced in the first quarter of 2009. No meaningful recovery was seen in the Industrial Applications Group
through the first quarter of 2010.

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



|              |  |                    |         |                      |   |               |  |   |       
|------------- |  | ------------------ | ------- | -------------------- | - | ------------- |  | - | ------
|              |  | Three Months Ended
|              |  | March 27,2010      |         | December 31,2009     |   | March 28,2009
|Asia          |  |                    | 68%     |                      |   | 71%           |  |   | 31%   
|North America |  |                    | 26%     |                      |   | 21%           |  |   | 47%   
|Europe        |  |                    | 6%      |                      |   | 8%            |  |   | 22%   
|             
|Gross Profit 
|              |  | Three Months Ended
|              |  | March 27,    2010  |         | December 31,    2009 |   | March 28,2009
|Gross Profit  |  | $                  | 133,967 |                      | $ | 113,638       |  | $ | 25,738
|Gross Margin  |  |                    | 48%     |                      |   | 47%           |  |   | 26%   

First quarter 2010 gross margin
increased by 1 and 22 percentage points compared to the fourth quarter of 2009 and first quarter of 2009, respectively. The increase in gross margin from the fourth quarter is primarily due to a change in mix of products sold. The increase in gross
margin from the first quarter 2009 is primarily due to increased absorption of fixed costs on higher shipment volumes and lower inventory write-downs.

Selling, General and Administrative (SG&A)



|               |  |                        |        |   |                     |   |        |                   |  |   |        |   |  |        |   |  |   |  
|-------------- |  | ---------------------- | ------ | - | ------------------- | - | ------ | ----------------- |  | - | ------ | - |  | ------ | - |  | - | -
|               |  | Three Months Ended     |        |   | Q1 2010%
ChangeFrom |  
|               |  | March 27,    2010      |        |   | December 31, 2009   |   |        | March 28,    2009 |  |   | Q42009 |   |  | Q12009 |  
|               |  | (Dollars in thousands) |        |   |                     |   |        |                   | 
|SG&A expense   |  | $                      | 45,051 |   |                     | $ | 38,560 |                   |  | $ | 43,102 |   |  | 17     | % |  | 5 | %
|% of net sales |  |                        | 16     | % |                     |   | 16     | %                 |  |   | 44     | % |  |        |   |  |   |  

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

SG&A expense increased in the first quarter of 2010 compared to the fourth and first quarter of 2009 primarily due to increased legal expenses of
$4.4 million incurred in connection with the Linear Technology Corporation trial and increased variable compensation expenses attributable to higher net sales and net income. Compared to the first quarter of 2009, these increases were offset by cost
reductions over the past year, primarily from reductions in employee headcount.



25



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##### Table of Contents

Research and Development (R&D)



|               |  |                        |        |   |                     |   |        |                   |  |   |        |   |  |        |   |  |    |  
|-------------- |  | ---------------------- | ------ | - | ------------------- | - | ------ | ----------------- |  | - | ------ | - |  | ------ | - |  | -- | -
|               |  | Three Months Ended     |        |   | Q1 2010% ChangeFrom |  
|               |  | March 27,    2010      |        |   | December 31, 2009   |   |        | March 28,    2009 |  |   | Q42009 |   |  | Q12009 |  
|               |  | (Dollars in thousands) |        |   |                     |   |        |                   | 
|R&D expense    |  | $                      | 39,687 |   |                     | $ | 36,732 |                   |  | $ | 36,015 |   |  | 8      | % |  | 10 | %
|% of net sales |  |                        | 14     | % |                     |   | 15     | %                 |  |   | 36     | % |  |        |   |  |    |  

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

The increase in R&D expense from fourth
quarter and first quarter of 2009 is primarily due to increases in variable compensation expense related to our net income as well as increased R&D project spending. However, R&D expense as a percentage of net sales decreased compared to
prior year periods because of the increase in net sales.

Income Taxes



|                                       |  |                    |       |   |                   |   |       |                   |  |   |        |   
|-------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | ----------------- |  | - | ------ | --
|                                       |  | Three Months Ended |      
|                                       |  | March 27,    2010  |       |   | December 31, 2009 |   |       | March 28,    2009 | 
|Provision for income taxes             |  | $                  | 9,294 |   |                   | $ | 5,390 |                   |  | $ | 14,309 |   
|% of income (loss) before income taxes |  |                    | 18    | % |                   |   | 13    | %                 |  |   | (27    | )%

As a result of our global business
structure, in periods of profitability we expect to achieve tax rates lower than current federal rates as we benefit from a geographical mix of income at lower tax rates. Likewise, in periods of operating losses, these losses may accumulate in lower
tax rate jurisdictions which would reduce our tax benefit. The income tax provision for the three months ended March 27, 2010 was computed based on our annual forecast of profit and losses by jurisdiction for fiscal year 2010.

Our provision for income taxes for the first quarter of 2010 was $9.3 million compared to a provision of $5.4 million for the fourth quarter of 2009, and
a provision of $14.3 million for the first quarter of 2009. These fluctuations primarily result from changes in our operating results before income taxes, along with the changes in geographical mix of those results before income taxes. Our first
quarter 2010 tax rate reflected a reduction of approximately 10 percentage points from our initial expected tax rate primarily due to our assessment of a recent U.S. Tax Court opinion related to foreign operations. We currently anticipate that our
tax rate for the year ending December 31, 2010 will be between 15% and 20%, given our current expected net sales volume and profit mix by jurisdiction. The first quarter of 2009 includes a $19.4 million discrete charge as a result of the
California Budget Act of 2008 signed into law on February 20, 2009. This law revised certain provisions of the California State Tax Code, including the option to elect an alternative method to attribute taxable income to California for tax
years beginning on or after January 1, 2011. In years 2011 and beyond, we expect our income subject to tax in California to be lower than under prior tax law. As a result, the realization of our California deferred tax assets is no longer more
likely than not.

Liquidity and Capital Resources

Cash, Cash Equivalents and Short-Term Investments



|                                                        |  |                |         |                  |   |        
|------------------------------------------------------- |  | -------------- | ------- | ---------------- | - | -------
|                                                        |  | March 27,2010  |         | December 31,2009
|                                                        |  | (In thousands)
|Cash and cash equivalents                               |  | $              | 198,670 |                  | $ | 142,047
|Short-term investments                                  |  |                | 354,245 |                  |   | 359,323
|                                                        |  |                |         |                  |   |        
|Total cash, cash equivalents and short-term investments |  | $              | 552,915 |                  | $ | 501,370
|                                                        |  |                |         |                  |   |        

We have historically financed our operating and capital resource
requirements through cash flows from operations, sales of equity securities and borrowings. Our primary source of liquidity as of March 27, 2010 consisted of $552.9 million of cash, cash equivalents and short-term investments, an increase of
$51.5 million from December 31, 2009, which is primarily due to cash generated from operations.



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Restricted Cash, Cash Equivalents and Long-Term Investments



|                                                                     |  |                |         |                  |   |        
|-------------------------------------------------------------------- |  | -------------- | ------- | ---------------- | - | -------
|                                                                     |  | March 27,2010  |         | December 31,2009
|                                                                     |  | (In thousands)
|Restricted cash and cash equivalents                                 |  | $              | 123,559 |                  | $ | 133,105
|Long-term investments                                                |  |                | 75,162  |                  |   | 78,763 
|                                                                     |  |                |         |                  |   |        
|Total restricted cash and cash equivalents and long-term investments |  | $              | 198,721 |                  | $ | 211,868
|                                                                     |  |                |         |                  |   |        

We held $198.7 million in restricted cash and long-term investments as
of March 27, 2010, a decrease of $13.1 million from $211.9 million as of December 31, 2009. The restricted cash and cash equivalents are primarily money market funds and Euro-denominated time-based deposits held to secure our debt
obligations.

Long-term investments consist of tax-exempt auction-rate securities, whose underlying assets are either student loans,
substantially backed by the federal government, or closed-end municipal bond funds. Beginning in February 2008, these auction-rate securities became illiquid because their scheduled auctions failed to settle. An auction failure occurs when the
parties wishing to sell securities at auction cannot. As a result, these investments are classified as long-term in our Condensed Consolidated Balance Sheet as we may have limited or no opportunities to liquidate these investments and fully recover
their par value in the near term. During the three months ended March 27, 2010, we redeemed $4.0 million of auction rate securities at par value. We have recorded a temporary unrealized loss of $10.3 million within OCI related to these
investments in our Condensed Consolidated Financial Statements as of March 27, 2010. See Note 3 to our Condensed Consolidated Financial Statements.

Cash Flow Summary



|                                                              |  |                    |         |   |               |   |        |  
|------------------------------------------------------------- |  | ------------------ | ------- | - | ------------- | - | ------ | -
|                                                              |  | Three Months Ended |        
|                                                              |  | March 27,2010      |         |   | March 28,2009 |  
|                                                              |  | (In thousands)     |        
|Net cash provided by (used in):                               |  |                    |         |   |               |   |        |  
|Operating activities                                          |  | $                  | 62,048  |   |               | $ | 22,592 |  
|Investing activities                                          |  |                    | 8,964   |   |               |   | (4,191 | )
|Financing activities                                          |  |                    | (12,434 | ) |               |   | 1,552  |  
|Effects of exchange rate changes on cash and cash equivalents |  |                    | (1,955  | ) |               |   | (887   | )
|                                                              |  |                    |         |   |               |   |        |  
|Net increase in cash and cash equivalents                     |  | $                  | 56,623  |   |               | $ | 19,066 |  
|                                                              |  |                    |         |   |               |   |        |  

Operating

Net cash provided by operating activities during the three months ended March 27, 2010 was $62.0 million. The primary sources of cash from operating
activities were net income of $41.3 million, adjusted to exclude the effect of non-cash charges, net of $21.7 million, offset by increases in working capital levels of $1.0 million.

Net cash provided by operating activities during the three months ended March 28, 2009 was $22.6 million. We generated cash from operations by
offsetting our net loss of $66.4 million with the effect of non-cash charges, net of $34.9 million and decreases in working capital levels of $54.1 million.

Investing

Net cash provided by
investing activities during the three months ended March 27, 2010 was $9.0 million. This amount consisted of net sales of investments of $7.8 million and a decrease in restricted cash and cash equivalents of $4.9 million offset by capital
expenditures of $3.7 million.

Net cash used in investing activities during the three months ended March 28, 2009 was $4.2 million. This
amount consisted of net purchases of investments of $5.7 million, an intangible asset purchase of $2.0 million and capital expenditures of $1.7 million, offset by a decrease in restricted cash and cash equivalents of $3.9 million and proceeds from
the sale of assets of $1.3 million.

Financing

Net cash used in financing activities during the three months ended March 27, 2010 was $12.4 million primarily as a result of stock repurchases of
$15.4 million and offset by proceeds from short-term lines of credit of $1.6 million and proceeds from employee stock compensation plans of $1.2 million.



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Net cash provided by financing activities during the three months ended March 28, 2009 was $1.5 million
and related to proceeds from lines of credit.

Credit Arrangements

We have short-term credit facilities with various financial institutions totaling $47.6 million. These credit facilities bear interest at various rates
and expire on various dates through January, 2011. As of March 27, 2010, we had $1.6 million of current debt obligations outstanding, $3.9 million was pledged against outstanding letters of credit and the remaining $42.1 million was unutilized.

On June 17, 2009, we entered into a three-year Credit Agreement, which was amended on September 23, 2009 (the Agreement), with Bank
of America, N.A. The Agreement established a secured credit line with an aggregate committed maximum amount of 80 million Euros at an interest rate of Euro Interbank Offered Rate (EURIBOR) plus 75 basis points. The outstanding balance is due
and payable on or before June 22, 2012. Upon execution of the Agreement, we borrowed 79.5 million Euros against this credit line. The proceeds of the loan were used to retire our credit facility with JPMorgan Chase Bank, which was due and
payable on June 25, 2009. The JPMorgan Credit Agreement was used to fund the acquisition of Peter Wolters AG in 2004 and for general corporate purposes. As of March 27, 2010 and December 31, 2009, we had amounts outstanding under the
Agreement of 79.5 million Euros, or $106.2 million and $114.1 million, respectively, at an effective interest rate of 1.1%. This Agreement is secured by deposits in money market funds at a minimum of 105 percent of the outstanding balance.
Amounts used to secure the debt are included within non-current restricted cash and cash equivalents on our Condensed Consolidated Balance Sheet. The Agreement contains customary affirmative covenants, representations and warranties and
events of default and limited negative covenants and financial covenants, which are subject to various exceptions and qualifications. We were in compliance with these covenants as of March 27, 2010.

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



|ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, 2009. Our exposure related to market risk has not changed materially since December 31, 2009.



|ITEM 4: | CONTROLS AND PROCEDURES
|------- | -----------------------

Quarterly
Evaluation of Our Disclosure Controls and Internal Controls

As of the end of the period covered by 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 control evaluation was done under the supervision and with the participation
of management, including our Chief Executive Officer and Principal Financial Officer. Rules adopted by the SEC require that, in this section of the Quarterly Report on Form 10-Q, we present the conclusions of the Chief Executive Officer and the
Principal Financial Officer about the effectiveness of our disclosure controls and internal controls for financial reporting based on and as of the date of the controls evaluation.

CEO and PFO Certifications

The
certifications of the Chief Executive Officer and the Principal Financial Officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to this Quarterly Report on Form 10-Q. 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 for Financial Reporting

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under
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 Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls for financial
reporting 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 U.S. GAAP.



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Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and the Principal Financial Officer, does not expect that our disclosure controls or our internal
controls for financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, 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 controls. 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, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation

The evaluation of our disclosure controls and our internal controls for financial reporting by our Chief Executive Officer and our Principal Financial
Officer included a review of the objective and design of the controls, our implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report on Form 10-Q. In accordance with SEC requirements,
the Chief Executive Officer and the Principal Financial Officer note that, during our most recent fiscal quarter, there have been no changes in our internal controls for financial reporting that have materially affected or are reasonably likely to
materially affect our internal controls for financial reporting.

Conclusions

Based upon the controls evaluation, our Chief Executive Officer and our Principal Financial Officer have concluded that our disclosure controls were
effective to ensure that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that material information relating to the Company is made known to
management, including the Chief Executive Officer and the Principal Financial Officer, particularly during the period when our periodic reports are being prepared, and that our internal controls for financial reporting are effective to provide
reasonable assurance that our financial statements are fairly presented in conformity with U.S. GAAP.

PART II: OTHER INFORMATION



|ITEM 1: | LEGAL PROCEEDINGS
|------- | -----------------

Linear Technology Corporation

As previously discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, in March 2002, Linear Technology Corporation (Linear)
filed a complaint against Novellus, among other parties, in the Superior Court of the State of California for the County of Santa Clara (the Superior Court) seeking damages of up to $200 million (including punitive damages), declaratory relief and
injunctions for causes of action involving alleged breach of contract, fraud, unfair competition and breach of warranty.

The Superior Court
dismissed Linears claims for fraud and unfair competition on October 5, 2004. The Court of Appeal for the Sixth Appellate District affirmed this dismissal on June 18, 2007. Trial on the remaining claims began before a jury on
January 19, 2010, in the Superior Court. Novellus prevailed on these claims at trial, which ended on February 26, 2010.

Linear has
filed two motions seeking entry of a judgment in its favor notwithstanding the jurys verdict, and a new trial. We believe that Linear will file an appeal if it is unsuccessful on these motions. Although we cannot at this time predict the
ultimate outcome in this case or estimate a range of any such potential loss, we believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Other Litigation

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



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|ITEM 1A: | RISK FACTORS
|-------- | ------------

Set forth below and
elsewhere in this Quarterly Report on Form 10-Q, and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements
contained in this Quarterly Report. We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede the risks previously disclosed in Part I, Item 1A in our Annual
Report on Form 10-K for the year ended December 31, 2009.

The semiconductor industry is highly cyclical and
difficult to predict.

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

We have experienced an increase in net orders in the last three quarters of 2009 and the first quarter of 2010 following declines in net orders during
each of the five preceding quarters. Despite these recent increases, we could again experience decreases in net orders in the future, and if so, our net sales and operating results could be adversely affected. Over the past two years, we have
implemented reductions in workforce, consolidation of our manufacturing operations, and other cost reduction actions to align our business with then current industry and economic conditions. Future restructurings or other cost reduction actions may
be required, which may have an adverse impact on our results of operations and our ability to capitalize on opportunities in a market recovery.

Weakness in the global economy or tightening of the credit markets may adversely affect our results of operations and our
liquidity.

The tightening of the credit markets, turmoil in the financial markets and weakening in the global economy contributed to
the downturn we experienced in 2008 and 2009. Because our business is ultimately driven by the global demand for electronic devices, the economic slowdown caused our customers to delay or discontinue spending on our products. The tightening of the
credit markets and concerns regarding the availability of credit that accompanied that downturn also made it more difficult for our customers to raise capital, whether debt or equity, to finance their purchases of capital equipment, including the
products we sell. Furthermore, our customers faced liquidity issues, which resulted in cancellations of equipment orders and increased payment delays or defaults. Reduced demand for our products and the general unavailability of financing adversely
impacted our operating results. While our operating results have improved along with the improvement in the economy, there can be no assurance that the economy and our operating results will continue to improve, that the economy will not experience
another significant downturn or that our operating results will not decrease. In such an event, our operating results, financial condition and business could be adversely affected.

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



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A decline in the condition of the global financial markets could adversely impact the market values or
liquidity of our investments. Our investment portfolio includes corporate and government securities, auction rate securities, money market funds and other types of debt securities. A decline in the capital and financial markets could adversely
impact their market values and liquidity. As of March 27, 2010, we held $75.2 million of auction-rate securities, net of $10.3 million in temporary impairment. Our auction rate securities are tax-exempt with underlying assets that are either
student loans, substantially backed by the federal government, or closed-end municipal bond funds. Due to the auction failures in 2008, we will not have access to these funds until (a) future auctions are successful, (b) the securities are
called by the issuer, (c) we sell the securities in a secondary market, or (d) the underlying notes mature and are repaid. Currently, there are no active secondary markets for these securities. If current market conditions do not improve,
additional temporary and other-than-temporary impairment charges could occur in future periods which would reduce the value of our investments and could negatively impact our results of operations.

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

Our management typically provides quarterly financial
forecasts. These forecasts, when made, are based on estimates believed to be reasonable at the time. However, actual results may vary and have varied in the past from forecasted results for a variety of reasons, including, but not limited to,
unanticipated manufacturing costs, changes in the economy or mix of products sold, unanticipated write-downs of inventory, and a higher than anticipated effective tax rate. Our lengthy sales cycle makes the timing of customer orders and product
acceptances difficult to predict. In addition, our backlog at the beginning of a quarter typically does not include all orders required to achieve our sales objectives for that quarter and is not a reliable indicator of our future sales. As a
result, our revenues and operating results for a quarter depend on us shipping orders as scheduled during that quarter, receiving customer acceptance during the quarter of previously shipped products, and obtaining new orders for products to be
shipped in that same quarter. Any delay in, or cancellation of, scheduled shipments and customer acceptances or in shipments from new orders could materially and adversely affect our financial results. These factors have caused and may continue to
cause our financial results to differ materially from prior periods and from financial forecasts we have previously provided.

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

Our quarterly operating results and stock price are unpredictable.

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



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



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



| |  |  | timing and cancellation of customer orders and shipments, including deferrals of orders of our existing products due to new product announcements by us
and/or our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | competitive pricing pressures;
| | - |  | ------------------------------



| |  |  | intellectual property disputes;
| | - |  | -------------------------------



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



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



| |  |  | variability in manufacturing yields;
| | - |  | ------------------------------------



| |  |  | fluctuations in warranty costs;
| | - |  | -------------------------------



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



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



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

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



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



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



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



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



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



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



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

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

We face risks related to a highly concentrated customer
base.

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

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

We are subject to taxation in the United States and other countries. Our effective tax rate has fluctuated
in the past and may fluctuate in the future. Future effective tax rates could be affected by changes in composition of earnings in countries with differing tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax
laws. We compute the quarterly effective tax rate using annual forecasts of jurisdictional profits and losses. Changes in the jurisdictional mix of profits and losses may cause fluctuations in the effective tax rate.

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

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



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



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



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



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



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| |  |  | our operating results before taxes.
| | - |  | -----------------------------------

We face risks related to intellectual property.

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

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

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

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

Intellectual Property Litigation

We have
received certain claims of infringement of intellectual property rights and may receive other such claims in the future. For example, we were served with a complaint on March 23, 2010 for an intellectual property claim seeking injunctive relief and
unspecified damages. In the past claims of infringement of intellectual property rights have sometimes evolved into legal proceedings or litigation against us, and they may continue to do so in the future. It is inherently difficult to assess the
outcome of litigation. Although we believe we have meritorious defenses to these claims and that the outcome of the litigation will not have a material adverse impact on our business, financial condition, or results of operations, there can be no
assurances that Novellus will prevail. Any such litigation could result in substantial cost to us, including diversion of the efforts of our technical and management personnel, and this could have an adverse effect on our business, financial
condition and operating results. If we are unable to successfully defend against such claims, we could be required to expend significant resources to develop or license alternative non-infringing technology or to obtain a license to the subject
technology. There is no assurance that we will be successful with such development, or that a license will be available on terms acceptable to us, if at all. Without such a license, we could be prohibited from future sales of the infringing product
or products, which could materially and adversely affect our business, financial condition and operating results.

Other Litigation

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



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

We review our long-lived assets, including goodwill and other intangible assets, for impairment annually in the fourth
quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We recorded an impairment charge in the fourth quarter of 2008 to reduce the carrying value of goodwill within our
Industrial Applications Group, or, IAG reporting unit. While the estimated fair value for this reporting unit exceeded its book value in our annual impairment test for 2009, our impairment analysis for IAG is sensitive to small changes to estimates
and assumptions in our valuation model. There were no impairment charges taken in 2009. Given the relatively low fair value of this reporting unit, we believe it is reasonably possible that IAG could fail the first step in a future annual impairment
test, which could result in additional impairment charges and negatively impact our results of operations.

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

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

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

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

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

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



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

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

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

We outsource the manufacture of most subassemblies, which enables us to focus on performing system design, assembly and testing in-house, thereby
minimizing our fixed costs and capital expenditures. Although we make reasonable efforts to ensure that third party providers will perform to our standards, our reliance on suppliers and subcontractors limits our control over quality assurance and
delivery schedules. Defects in workmanship, unacceptable yields, manufacturing disruptions and difficulties in obtaining export and import approvals may impair our ability to manage inventory and cause delays in shipments and cancellation of orders
that may adversely affect our relationships with current and prospective customers and enable competitors to penetrate our customer accounts. In addition, third party providers may prioritize capacity for larger competitors or increase prices to us,
which may adversely affect our profitability and our ability to respond to pricing pressures from competitors and customers.

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

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

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

We are exposed to the risks of
global operations.

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



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



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



| |  |  | potential adverse tax consequences, including withholding tax rules that may limit the repatriation of our earnings, and higher effective income tax
rates in foreign countries where we conduct business;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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| |  |  | tariffs and other trade barriers;
| | - |  | ---------------------------------



| |  |  | challenges in staffing and managing foreign operations and providing prompt and effective field support to our customers outside of the United States;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in managing foreign distributors;
| | - |  | ----------------------------------------------



| |  |  | governmental controls, either by the United States or other countries, that restrict our business overseas or the import or export of semiconductor
products, or increase the cost of our operations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

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

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

We are subject to increasingly strict environmental
regulations.

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

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

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

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



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

From time to time, in the normal course of business, we indemnify third parties with whom we enter into contractual relationships,
including customers and lessors, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other
third party claims that our products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. We have been, and in the future may be, compelled to
enter into or accrue for probable settlements of alleged indemnification obligations or become subject to potential liability arising from our customers involvements in legal disputes. It is difficult to determine the maximum potential amount
of liability under any indemnification obligations, whether or not asserted, due to our limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Our business,
financial condition and results of operations in a reported fiscal period could be materially adversely affected if we expend significant amounts in defending or settling any purported claims, regardless of their merit or outcomes.

We are exposed to risks associated with our diversification strategy.

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

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

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



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



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



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



| |  |  | revenue and expense levels of acquired entities differing from those anticipated at the time of the acquisitions;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in managing geographically dispersed operations;
| | - |  | -------------------------------------------------------------



| |  |  | the potential loss of key employees, customers and strategic partners of acquired companies;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | claims by terminated employees, shareholders of acquired companies or other third parties related to the transaction;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | the issuance of securities dilutive to current shareholders, assumption or incurrence of additional debt obligations or expenses, or use of substantial
portions of our cash;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | diversion of managements attention from normal daily operations of the business;
| | - |  | ---------------------------------------------------------------------------------



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



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

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

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

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

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



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



|ITEM 2: | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

Repurchase of Company Securities

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

Following is a summary of our stock repurchases pursuant to our
publicly announced plans for the quarter ended March 27, 2010.



|                                           |  |                                 |  |                            |       |                                                                              |         |                                                                                      |   |              
|------------------------------------------ |  | ------------------------------- |  | -------------------------- | ----- | ---------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------------ | - | -------------
|Period                                     |  | Total Number ofShares Purchased |  | Average PricePaid PerShare |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor
Programs |         | ApproximateDollar Value ofShares that Mayyet be 
PurchasedUnder the Plans orPrograms
|January 1, 2010 through January 30, 2010   |  | 312,300                         |  | $                          | 21.42 |                                                                              | 312,300 |                                                                                      | $ | 796.9 million
|January 31, 2010 through February 27, 2010 |  | 294,100                         |  | $                          | 21.50 |                                                                              | 294,100 |                                                                                      | $ | 790.6 million
|February 28, 2010 through March 27, 2010   |  | 102,400                         |  | $                          | 21.76 |                                                                              | 102,400 |                                                                                      | $ | 788.3 million
|                                           |  |                                 |  |                            |       |                                                                              |         |                                                                                      |   |              
|Total                                      |  | 708,800                         |  | $                          | 21.50 |                                                                              | 708,800 |                                                                                      | $ | 788.3 million
|                                           |  |                                 |  |                            |       |                                                                              |         |                                                                                      |   |              

In addition to shares repurchased above, we withheld 5,404 shares through net share settlements for the three
months ended March 27, 2010 upon the vesting of restricted stock awards. For the majority of restricted stock awards granted, the number of shares issued on the date the restricted stock awards vest is net of the minimum statutory withholding
requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. These withheld shares are not included within common stock repurchases under our authorized plan.

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



|ITEM 6: | EXHIBITS
|------- | --------

(a) Exhibits



|       |  |                                                                                                                                                                                                                                                                                                                
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.27 |  | Letter Agreement between Novellus Systems, Inc. and Jeffrey Benzing dated January 8, 2010.                                                                                                                                                                                                                     
|       | 
|*10.28 |  | Restricted Stock Purchase Agreement between Novellus Systems, Inc. and Richard S. Hill dated January 28, 2010.                                                                                                                                                                                                 
|       | 
|31.1   |  | Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated May 5, 2010 in accordance with Rules 13a-14(a) and
15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2   |  | Certification of Jeffrey C. Benzing, Executive Vice President and Chief Administrative Officer of Novellus Systems, Inc. dated May 5, 2010 in accordance with Rules 13a-14(a)
and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  
|       | 
|32.1   |  | Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated May 5, 2010 in accordance with 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                          
|       | 
|32.2   |  | Certification of Jeffrey C. Benzing, Executive Vice President and Chief Administrative Officer of Novellus Systems, Inc. dated May 5, 2010 in accordance with 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                            
|       | 
|*      |  | Management contracts or compensatory plans or arrangements.                                                                                                                                                                                                                                                    



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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/ Jeffrey C. BenzingJeffrey C. BenzingExecutive Vice President and Chief Administrative Officer(Principal Financial Officer)May 5, 2010




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EXHIBIT INDEX



|       |  |                                                                                                                                                                                                                                                                                                                
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.27 |  | Letter Agreement between Novellus Systems, Inc. and Jeffrey Benzing dated January 8, 2010.                                                                                                                                                                                                                     
|       | 
|*10.28 |  | Restricted Stock Purchase Agreement between Novellus Systems, Inc. and Richard S. Hill dated January 28, 2010.                                                                                                                                                                                                 
|       | 
|31.1   |  | Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated May 5, 2010 in accordance with Rules 13a-14(a) and
15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|       | 
|31.2   |  | Certification of Jeffrey C. Benzing, Executive Vice President and Chief Administrative Officer of Novellus Systems, Inc. dated May 5, 2010 in accordance with Rules 13a-14(a) and
15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  
|       | 
|32.1   |  | Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated May 5, 2010 in accordance with 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                          
|       | 
|32.2   |  | Certification of Jeffrey C. Benzing, Executive Vice President and Chief Administrative Officer of Novellus Systems, Inc. dated May 5, 2010 in accordance with 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                            
|       | 
|*      |  | Management contracts or compensatory plans or arrangements.                                                                                                                                                                                                                                                    



40