NOVELLUS SYSTEMS INC (Form: 10-Q, Received: 11/05/2008 17:20:23)

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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 September 27, 2008

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

For the transition period from to

Commission File Number 000-17157

NOVELLUS SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)


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

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

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

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 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 October 31, 2008, 97,664,418 shares of the Registrant’s common stock, no par value, were issued and outstanding.

NOVELLUS SYSTEMS, INC.

FORM 10-Q

QUARTER ENDED September 27, 2008

TABLE OF CONTENTS


		Page
Part I: Financial Information
Item 1:	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 27, 2008 and September 29, 2007	3
	Condensed Consolidated Balance Sheets as of September 27, 2008 and December 31, 2007	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2008 and September 29, 2007	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4:	Controls and Procedures	24
Part II: Other Information
Item 1:	Legal Proceedings	25
Item 1A:	Risk Factors	26
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6:	Exhibits	34
Signatures		35
EXHIBIT 10.9
EXHIBIT 10.28
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I: FINANCIAL INFORMATION

ITEM 1:

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 27, 2008		September 29, 2007		September 27, 2008		September 29, 2007
	(In thousands, except per share amounts)
Net sales	$	250,098	$	393,277	$	822,551	$	1,206,586
Cost of sales		138,574		198,970		455,124		609,260

Gross profit		111,524		194,307		367,427		597,326
Operating expenses:
Selling, general and administrative		53,858		67,420		176,717		206,531
Research and development		51,649		61,384		168,804		185,158

Total operating expenses		105,507		128,804		345,521		391,689

Operating income		6,017		65,503		21,906		205,637
Interest and other income, net:
Interest income, net		2,588		8,617		7,667		25,005
Other income, net		467		316		1,413		9,632

Total interest and other income, net		3,055		8,933		9,080		34,637

Income before provision for income taxes		9,072		74,436		30,986		240,274
Provision for income taxes		7,675		24,725		16,445		79,435

Net income	$	1,397	$	49,711	$	14,541	$	160,839

Net income per share:
Basic	$	0.01	$	0.41	$	0.15	$	1.31

Diluted	$	0.01	$	0.41	$	0.15	$	1.28

Shares used in basic per share calculations		97,581		120,414		98,807		122,730

Shares used in diluted per share calculations		98,348		121,902		99,550		125,244

See accompanying notes to Condensed Consolidated Financial Statements.

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 27, 2008			December 31, 2007 *
	(Unaudited)
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	162,231		$	175,071
Short-term investments		293,073			421,695
Accounts receivable, net		210,445			346,866
Inventories		211,810			212,995
Deferred tax assets, net		31,544			48,965
Restricted cash and cash equivalents, current		143,314			—
Prepaid and other current assets		23,214			18,366

Total current assets		1,075,631			1,223,958
Property and equipment, net		287,706			320,009
Restricted cash and cash equivalents		3,515			161,050
Investments		100,467			—
Goodwill		238,492			238,944
Intangible and other assets		115,433			132,982

Total assets	$	1,821,244		$	2,076,943

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	73,279		$	97,135
Accrued payroll and related expenses		42,206			73,273
Accrued warranty		32,477			44,864
Other accrued liabilities		46,406			50,183
Deferred profit		24,078			52,252
Current debt obligations		129,479			1,509

Total current liabilities		347,925			319,216
Long-term debt		1,325			143,267
Long-term income taxes payable		25,433			27,408
Other non-current liabilities		49,672			57,965

Total liabilities		424,355			547,856
Commitments and contingencies
Shareholders’ equity:
Common stock		1,165,488			1,219,533
Retained earnings		233,767			304,278
Accumulated other comprehensive income (loss)		(2,366	)		5,276

Total shareholders’ equity		1,396,889			1,529,087

Total liabilities and shareholders’ equity	$	1,821,244		$	2,076,943

*	Amounts are derived from the December 31, 2007 audited consolidated financial statements.

See accompanying notes to Condensed Consolidated Financial Statements.

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 27, 2008			September 29, 2007
	(In thousands)
Cash flows from operating activities:
Net income	$	14,541		$	160,839
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on disposal of property and equipment		2,153			50
Depreciation and amortization		47,464			50,709
Deferred income taxes		6,073			24,479
Stock-based compensation		24,836			28,227
Tax benefit realized from stock-based compensation		976			3,251
Excess tax benefit from stock-based compensation		(97	)		(782	)
Other-than-temporary impairment of short-term investment		737			1,763
Other non-cash charges, net		2,177			2,052
Changes in operating assets and liabilities:
Accounts receivable, net		137,236			(48,864	)
Inventories		6,525			(28,183	)
Prepaid and other assets		17,834			(2,885	)
Accounts payable		(9,423	)		7,930
Accrued payroll and related expenses		(26,632	)		(8,828	)
Accrued warranty		(17,147	)		3,781
Other liabilities		(6,708	)		26,537
Deferred profit		(28,688	)		15,963

Net cash provided by operating activities		171,857			236,039

Cash flows from investing activities:
Proceeds from sales of short-term and long-term investments		311,550			669,945
Proceeds from maturities of short-term investments		78,110			176,380
Purchases of short-term investments		(375,304	)		(807,424	)
Capital expenditures		(16,677	)		(26,949	)
Decrease (increase) in restricted cash and cash equivalents		14,221			(7,234	)
Other		—			(64	)

Net cash provided by investing activities		11,900			4,654

Cash flows from financing activities:
Proceeds from employee stock compensation plans		6,415			33,777
Proceeds from (repayments of) lines of credit, net		534			(11,964	)
Payments on debt obligations		(15,568	)		(21	)
Repurchases of common stock		(188,886	)		(216,893	)
Excess tax benefit from stock-based compensation		97			782

Net cash used in financing activities		(197,408	)		(194,319	)

Effects of exchange rate changes on cash and cash equivalents		811			814

Net increase (decrease) in cash and cash equivalents		(12,840	)		47,188
Cash and cash equivalents at the beginning of the period		175,071			58,463

Cash and cash equivalents at the end of the period	$	162,231		$	105,651

See accompanying notes to Condensed Consolidated Financial Statements.

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 and Article 10 of Regulation S-X. The interim financial information is unaudited and does not include all of the information and footnotes required by 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 and nine months ended September 27, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or any future period. The interim financial statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in Novellus’ Annual Report on Form 10-K for the year ended December 31, 2007.

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 are believed 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 under different assumptions or conditions.

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. Warranty obligations in the amount of $10.0 million have been reclassified from Accrued warranty to Other non-current liabilities in the December 31, 2007 Condensed Consolidated Balance Sheet to conform to the 2008 financial statement presentation. This reclassification did not affect any prior amounts of reported total assets, liabilities, stockholders’ equity, results of operations or cash flows.

Derivatives

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

Cash Flow Hedges

We designate and document as cash flow hedges foreign currency forward exchange contracts 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 each hedge’s effectiveness 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 Other comprehensive income (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. During the three months ended September 27, 2008 and September 29, 2007, gains of $0.1 million and $0.8 million, respectively, were recorded in Net sales due to hedge ineffectiveness. During the nine months ended September 27, 2008 and September 29, 2007, gains of $0.5 million and $2.7 million, respectively, were recorded in Net sales due to hedge ineffectiveness. In the event it becomes probable that an anticipated hedged transaction will not occur as a result of the associated shipment date pushing outside of the forecasted range, the gains or losses on the related cash flow hedges are reclassified from Accumulated other comprehensive income (loss) to Net sales in the Condensed Consolidated Statement of Operations. No such events occurred during the three months ended September 27, 2008 and September 29, 2007. During both of the nine months ended September 27, 2008 and September 29, 2007, we reclassified losses of $0.7 million into Net sales as a result of the discontinuance of hedged anticipated transactions.

The following table summarizes the pre-tax impact of cash flow hedges on OCI during the three and nine months ended September 27, 2008 and September 29, 2007.


	Three Months Ended						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(In thousands)
Balance, beginning of period – gains (losses)	$	341		$	1,805		$	(2,578	)	$	(329	)
Effective portion of hedge remeasurement		(61	)		(4,533	)		(450	)		(3,641	)
Reclassification to Net sales		269			(433	)		3,577			809

Balance, end of period – gains (losses)	$	549		$	(3,161	)	$	549		$	(3,161	)

We anticipate reclassifying the net gains recorded as of September 27, 2008 from OCI to Net sales within 12 months.

Net Investment Hedges

We hedge our net investment in certain foreign subsidiaries to reduce economic currency risk. The foreign currency forward exchange contracts used to hedge this exposure are designated and documented as net investment hedges. 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. A gain of $1.2 million and a loss of $0.1 million were recorded in OCI for net investment hedges during the three months ended September 27, 2008 and September 29, 2007, respectively, and losses of $0.5 million and $0.4 million were recorded in OCI during the nine months ended September 27, 2008 and September 29, 2007, respectively. Ineffectiveness, if any, along with the excluded time value of the forward contracts, is recorded as foreign currency gain or loss in Other income, net. We recorded gains due to ineffectiveness of $0.1 million during both of the three months ended September 27, 2008 and September 29, 2007 and gains of $0.5 million during both of the nine months ended September 27, 2008 and September 29, 2007.

Other Foreign Currency Hedges

We enter into foreign currency forward exchange contracts (a) to hedge intercompany balances denominated in non-functional currencies, (b) to hedge certain third-party receivables denominated in Japanese yen and (c) to hedge anticipated sales denominated in foreign currency that do not qualify for special hedge accounting treatment under SFAS 133 due to uncertainty surrounding the timing of shipment. The maturities of these contracts are generally less than 12 months. Gains or losses arising from the remeasurement of these contracts to fair value each period are recorded in Other income, net. During the three months ended September 27, 2008 and September 29, 2007, we recorded derivative losses on these hedges of $2.5 million and $3.5 million, respectively, and during the nine months ended September 27, 2008 and September 29, 2007, we recorded derivative losses on these hedges of $6.7 million and $0.9 million, respectively.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157), which establishes specific criteria for the fair value measurements of financial and nonfinancial assets and liabilities that are already subject to fair value under current accounting rules. SFAS 157 also requires expanded disclosures related to fair value measurements. See Note 3 for information about fair value measurements.

In February 2008, the FASB issued FASB Staff Position (FSP) of Financial Accounting Standards (FAS) 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which allows companies to elect a one-year delay in applying SFAS 157 to certain fair value measurements of non-financial instruments, except for those recognized or disclosed at fair value on at least an annual basis. We elected the delayed adoption date for the portions of SFAS 157 impacted by FSP 157-2 and, as a result, we partially adopted SFAS 157 on January 1, 2008. The partial adoption of SFAS 157 was prospective and did not have a significant effect on our Condensed Consolidated Financial Statements. We are currently evaluating the impact of applying the deferred portion of SFAS 157 to the nonrecurring fair value measurements of our nonfinancial assets and nonfinancial liabilities. In accordance with FSP 157-2, the fair value measurements for these items will be adopted effective January 1, 2009.

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3), which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of this standard as of September 27, 2008 did not have a significant impact on our Condensed Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of SFAS 115” (SFAS 159). SFAS 159 permits a company to voluntarily elect to use fair value, instead of historic or original cost, to account for certain financial assets and liabilities. The fair value option is designated on an item-by-item basis, is irrevocable and requires that changes in fair value in subsequent periods be recognized in earnings in the period of change. We adopted SFAS 159 on January 1, 2008. The adoption had no impact on our Condensed Consolidated Financial Statements as we did not make a fair value election for any of our existing financial assets and liabilities. Any election to use the fair value method for future eligible transactions will be made on a case-by-case and instrument-by-instrument basis.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R). Under SFAS 141R, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS 141R will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (SFAS 160), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We do not expect that the adoption of SFAS 160 will have a significant impact on our Condensed Consolidated Financial Statements as all of our subsidiaries are currently wholly owned.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (SFAS 161), which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We are currently evaluating the impact of SFAS 161 on our Condensed Consolidated Financial Statements.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FSP 142-3 provides guidance with respect to estimating the useful lives of recognized intangible assets acquired on or after the effective date and requires additional disclosure related to the renewal or extension of the terms of recognized intangible assets. FSP 142-3 is effective for fiscal years and interim periods beginning after December 15, 2008. We are currently evaluating the impact of FSP 142-3 on our Condensed Consolidated Financial Statements.

Note 2. Net Income Per Share

Basic net income per share is computed by dividing Net income by the weighted-average number of common shares outstanding during the period. For purposes of computing basic net income per share, the weighted-average number of outstanding shares of common stock excludes unvested restricted stock awards, consisting of restricted stock and restricted stock units that may be settled in our common shares.

Diluted net income per share is computed by dividing Net income by the weighted-average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist primarily of stock options and restricted stock awards.

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


	Three Months Ended				Nine Months Ended
	September 27, 2008		September 29, 2007		September 27, 2008		September 29, 2007
	(In thousands, except per share amounts)
Numerator:
Net income	$	1,397	$	49,711	$	14,541	$	160,839

Denominator:
Basic weighted-average shares outstanding		97,581		120,414		98,807		122,730
Dilutive common equivalent shares		767		1,488		743		2,514

Diluted weighted-average shares outstanding		98,348		121,902		99,550		125,244

Net income per share – Basic	$	0.01	$	0.41	$	0.15	$	1.31
Net income per share – Diluted	$	0.01	$	0.41	$	0.15	$	1.28

For the three months ended September 27, 2008 and September 29, 2007, 19.5 million and 15.4 million shares, respectively, and for the nine months ended September 27, 2008 and September 29, 2007, 20.1 million and 11.0 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive. Generally, options are considered anti-dilutive when their exercise prices are greater than or equal to the average market value of our common shares during the period of measurement. Restricted stock awards representing 0.8 million shares for both of the three and nine months ended September 27, 2008 and September 29, 2007 were excluded from the computation of diluted shares outstanding as the shares underlying these awards were subject to performance conditions that had not been met.

Note 3. Financial Instruments

Assets and liabilities measured at fair value on a recurring basis are as follows at September 27, 2008:


	Fair Value Measurement at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets
Money market funds	$	259,518	$	—	$	—	$	259,518
Municipal bonds		—		208,164		—		208,164
Variable-rate demand notes		—		65,156		—		65,156
Auction-rate securities		—		—		102,367		102,367
Derivative assets (1)		—		1,972		—		1,972

Total	$	259,518	$	275,292	$	102,367	$	637,177

Liabilities
Derivative liabilities (1)	$	—	$	1,219	$	—	$	1,219

Total	$	—	$	1,219	$	—	$	1,219

(1)	See Note 1 of our Condensed Consolidated Financial Statements.

Money Market Funds

Money market funds include $116.2 million classified as Cash and cash equivalents and $143.3 million classified as Restricted cash and cash equivalents, current, on our Condensed Consolidated Balance Sheet.

Municipal Bonds

Municipal bonds are bonds issued by state and local governments and other governmental entities such as authorities or special districts. These are classified as available-for-sale within Short-term investments on our Condensed Consolidated Balance Sheet. We used the market approach to value municipal bonds. We classified these securities as Level 2 instruments due to either 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.

Variable-Rate Demand Notes

Variable-rate demand notes are long-term, floating-rate obligations that are payable on demand. These are classified as available-for-sale within Short-term investments on our Condensed Consolidated Balance Sheet. We used the market approach to value variable-rate demand notes. We classified these securities as Level 2 instruments due to either our usage 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.

Auction-Rate Securities

Auction-rate securities include auction-rate notes and auction-rate preferred shares of tax-exempt closed-end municipal funds. Our auction-rate notes consist of student loans that are substantially backed by the federal government. Beginning in February 2008, our auction-rate securities became illiquid as their scheduled auctions failed to settle. An auction failure occurs when the parties wishing to sell securities cannot. As a result, the affected securities begin to pay interest under their default interest rate features. 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 September 27, 2008 we have recorded a temporary impairment charge of $10.7 million within OCI based upon our assessment of the fair value of our auction-rate securities. The impairment of these securities is temporary as we have both the ability and intent to hold these securities to recovery. Our valuation of these securities incorporates our assumptions about the anticipated term and the yield that a market participant would require to purchase such a security in the marketplace. We have included auction-rate securities, of which $1.9 million are classified as Short-term investments and $100.5 million are classified as non-current assets on our Condensed Consolidated Balance Sheet, in the Level 3 fair value category, as there are significant unobservable inputs to our cash-flow-based valuation model.

The table below presents a reconciliation of all financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 27, 2008. We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs. All Level 3 financial instrument activities for the three and nine months ended September 27, 2008 are related to auction-rate securities.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended			Nine Months Ended
	September 27, 2008			September 27, 2008
	(In thousands)
Balance, beginning of period	$	112,055			—
Transfers in and/or out of Level 3		—			123,420
Total net gains or losses (realized and unrealized):
Included in Net income (loss)		—			—
Included in Other comprehensive income (loss)		(3,588	)		(10,733	)
Purchases, issuances and settlements, net		(6,100	)		(10,320	)

Balance, end of period	$	102,367		$	102,367

Note 4. Inventories

Inventories are stated at the lower of cost, on a first-in, first-out basis, or market. As of the balance sheet date, inventories consisted of the following:


	September 27, 2008		December 31, 2007
	(In thousands)
Purchased and spare parts	$	146,175	$	147,475
Work-in-process		38,747		39,105
Finished goods		26,888		26,415

Total inventories	$	211,810	$	212,995

Note 5. Goodwill and Intangible Assets

Goodwill

A summary of changes in goodwill during the nine months ended September 27, 2008 is as follows:


	Semiconductor Group		Industrial Applications Group			Total
	(In thousands)
Balance, beginning of period	$	108,431	$	130,513		$	238,944
Foreign currency translation adjustments		—		(452	)		(452	)

Balance, end of period	$	108,431	$	130,061		$	238,492

There have been no significant events or circumstances affecting the valuation of goodwill since our annual impairment test was performed in the fourth quarter of 2007 when we concluded no impairment existed.

Intangible Assets

The following tables provide details of our acquired intangible assets:


	September 27, 2008								December 31, 2007
	Weighted Average Amortization Period	Gross		Accumulated Amortization			Net		Weighted Average Amortization Period	Gross		Accumulated Amortization			Net
	(Years)	(In thousands)							(Years)	(In thousands)
Patents and other intangible assets	12	$	16,661	$	(2,755	)	$	13,906	12	$	16,661	$	(1,679	)	$	14,982
Developed technology	6		30,229		(25,952	)		4,277	6		30,270		(22,169	)		8,101
Trademark	10		7,447		(3,165	)		4,282	10		7,473		(2,616	)		4,857

Total intangible assets	8	$	54,337	$	(31,872	)	$	22,465	8	$	54,404	$	(26,464	)	$	27,940

Our estimated amortization expense for currently recognized identifiable intangible assets is approximately $1.6 million in the fourth quarter of 2008, and $4.3 million, $3.2 million, $2.1 million, $2.1 million and $2.1 million for the years ending December 31, 2009, 2010, 2011, 2012 and 2013, respectively. As of September 27, 2008, we had no identifiable intangible assets with indefinite lives.

Note 6. Product Warranty

We record the estimated cost of warranty coverage to Cost of sales when revenue is recognized. The estimated cost of warranty is determined by the warranty term as well as the average historical labor and material costs for a specific product. We review the actual product failure rates and material usage rates on a quarterly basis and adjust our warranty liability as necessary. Product warranty obligations that extend for more than twelve months from our balance sheet date are included in Other non-current liabilities. Changes in the accrued warranty liability were as follows:


	Three Months Ended						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(In thousands)
Balance, beginning of period	$	41,361		$	58,650		$	54,857		$	55,349
Warranties issued		12,718			18,992			44,578			61,888
Settlements		(16,035	)		(18,199	)		(59,273	)		(57,928	)
Net changes in liability for pre-existing warranties, including expirations		(250	)		(106	)		(2,368	)		28

Balance, end of period	$	37,794		$	59,337		$	37,794		$	59,337
Less: Long-term portion		(5,317	)		(11,239	)		(5,317	)		(11,239	)
Accrued warranty, current	$	32,477		$	48,098		$	32,477		$	48,098

Note 7. Restructuring and Other Charges

As of September 27, 2008, substantially all actions under our restructuring plans were completed, except for payments of future rent obligations. The remaining excess facility costs are stated at estimated net present value, net of estimated sublease income. We expect to pay remaining obligations in connection with vacated facilities no later than the expiration dates of the lease terms, which expire on various dates through 2017. An adjustment of prior restructuring costs was made due to changes in estimated sublease income over the remaining lease term. This adjustment is included within Selling, general and administrative expenses. All remaining restructuring activity relates to the Semiconductor Group (see Note 12. Operating Segments).

The following table summarizes our facilities restructuring activity for the three and nine months ended September 27, 2008 and September 29, 2007:


	Three Months Ended						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(In thousands)
Balance, beginning of period	$	16,823		$	15,700		$	17,654		$	17,503
Adjustment of prior restructuring costs		1,819			—			2,861			—
Cash payments		(1,234	)		(1,248	)		(3,107	)		(3,051	)

Balance, end of period	$	17,408		$	14,452		$	17,408		$	14,452

In addition to the restructuring activity above, results of operations for the nine months ended September 27, 2008 include $13.6 million of charges recorded in the second quarter of 2008 as a result of strategic decisions to focus on our core products and reduce our cost structure going forward. These charges include: (a) impairments of inventory and evaluation systems of $6.4 million, (b) write-downs of certain research and development assets of $3.8 million and (c) reductions in workforce of $3.4 million. Of these charges, $6.5 million are in Cost of sales, $4.3 million are in Research and development expenses and $2.8 million are in Selling, general and administrative expenses.

Note 8. Debt Obligations

As of September 27, 2008, we had borrowings of $130.8 million denominated in Euros and Swiss francs. The weighted-average interest rate on these borrowings was 4.5% as of September 27, 2008. Substantially all of these borrowings are secured by cash and cash equivalents and are due and payable on or before June 25, 2009. Amounts to secure these borrowings are included within Restricted cash and cash equivalents, current on our Condensed Consolidated Balance Sheet.

Note 9. Other Income, Net

The components of other income, net are as follows:


	Three Months Ended						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(In thousands)
Other income and expenses, net	$	711		$	2,297		$	3,794		$	7,213
Other-than-temporary impairment of short-term investment		—			(1,763	)		(737	)		(1,763	)
Foreign currency gain (loss), net		(244	)		(218	)		(1,644	)		4,182

Total other income, net	$	467		$	316		$	1,413		$	9,632

Note 10. Shareholders’ Equity

Other Comprehensive Income (Loss)

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


	Three Months Ended						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(In thousands)
Net income	$	1,397		$	49,711		$	14,541		$	160,839
Other comprehensive income (loss):
Foreign currency translation adjustments		(3,016	)		3,568			116			3,238
Unrealized gain (loss) on short-term and long-term investments		(3,324	)		783			(10,885	)		(338	)
Unrealized gain (loss) on derivative instruments		208			(4,966	)		3,127			(2,832	)
Unrealized gain (loss) on minimum pension liability adjustment		22			(44	)		—			(37	)

Comprehensive income (loss)	$	(4,713	)	$	49,052		$	6,899		$	160,870

The components of accumulated other comprehensive income (loss) are as follows:


	September 27, 2008			December 31, 2007
	(In thousands)
Foreign currency translation adjustments	$	8,180		$	8,064
Unrealized loss on short-term and long-term investments		(10,898	)		(13	)
Unrealized gain (loss) on derivative instruments		549			(2,578	)
Unrealized loss on minimum pension liability adjustment		(197	)		(197	)

Accumulated other comprehensive income (loss)	$	(2,366	)	$	5,276

Common Stock Repurchase Program

The Board of Directors has authorized the repurchase of outstanding common stock, including approvals of $1.0 billion on September 14, 2004 and another $1.0 billion on October 26, 2007. As of September 27, 2008, we had $845.9 million available for stock repurchases under these authorizations. For the nine months ended September 27, 2008 and September 29, 2007, 7.6 million and 8.0 million shares, respectively, were repurchased under this plan for $173.8 million and $226.9 million, respectively, at a weighted average purchase price of $22.74 and $28.39, respectively.

Note 11. 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 complaint seeks damages (including punitive damages), declaratory relief and injunctions for causes of action involving alleged breach of contract, fraud, unfair competition and breach of warranty. The Superior Court dismissed Linear’s claims for fraud and unfair competition on October 5, 2004. The Court of Appeal affirmed this dismissal on June 18, 2007. Trial on the remaining claims is currently set for May 26, 2009. At this time, we cannot predict the ultimate outcome of this case, nor can we estimate a range of potential loss, if any. However, we believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Other Litigation

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

Note 12. Income Taxes

Our effective tax rates were 84.6% and 33.2% for the three months ended September 27, 2008 and September 29, 2007, respectively, and 53.1% and 33.1% for the nine months ended September 27, 2008 and September 29, 2007, respectively. The higher effective tax rates for 2008 are principally the result of decreased profits before taxes and an unfavorable mix of our anticipated annual operating results, particularly in certain foreign jurisdictions. This increased our effective tax rate for the nine months ended September 27, 2008 to 53.1% from 40.0% for the six months ended June 28, 2008 resulting in an 84.6% effective tax rate for the three months ended September 27, 2008.

Note 13. Stock-Based Compensation

The following table summarizes the stock-based compensation expense for stock options, restricted stock and employee stock purchase plan (ESPP) included in our Condensed Consolidated Statements of Operations:


	Three Months Ended						Nine Months Ended
	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(In thousands)
	(1)			(2)			(1)			(2)
Cost of sales	$	749		$	543		$	2,166		$	1,619
Selling, general and administrative		4,632			6,674			15,140			17,619
Research and development		2,558			2,987			7,530			8,989

Stock-based compensation expense		7,939			10,204			24,836			28,227
Income tax benefit		(2,015	)		(3,449	)		(6,368	)		(7,805	)

Total stock-based compensation, net of income tax benefit	$	5,924		$	6,755		$	18,468		$	20,422

(1)	Amounts include amortization expense related to stock options of $4.0 million and $12.9 million, ESPP of $0.6 million and $2.0 million, and restricted stock awards of $3.3 million and $9.9 million for the three and nine months ended September 27, 2008, respectively.

(2)	Amounts include amortization expense related to stock options of $5.4 million and $15.3 million, ESPP of $0.8 million and $2.2 million, and restricted stock awards of $4.0 million and $10.7 million for the three and nine months ended September 29, 2007, respectively.

Stock Options

The exercise price of each stock option equals the 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				Nine Months Ended
	September 27, 2008		September 29, 2007		September 27, 2008		September 29, 2007
Risk-free interest rate	2.6	%	4.6	%	2.7	%	4.7	%
Volatility	52.7	%	48.6	%	51.7	%	47.6	%
Expected term	4.3 years		4.4 years		4.3 years		4.4 years
Dividends	None		None		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 during the nine months ended September 27, 2008 is as follows:


	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value
	(In thousands)					(In thousands)
Outstanding, beginning of period	21,774		$	31.99	5.62	$	17,187
Grants	151			22.16
Exercises	(114	)		14.36
Forfeitures or expirations	(2,238	)		32.53

Outstanding, end of period	19,573		$	31.95	4.94	$	1,065

Vested and expected to vest, end of period	19,047		$	32.05	4.84	$	1,065
Exercisable, end of period	15,267		$	33.00	4.05	$	1,065

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 0.3 million and 7.2 million shares that had exercise prices lower than the market price of our common stock as of September 27, 2008 and December 31, 2007, respectively. The aggregate intrinsic value of options exercised, determined as of the date of exercise, was $0.2 million and $1.1 million during the three months ended September 27, 2008 and September 29, 2007, respectively, and $0.9 million and $7.9 million during the nine months ended September 27, 2008 and September 29, 2007, respectively. The weighted-average grant date fair value of options granted during the three months ended September 27, 2008 and September 29, 2007 was $9.40 and $13.39, respectively, and during the nine months ended September 27, 2008 and September 29, 2007 was $9.80 and $13.76, respectively. The total cash received from employees as a result of stock option exercises was $0.7 million and $3.7 million during the three months ended September 27, 2008 and September 29, 2007, respectively, and $1.6 million and $29.1 million during the nine months ended September 27, 2008 and September 29, 2007, respectively. In connection with these exercises and the disqualification of incentive stock options, we realized a tax benefit of $0.1 million and $0.4 million for the three months ended September 27, 2008 and September 29, 2007, respectively, and $0.2 million and $2.4 million for the nine months ended September 27, 2008 and September 29, 2007, respectively. We settle employee stock option exercises with newly issued common shares.

As of September 27, 2008 there was $29.1 million of unrecognized compensation cost related to unvested stock options, of which $4.4 million is expected to be recognized in the fourth quarter of 2008, and $12.8 million, $9.1 million, $2.7 million and $0.1 million is expected to be recognized in 2009, 2010, 2011 and 2012, respectively.

Restricted Stock

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 during the nine months ended September 27, 2008 is as follows:


	Number of Shares		Weighted-Average Grant Date Fair Value
	(In thousands)
Unvested restricted stock awards, beginning of period	2,765		$	28.45
Granted	268			22.94
Vested	(72	)		27.64
Forfeited	(285	)		28.17

Unvested restricted stock awards, end of period	2,676		$	27.95

The unvested restricted stock awards at September 27, 2008 include 1.2 million of restricted stock units.

The total fair value of restricted stock awards that vested was $0.1 million and $0.3 million during the three months ended September 27, 2008 and September 29, 2007, respectively, and $1.7 million and $1.8 million during the nine months ended September 27, 2008 and September 29, 2007, respectively. In connection with the vesting of these awards, we realized tax benefits of $0.1 million for the three months ended September 27, 2008 and $0.6 million for both of the nine months ended September 27, 2008 and September 29, 2007. No tax benefit was realized for the three months ended September 29, 2007. As of September 27, 2008, there was a total of 0.8 million shares of restricted stock awards subject to performance conditions that will result in forfeiture if the conditions are not met.

As of September 27, 2008 there was $24.9 million of unrecognized compensation cost related to restricted stock awards, of which $3.5 million is expected to be recognized in the fourth quarter of 2008, and $10.3 million, $6.3 million, $4.6 million and $0.2 million, is expected to be recognized in 2009, 2010, 2011 and 2012, respectively.

Employee Stock Purchase Plan

We have an ESPP that allows qualified employees to purchase shares of common stock at 85 percent of the fair market value on specified dates. There were no ESPP shares issued during the third quarter of 2008 and 2007. The weighted-average grant date fair value of shares for the three months ended September 27, 2008 and September 28, 2007 was $6.11 and $7.98, respectively, and for the nine months ended September 27, 2008 and September 29, 2007 was $6.64 and $7.51, respectively. The fair values of ESPP were estimated using the Black-Scholes valuation model with the following weighted-average assumptions:


	Three Months Ended				Nine Months Ended
	September 27, 2008		September 29, 2007		September 27, 2008		September 29, 2007
Risk-free interest rate	1.7	%	5.0	%	2.7	%	5.0	%
Volatility	40.0	%	31.6	%	39.3	%	32.6	%
Expected term	6 months		6 months		6 months		6 months
Dividends	None		None		None		None

Note 14. Operating Segments

Our operations are organized into two segments, the Semiconductor Group and the Industrial Applications Group. The Semiconductor Group develops, manufactures, sells and supports equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. The Industrial Applications Group is a supplier of lapping, grinding, polishing and deburring products 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, 2007.

Segment information for the periods presented is as follows:


	Three Months Ended September 27, 2008						Nine Months Ended September 27, 2008
	(In thousands)
	Semiconductor Group		Industrial Applications Group		Consolidated		Semiconductor Group		Industrial Applications Group		Consolidated
Sales to unaffiliated customers	$	207,050	$	43,048	$	250,098	$	685,672	$	136,879	$	822,551
Operating income	$	3,139	$	2,878	$	6,017	$	4,162	$	17,744	$	21,906

	Three Months Ended September 29, 2007						Nine Months Ended September 29, 2007
	(In thousands)
	Semiconductor Group		Industrial Applications Group		Consolidated		Semiconductor Group		Industrial Applications Group		Consolidated
Sales to unaffiliated customers	$	348,625	$	44,652	$	393,277	$	1,093,027	$	113,559	$	1,206,586
Operating income	$	58,855	$	6,648	$	65,503	$	192,139	$	13,498	$	205,637

	September 27, 2008						December 31, 2007
	(In thousands)
	Semiconductor Group		Industrial Applications Group		Consolidated		Semiconductor Group		Industrial Applications Group		Consolidated
Total assets	$	1,573,402	$	247,842	$	1,821,244	$	1,792,443	$	284,500	$	2,076,943

Note 15. Related Party Transactions

We lease an aircraft from a third-party entity wholly owned by Richard S. Hill, our Chairman and Chief Executive Officer. Under the aircraft lease agreement, we incurred lease expenses of $0.1 million and $0.2 million for the three months ended September 27, 2008 and September 29, 2007, respectively, and $0.6 million and $0.5 million for the nine months ended September 27, 2008 and September 29, 2007, respectively.

We employ immediate family members of certain executive officers in non-executive positions. We recognized aggregate compensation expense for these employees of $0.1 million during both of the three months ended September 27, 2008 and September 29, 2007 and $0.4 million during both of the nine months ended September 27, 2008 and September 29, 2007.

As of September 27, 2008 and December 31, 2007, we had outstanding loans to non-executive vice presidents and other key personnel of $1.0 million. As of September 27, 2008, 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.

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,” and similar expressions also identify forward-looking statements. The forward-looking statements include, without limitation: our anticipation to reclassify net gains recorded as of September 27, 2008 from OCI to Net sales within the next twelve months; our expectation that the adoption of certain accounting pronouncements will not have a significant impact on our Condensed Consolidated Financial Statements; our estimated amortization expense for currently recognized identifiable intangible assets in the fourth quarter of 2008 and for the years ending December 31, 2009, 2010, 2011, 2012 and 2013, respectively; our expectation that the remaining obligations in connection with vacated facilities will be satisfied no later than the lease terms, which expire on various dates through 2017; our expectation that the ultimate disposition of the Linear litigation will not have a material adverse effect on our business, financial condition or operating results; our expectation that $29.1 million of unrecognized compensation cost related to unvested stock options, of which $4.4 million is expected

to be recognized in the fourth quarter of 2008, and $12.8 million, $9.1 million, $2.7 million and $0.1 million is expected to be recognized in 2009, 2010, 2011 and 2012, respectively; our expectation that $24.9 million of unrecognized compensation cost related to restricted stock awards, of which $3.5 million is expected to be recognized in the fourth quarter of 2008 and $10.3 million, $6.3 million, $4.6 million and $0.2 million will be recognized in 2009, 2010, 2011 and 2012, respectively; our efforts 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 belief that our continued investment in research and development has positioned us for future growth; our expectation that the average selling price for memory chips will stabilize; our expectation that our customers capital spending will increase over the long term as demand from various industries continues to steadily rise; our belief that the shift to DRAM and NAND products will stimulate the development of more efficient tools to satisfy our customers’ needs; our belief that our customers are seeking more affordable technology to drive down their prices so they can continue to grow the market demand for their products; our continued focus on operational execution and a pairing down of certain research and development activities to improve profitability by reducing our cost structure; our expectation that net orders will fluctuate due to the cyclicality of the semiconductor industry; our plan to continue to focus on expanding our market presence in Asia; our belief that significant additional growth potential exists in the Asia region over the long term; our belief that significant investment in research and development is required to remain competitive; our plan to continue to invest in new products and enhancement of our current product lines; our intention to hold auction-rate securities to recovery; our belief that we will ultimately be able to liquidate our investments in auction-rate securities without significant loss through successful auctions, redemptions of securities by the issuers or upon maturity; our belief that the impairment of the auction-rate securities is temporary because they have either been guaranteed by the federal government or in the case of closed-end funds they are backed by more than 200% collateral; our anticipation that the illiquidity of the auction-rate securities will not negatively affect our ability to execute our current business plan and operations; our intention to continue to seek legal protection through patents and trade secrets for our proprietary technology; our belief that our current cash position, cash generated through operations and equity offerings, and available borrowing capacity will be sufficient to meet our needs through the next twelve months; our belief that the ultimate outcome of actions that have arisen in the normal course of business will not have a material adverse effect on our business, financial condition or results of operations; our expectation 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 to continue to experience significant fluctuations in our quarterly operating results; our expectation to use the proceeds from certain credit agreements for working capital and other general corporate purposes, including the repurchase of shares; and our expectation to repurchase shares from time to time in the open market, through block shares or otherwise.

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 the forward-looking statements. These risks and uncertainties include, but are not limited to: unanticipated trends with respect to the cyclicality of the semiconductor industry; inability to reclassify net gains from OCI to Net sales within the next twelve months; inaccuracies regarding growth potential in the Asia region over the long term; sustained decrease in or leveling off of customer demand; inability to predict the impact of the Linear litigation on our business, financial conditions or operating results; inability to accurately predict the impact of new accounting pronouncements on our Condensed Consolidated Financial Statements; inability to accurately assess the period in which the Company 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; inability of the Company to meet certain performance conditions that may result in forfeiture of certain restricted stock awards; unexpected increase in costs associated with manufacturing memory chips; inability to anticipate cyclical changes in customers’ capacity utilization and demand; the negative impact of higher cost of services on gross margins; 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 difficulties in introducing new and enhanced products in a timely manner in order to remain competitive; unexpected changing product needs of our customers; loss of a major customer; the need to seek new customers and diversify our customer base; unanticipated need for additional liquid assets in the next twelve months; our failure to accurately predict the effect of the ultimate outcome of current litigation on our business, financial condition, results of operations or material adjustment to our financial statements; inherent uncertainty in the outcome of litigation matters; our potential inability to enforce our patents and protect our trade secrets; inability to accurately predict our ability to recover the carrying value of our investment in auction-rate securities, market changes negatively affecting auction-rate securities and the government’s inability to guarantee the underlying securities; inability to accurately predict customers capital spending over the long term and continued customer capital spending reductions in the semiconductor industry; further periodic downturns in the semiconductor industry which could have a material adverse effect on the semiconductor industry’s demand for semiconductor processing equipment inability to accurately predict mega-fabrication trends in memory manufacturing; uncertainties related to the acceptance of new technology into the memory market; introduction of new products by competitors; inability to gain and leverage market position during the economic downturn; and unexpected shift in market demands for both memory and logic products; uncertainties related to growth in the electronic industry; and inability to successfully select, develop, and market new products, or enhance existing products.

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 and risk factors listed in our Annual Report on Form 10-K for the year ended December 31, 2007 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;

•

Financial Performance Overview;

•

Results of Operations;

•

Critical Accounting Policies; 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 market segments beyond semiconductor manufacturing with the acquisition of Peter Wolters AG, a German company specializing in lapping and polishing equipment for a number of industries. With the acquisition of Switzerland-based Voumard Machine Co. SA in 2005 we expanded our product offerings to include high-precision machine manufacturing tools. We call this segment the Industrial Applications Group (IAG).

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 vehicles, aircraft and electronic products, parts and components. At the broadest level, machine tools demand 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 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 products are used to manufacture semiconductors 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.

The demand for our products is affected by the profitability of our customers which is driven by capacity and market supply for their products. In fiscal 2006 and 2007, our memory customers built excess capacity as they did not accurately predict demand for their products. As a result, memory capacity additions during those years outpaced the current rate of demand. The overcapacity of memory customers coupled with weak memory pricing, tight liquidity in the credit markets, and the negative economic environment has caused those customers to delay capital spending and, in some instances, constrain or retire some of their capacity output. These actions are expected to stabilize average selling prices for memory chips. While we have seen capital expenditures slow in the recent past, we expect our customers’ capital spending to increase over the long term as demand from various industries continues to steadily rise. This is mainly driven by worldwide technology consumption of chips that has grown at an annual historical rate of 10%.

As we look further at end market demand, notwithstanding any potential worldwide economic slowdown or recession, we have also begun to see growing demand for DRAM and NAND memory devices, enabled by lower memory average selling prices. We believe this shift will stimulate the development of more efficient tools to satisfy our customers’ needs. The manufacture of memory chips requires tremendous economies of scale that involve large fabrication facilities. Our customers seek more affordable technology to drive down their costs so they can grow the market demand for their products.

Given the historically cyclical nature of the semiconductor industry, we continue to focus on operational execution and a paring down of certain research and development activities to improve profitability by reducing our cost structure. As a result, we achieved our goal of reducing quarterly operational expenses below $110 million in the third quarter of 2008. In October 2008, we announced that we would continue to drive down operational expenses to a level sufficient to achieve cash break-even with a quarterly revenue base of $187 million by the end of the fourth quarter. We define cash break-even as the point at which a net loss plus non-cash expenses such as those associated with stock compensation, depreciation and amortization equals zero.

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 are also referred to as bookings, consist of current period orders less current period cancellations. 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
	2008									2007
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Net sales	$	250,098		$	257,740		$	314,713		$	363,463		$	393,277		$	416,335		$	396,974
Gross profit	$	111,524		$	110,963		$	144,940		$	171,863		$	194,307		$	208,110		$	194,909
Net income (loss)	$	1,397		$	(2,385	)	$	15,529		$	52,861		$	49,711		$	57,345		$	53,783
Net income (loss) per share – Diluted	$	0.01		$	(0.02	)	$	0.15		$	0.47		$	0.41		$	0.45		$	0.42
Shipments	$	230,153		$	240,320		$	312,857		$	363,055		$	387,817		$	436,382		$	389,052
Change in shipments from prior quarter		(4	)%		(23	)%		(14	)%		(6	)%		(11	)%		12	%		(0	)%
Net orders	$	202,765		$	234,628		$	297,025		$	343,086		$	305,329		$	332,201		$	412,219
Change in net orders from prior quarter		(14	)%		(21	)%		(13	)%		12	%		(8	)%		(19	)%		(7	)%

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

Financial Performance Overview

The following is an overview of our financial performance for the nine months ended September 27, 2008 compared to the nine months ended September 29, 2007:

•

Net sales decreased 31.8% to $822.6 million from $1.2 billion;

•

Net income decreased 91.0% to $14.5 million from $160.8 million;

•

Diluted net income per share decreased to $0.15 from $1.28;

•

Shipments decreased 35.4% to $783.3 million from $1.2 billion; and

•

Net orders decreased 30.0% to $734.4 million from $1.0 billion.

Results of operations for the nine months ended September 27, 2008 include $13.6 million of charges recorded in the second quarter of 2008 due to a decision to focus on our core product lines. These charges include: (a) impairments of inventory and evaluation systems of $6.4 million, (b) write-downs of certain research and development assets of $3.8 million and (c) reductions in workforce of $3.4 million. Of these charges, $6.5 million are in Cost of sales, $4.3 million are in Research and development expenses and $2.8 million are in Selling, general and administrative expenses.

Results of Operations

Net Sales


	Three Months Ended						Nine Months Ended
	September 27, 2008		June 28, 2008		September 29, 2007		September 27, 2008		September 29, 2007
	(In thousands)
Semiconductor Group	$	207,050	$	208,272	$	348,625	$	685,672	$	1,093,027
Industrial Applications Group		43,048		49,468		44,652		136,879		113,559

Net sales	$	250,098	$	257,740	$	393,277	$	822,551	$	1,206,586

The net sales we report are correlated to shipments and the timing of customer acceptance. Deferred revenue at the end of the third quarter of 2008 was $70.2 million.

Semiconductor Group net sales in the third quarter of 2008 remained relatively flat with the second quarter of 2008 and are down 41% and 37% compared to the prior year third quarter and year-to-date net sales, respectively. Net sales have continued to decline compared to prior periods as a result of ongoing weakness in the overall economy and the semiconductor industry in particular.

The primary functional currency of IAG is the Euro. Changes in the exchange rate increased IAG net sales for the third quarter and year-to-date by 10% and 15%, respectively, compared to the same periods in the prior year. Demand decreased at IAG during the third quarter of 2008 after an increase in demand from its wafer customers for the prior four quarters.

Geographical net sales as a percentage of total net sales were as follows (based upon the location of our customers’ facilities):


	Three Months Ended						Nine Months Ended
	September 27, 2008		June 28, 2008		September 29, 2007		September 27, 2008		September 29, 2007
Asia	58	%	61	%	66	%	61	%	67	%
North America	29	%	27	%	25	%	28	%	26	%
Europe	13	%	12	%	9	%	11	%	7	%

A significant portion of our net sales is generated in Asia, primarily because a substantial portion of the world’s semiconductor manufacturing capacity is located there. Our Asia region includes Korea, Japan, Singapore, Malaysia, China and Taiwan. We plan to continue to focus on expanding our market presence in Asia, as we believe that significant additional growth potential exists in this region over the long term.

Gross Profit


	Three Months Ended									Nine Months Ended
	September 27, 2008			June 28, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(Dollars in thousands)
Gross profit	$	111,524		$	110,963		$	194,307		$	367,427		$	597,326
Gross margin		45	%		43	%		49	%		45	%		50	%

The increase in gross margin in the third quarter of 2008 compared to the second quarter of 2008 is due to $6.5 million of charges incurred in the second quarter of 2008, related primarily to impairments of inventory and evaluation systems. Excluding those charges, gross margin decreased by one percentage point due to product mix and lower absorption of fixed overhead costs as shipment volumes decreased. Gross margin in third quarter and year-to-date 2008 decreased from prior periods as a result of lower absorption due to a decline in shipment volumes and an increase in the percentage of total sales represented by IAG products, whose margins are generally lower than those of Semiconductor Group products.

Selling, General and Administrative (SG&A)


	Three Months Ended									Nine Months Ended
	September 27, 2008			June 28, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(Dollars in thousands)
SG&A expense	$	53,858		$	62,530		$	67,420		$	176,717		$	206,531
% of net sales		22	%		24	%		17	%		21	%		17	%

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

SG&A expense decreased in the third quarter of 2008 from the second quarter of 2008, in part as a result of $2.8 million of charges incurred during the second quarter related to the reduction in workforce. Excluding those charges, SG&A decreased by $5.8 million as a result of lower headcount and a focus on reducing operating expenses. The decrease in SG&A expense during the three and nine months ended September 27, 2008 over the same prior year periods, is primarily due to lower headcount, profit sharing, commissions and other sales and marketing related costs as a result of decreased sales volumes. SG&A expense, as a percentage of net sales, increased compared to prior year periods primarily due to the decline in net sales.

Research and Development (R&D)


	Three Months Ended									Nine Months Ended
	September 27, 2008			June 28, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(Dollars in thousands)
R&D expense	$	51,649		$	59,815		$	61,384		$	168,804		$	185,158
% of net sales		21	%		23	%		16	%		21	%		15	%

R&D expense includes compensation and benefits for our R&D personnel, project materials, chemicals and other direct expenses incurred in product and technology development. Also included are expenses for equipment repairs and maintenance, rents, utilities and depreciation related to product and technology development. 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 decrease in R&D expense over second quarter 2008 levels was primarily due to the write-down of certain R&D assets and the reduction of workforce in the second quarter totaling $4.3 million. Excluding the aforementioned charges, R&D expense decreased by $3.9 million due to lower headcount and a focus on reducing operating expenses. R&D expense decreased during the three and nine months ended September 27, 2008 from the prior year periods primarily as a result of reduced headcount and lower profit sharing due to the decline in operating income. R&D expense, as a percentage of net sales, increased compared to prior year periods primarily due to the decrease in net sales.

Interest and Other Income, Net


	Three Months Ended									Nine Months Ended
	September 27, 2008			June 28, 2008			September 29, 2007			September 27, 2008			September 29, 2007
	(Dollars in thousands)
Interest and other income, net	$	3,055		$	4,916		$	8,933		$	9,080		$	34,637
% of net sales		1	%		2	%		2	%		1	%		3	%

Interest and other income, net, includes interest income, interest expense and other non-operating items. Interest and other income, net decreased from the second quarter of 2008 primarily due to mark-to-market adjustments on certain hedging contracts. During the three and nine months ended September 27, 2008 interest and other income, net decreased compared to prior year periods due to reductions in interest income and foreign currency gains. Interest income for the three and nine months ended September 27, 2008 decreased by $5.7 million and $16.2 million, respectively, as a result of declining yields on interest bearing investments, lower balances of cash, cash equivalents and investments, and the transition to U.S. Treasuries that provided lower yields. Additionally, there were decreased gains on foreign currency transactions of $5.8 million from the nine months ended September 29, 2007.

Income Taxes

Our effective tax rates were a provision of 84.6%, a benefit of 63.1% and a provision of 33.2% for the three months ended September 27, 2008, June 28, 2008 and September 29, 2007, respectively. Our effective tax rates were 53.1% and 33.1% for the nine months ended September 27, 2008 and September 29, 2007, respectively. The higher effective tax rates for 2008 are principally the result of decreased profits before taxes and an unfavorable mix of our anticipated annual operating results, particularly in certain foreign jurisdictions. This increased our effective tax rate for the nine months ended September 27, 2008 to 53.1% from 40.0% for the six months ended June 28, 2008 resulting in an 84.6% effective tax rate for the three months ended September 27, 2008. Our future effective income tax rate depends on various factors, such as the company’s operating results before taxes, tax legislation, the geographic composition of pre-tax operating results, non-deductible expenses incurred in connection with acquisitions and items outside of the annual effective tax rate such as interest expense on uncertain tax positions and stock option and restricted stock-based deductions.

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 investments, 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 and litigation. 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, 2007. Except for the critical accounting policy set forth below entitled “Valuation of Investments,” there have been no other significant changes in our critical accounting policies or estimates since those reported in our Annual Report.

Valuation of Investments

In valuing our investments we predominantly use market data or data derived from market sources. When market data is not available, such as when the investment is illiquid, we employ a cash-flow-based modeling technique to arrive at the recorded fair value. This process involves incorporating our assumption about the anticipated term and the yield that a market participant would require to purchase the security in the marketplace. As of September 27, 2008 we have recorded a temporary impairment charge of $10.7 million within OCI based upon our assessment of the fair value of our auction-rate securities and our ability and intent to hold these securities to recovery (see Note 3 to the Condensed Consolidated Financial Statements).

Liquidity and Capital Resources

Cash, Cash Equivalents and Short-Term Investments


	September 27, 2008		December 31, 2007
	(In thousands)
Cash and cash equivalents	$	162,231	$	175,071
Short-term investments		293,073		421,695

Total cash, cash equivalents and short-term investments	$	455,304	$	596,766

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 September 27, 2008 consisted of $455.3 million of cash, cash equivalents and short-term investments. This amount represents a decrease of $141.5 million from $596.8 million as of December 31, 2007. The majority of this decrease is due to $100.5 million of auction-rate securities reclassified to Long-term investments in the first quarter of 2008.

Restricted Cash, Cash Equivalents and Long-Term Investments


	September 27, 2008		December 31, 2007
	(In thousands)
Restricted cash and cash equivalents	$	146,829	$	161,050
Long-term investments		100,467		—

Total restricted cash and long-term investments	$	247,296	$	161,050

We held $247.3 million in restricted cash and long-term investments as of September 27, 2008, an increase of $86.2 million from $161.1 million as of December 31, 2007. As of September 27, 2008 we held $146.8 million in restricted cash and cash equivalents, which relates to debt obligations that are secured by deposits in money market funds.

As of September 27, 2008, we held $102.4 million of tax-exempt auction-rate securities, whose underlying assets are generally either student loans substantially backed by the federal government or closed-end municipal funds. Beginning in February 2008, these auction-rate securities became illiquid because their scheduled auctions failed to settle. An auction failure occurs when the parties wishing to sell securities at auction cannot. As a result, we may have limited or no opportunities to liquidate these investments and fully recover their stated value in the near term. When an auction fails the affected securities begin to pay interest under their default interest rate terms. As a result of the illiquidity caused by the lack of an active market, $100.5 million of these investments were classified as non-current. As of September 27, 2008, we have recorded a temporary impairment charge of $10.7 million within OCI based upon our assessment of the fair value of these securities. We utilized a cash-flow-based valuation method in determining the fair value of these securities, which used significant unobservable inputs at September 27, 2008.

Cash Flow Summary


	2008 YTD			2007 YTD
	(In thousands)
Net cash provided by (used in):
Operating activities	$	171,857		$	236,039
Investing activities		11,900			4,654
Financing activities		(197,408	)		(194,319	)
Effects of exchange rate changes on cash and cash equivalents		811			814

Net increase in cash and cash equivalents	$	(12,840	)	$	47,188

Operating

Net cash provided by operating activities during the nine months ended September 27, 2008 was $171.9 million. This amount consisted primarily of $14.5 million provided by net income, adjusted for non-cash items of $84.3 million and changes in working capital accounts of $73.0 million. The primary reason for the decrease in cash flows from operating activities compared to the prior year period is due to lower net income and a decrease in deferred profit due to the reduction in shipments, offset by a decrease in accounts receivable. Accounts receivable decreased by $137.2 million from year-end levels due to reduced shipments and strong collections.

Net cash provided by operating activities during the nine months ended September 29, 2007 was $236.0 million. This amount consisted primarily of $160.8 million provided by net income, adjusted for non-cash items of $109.7 million and decreases in working capital accounts of $34.5 million.

Investing

Net cash provided by investing activities during the nine months ended September 27, 2008 was $11.9 million, which consisted of net purchases, sales and maturities of short-term investments of $14.4 million and a decrease in restricted cash and cash equivalents of $14.2 million, offset by capital expenditures of $16.7 million. As of September 27, 2008, we had no significant commitments to purchase property or equipment.

Net cash provided by investing activities during the nine months ended September 29, 2007 was $4.7 million, which consisted primarily of net sales and maturities of short-term investments of $38.9 million and capital expenditures of $26.9 million.

Financing

Net cash used in financing activities during the nine months ended September 27, 2008 was $197.4 million. This amount consisted primarily of repurchases of common stock of $188.9 million and a debt repayment of $15.6 million in the third quarter, offset by proceeds from employee stock compensation plans of $6.4 million.

Net cash used in financing activities during the nine months ended September 29, 2007 was $194.3 million. This amount consisted primarily of repurchases of common stock of $216.9 million and payments on lines of credit of $12.0 million, offset by proceeds from employee stock compensation plans of $33.8 million.

Liquidity

We have short-term credit facilities with various financial institutions totaling $96.4 million. These credit facilities bear interest at various rates and expire on various dates through June 2009. As of September 27, 2008, $2.7 million of current obligations were outstanding at an interest rate of 5.0%, $29.0 million was pledged against outstanding letters of credit and the remaining $64.7 million was unutilized.

Current debt obligations also include a credit arrangement denominated in Euros used to fund the acquisition of Peter Wolters AG in 2004 and for general corporate purposes. As of September 27, 2008 borrowings under this credit arrangement were $126.8 million at an interest rate of 4.6% and are secured by deposits in money market funds, which are included within Restricted cash and cash equivalents, current, on our Condensed Consolidated Balance Sheet. Borrowings under this credit arrangement are due and payable on or before June 25, 2009. This credit arrangement includes certain financial covenants, with which we were in compliance as of September 27, 2008.

We also have long-term credit facilities with various institutions totaling $151.3 million. As of September 27, 2008 we had $1.3 million in long-term debt outstanding under these credit arrangements at an interest rate of 4.0%, expiring in December 2037. The unutilized amount of $150.0 million relates to a senior unsecured five-year revolving credit agreement (the Agreement) expiring in 2011 with an aggregate committed amount of $150.0 million and an option to increase the total line by up to an additional $100.0 million under certain circumstances. We expect to use the proceeds, if any, for working capital and other general corporate purposes, including the repurchase of our own common shares. The Agreement contains customary affirmative and negative covenants, financial covenants, representations and warranties and events of default, which are subject to various exceptions and qualifications. We were in compliance with these covenants as of September 27, 2008.

We believe that our current cash position, cash generated through operations and equity offerings, and available borrowings will be sufficient to meet our needs at least 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, 2007. Our exposure related to market risk has not changed materially since December 31, 2007.

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.

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 are 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

There have been no material developments in litigation matters during the quarter ended September 27, 2008 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

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

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. The risk factors set forth below entitled “Recent deterioration in the global economy and credit markets may adversely affect our future results of operations” and “We may incur impairments to goodwill or long-lived assets” have been added to this Quarterly Report on Form 10-Q to be filed with the SEC for the quarter ended September 27, 2008. The risk factor set forth below entitled “Our liquidity can be affected by unanticipated events in the debt markets” has been revised from the prior statement on our Quarterly Report on Form 10-Q filed with the SEC for the quarter ended June 28, 2008.

Recent deterioration in the global economy and credit markets may adversely affect our future results of operations.

Our operations may be adversely affected by the recent deterioration in the global economy causing our customers to delay or cease spending on our products. Recent tightening of the credit markets may further negatively impact our operations by affecting the solvency of our customers, the solvency of our key suppliers or the ability of our customers to obtain credit to finance purchases of our products. If the global economy and credit markets continue to deteriorate and our future sales continue to decline, our financial condition and results of operations could be adversely impacted.

Downturns in the semiconductor industry negatively impact demand for our equipment.

Our business depends predominantly on the capital expenditures of semiconductor manufacturers, which in turn depend on current and anticipated market demand for integrated circuits and the products that use them. The semiconductor industry has historically been cyclical and has experienced periodic downturns that reduced the demand for semiconductor processing equipment, including equipment that we manufacture and market. During periods of reduced and declining demand, we must be able to quickly and effectively align our costs with prevailing market conditions, and at the same time motivate and retain key employees and maintain a stable management team. Our inventory levels during periods of reduced demand have at times been higher than optimal. We cannot provide any assurance that we will not be required to make inventory valuation adjustments in future periods. 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. In the period from 2001 through 2006, we implemented restructuring plans to align our business with fluctuating conditions. Future restructurings may be required. In addition, we made strategic decisions during the second quarter of 2008 to focus on our core product lines, and we incurred charges related to impairments of inventory and evaluation systems, write-downs of certain research and development assets, and reductions in workforce. Net orders, net sales and operating results may be adversely affected if we fail to respond to changing industry conditions in a timely and effective manner. We experienced a decrease in bookings in each of the first three quarters of 2008. We could continue to experience decreases in bookings in the foreseeable future, and as a result, our net sales and operating results may be adversely affected.

Changes in tax rates, tax assets or liabilities have negatively impacted our results and could further negatively impact our future results.

We are subject to taxation in the United States and other countries. Our tax rate has fluctuated in the past and may fluctuate in the future. For example, our effective tax rate for the third quarter of 2008 is higher compared to the second quarter of 2008 and third quarter of 2007 as a result of an increase in our 2008 annual forecasted effective tax rate.

Future tax rates could continue to be affected by changes in the composition of earnings in countries with differing tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in the tax laws. 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. Factors that could cause estimates to be materially different 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; and

•

The Company’s operating results before taxes.

Our liquidity can be affected by unanticipated events in the debt markets.

As of September 27, 2008, we held $102.4 million of tax-exempt auction-rate securities, whose underlying assets are generally student loans, substantially backed by the federal government, or closed-end municipal funds. Beginning in February 2008, these auction-rate securities became illiquid because their scheduled auctions failed to settle. An auction failure occurs when the parties wishing to sell securities at auction cannot. As a result, we may have limited or no opportunities to liquidate these investments and fully recover their stated value in the near term. When an auction fails the affected securities begin to pay interest under their default interest rate terms. As a result of the illiquidity caused by the lack of an active market, $100.5 million of these investments were classified as non-current and a temporary unrealized loss of $10.7 million has been recorded as of September 27, 2008.

We believe the impairment of these securities is temporary because we have the ability and intent to hold these securities to recovery and they have either been guaranteed by the federal government or in the case of closed-end funds they are backed by more than 200% collateral. Substantially all of our auction-rate securities are currently rated AAA, the highest rating by a rating agency. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and insurance guarantor, and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. We believe we will ultimately be able to liquidate these investments without significant loss through successful auctions, redemptions of securities by the issuers, or upon maturity. However, it could take until the final maturity of the underlying notes to realize the investments’ full value. If current market conditions do not improve, an other-than-temporary impairment charge could occur in future periods which would negatively impact our results of operations. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate that the current illiquidity of these investments will adversely affect our 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 forecasts may be inaccurate.

Our financial results in the first quarter of 2008 fell short of previously announced guidance for the quarter. This was the result of higher than anticipated manufacturing costs, higher write-downs of evaluation systems and a higher than anticipated effective tax rate. Management typically provides quarterly financial forecasts. These forecasts when made are based on assumptions believed to be reasonable at the time. However, actual results may vary from forecasted results for a variety of reasons as evidenced by the first quarter 2008 results. Our lengthy sales cycle, coupled with customers’ competing capital budget considerations, 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 our shipping orders as scheduled during that quarter, receiving customer acceptance of shipped products during the quarter, 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 stockholders and potential stockholders, 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 could lead to fluctuations in our results include, but are not limited to:

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Changing demand for and sales of lower-margin products relative to higher-margin products;

•

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

•

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

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Emergence of new industry standards;

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Competitive pricing pressures;

•

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

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Timing and cancellation of customer orders and shipments, including deferring orders of our existing products due to new product announcements by us and/or our competitors;

•

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

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

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Foreign currency exchange rate fluctuations;

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Fluctuation in warranty costs;

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Variability in manufacturing yields; and

•

Ability to fund capital requirements.

We may 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.

Significant 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 Industrial Applications Group could lead to an impairment charge of our long-lived assets, including goodwill and other intangible assets. If, in any period, our stock price decreases to the point where the fair value of the Company, as determined by our market capitalization, is less than our book value, this too could indicate a potential impairment and we may be required to record an impairment charge in that period.

Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from results. Additionally, if our analysis results in an impairment to our goodwill for the Semiconductor Group or Industrial Applications Group, we may be required to record a charge to earnings in our financial statements during a period in which such impairment is determined to exist, which may negatively impact our results of operations.

We face risks related to concentration of net sales.

We sell to a limited number of customers, and we expect that sales to relatively few 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, including reductions due to customer departures from recent buying patterns, as well as economic or competitive conditions in the semiconductor industry, could materially and adversely affect our business, financial condition or results of operations. Because products are configured to customer specifications, changing, rescheduling or canceling may result in significant non-recoverable costs.

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

We devote a significant portion of our personnel and financial resources to R&D programs, and we seek to maintain close relationships with our customers in order to remain responsive to their product and manufacturing process needs. Our success depends in part on our ability to accurately predict evolving industry standards, to develop innovative solutions and improve existing technologies, to win market acceptance of our new and advanced technologies and to manufacture our products in a timely and cost-effective manner. Our products and processes must address changing customer needs in a range of materials, including copper and aluminum, at ever-smaller line widths and feature sizes, while maintaining our focus on manufacturing efficiency and product reliability. If we do not 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 seriously harmed.

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

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

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

We face substantial competition in the industry, from both potential new market entrants and established competitors. Competitors may have greater financial, marketing, technical or other resources, and greater ability to respond to pricing pressures than we do. They may also have broader product lines, 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 and warranty costs. Semiconductor equipment 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 growth and ability to meet customer demands depend in part on our ability to obtain from our suppliers timely deliveries of parts, components and subassemblies for the manufacture and support of our products. Although we make reasonable efforts to ensure that such parts are available from multiple suppliers, certain key parts may be obtained only from a single source or from limited sources. These suppliers are in some cases thinly capitalized, independent companies who derive a significant amount of their business from us or from a small group of companies in the semiconductor industry. As a result, our supply channels may be vulnerable to disruption. Any such disruption to or termination of our supplier relationships may result in a prolonged inability to secure adequate supplies at reasonable prices or of acceptable quality, and may adversely affect our ability to bring new products to market and deliver them to customers in a timely manner. As a result, our revenues and operations may be adversely affected.

The loss of key employees could harm our business and operations.

Our employees are extremely important to our success, and our key management, engineering and other employees may be difficult to replace. The expansion of high technology companies has increased demand and competition for qualified personnel. If we are unable to retain key personnel, or to attract, assimilate and retain additional 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:

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Global or regional economic downturns; and

•

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;

•

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;

•

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

•

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

•

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. There is no assurance that our hedging program will be effective. Exchange rate volatility may also increase the cost of our exported products for international customers and inhibit demand.

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

We 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 way. Regardless of the merit of any legal disputes, we incur and may be required to incur in the future substantial costs to prosecute or defend our intellectual property rights. Even in the absence of infringement by our products of third parties’ intellectual property rights, we have elected in the past and may in the future elect to seek licenses or enter into settlements to avoid the costs of protracted litigation and the diversion of resources and management attention. However, if the terms of settlements entered into with certain of our competitors are not observed or enforced, we may suffer further costs. Any of these circumstances could have a material adverse effect on our business, financial condition or results of operations.

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

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

Intellectual Property Litigation

We have currently received certain claims of infringement of intellectual property rights and may receive other such claims in the future. In the future, such claims may evolve into legal proceedings or litigation against us. It is inherently difficult to assess the outcome of litigation, and there can be no assurance that we will prevail in any specific proceedings. Any such litigation could result in substantial cost to us, including diversion of the efforts of our technical and management personnel, and this could have a material 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 enjoined 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 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 affect our business, financial condition and operating results. Further, if a claim or proceeding were resolved against us or if we were to settle any such dispute, we could be required to pay damages or refrain from certain activities, which could have a material adverse impact on our business, financial condition and operating results.

We are exposed to risks associated with our diversification strategy.

Our core business and expertise has historically been in the development, manufacture, sale and support of deposition technologies, wafer surface preparation and chemical mechanical planarization technologies. We lack experience in the high-precision machine manufacturing equipment market serviced by our IAG segment, 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. Our efforts to develop the Industrial Applications Group may divert capital, management attention, R&D and other critical resources away from, and adversely affect, our core business.

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

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

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

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

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

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

•

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 dilutive securities, 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; and

•

The impairment of acquired intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies.

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 used for our worldwide operations, as well as other key software applications used in our operations. Our ERP system is integral to our ability to accurately and efficiently maintain our books and records, record our transactions, provide critical information to our management and prepare our financial statements.

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.

Compliance with current and future environmental regulations may be costly.

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

ITEM 2:

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchase of Company Securities

All shares repurchased below were pursuant to publicly-announced plans. On February 24, 2004 we announced that 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 13, 2007. On September 20, 2004 we announced that our Board of Directors authorized an additional $1.0 billion for repurchase of our outstanding common stock through September 14, 2009. On October 26, 2007 we announced that our Board of Directors authorized an additional $1.0 billion for repurchase of our outstanding common stock through October 26, 2011.


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May yet be Purchased Under the Plans or Programs
June 29, 2008 through August 2, 2008	293,916	$	19.77	293,916	$	868.9 million
August 3, 2008 through August 30, 2008	97,117	$	22.35	97,117	$	866.7 million
August 31, 2008 through September 27, 2008	978,211	$	21.25	978,211	$	845.9 million

Total	1,369,244	$	21.01	1,369,244	$	845.9 million

In addition to shares repurchased above, we withheld 506 shares through net share settlements during the three months ended September 27, 2008 upon the vesting of restricted stock awards to cover the employees’ tax withholding obligations.

ITEM 6:

EXHIBITS

(a) Exhibits


*10.9		Novellus 2001 Stock Incentive Plan, as amended, together with forms of agreement thereunder.

*10.28		Amended Executive Voluntary Deferred Compensation Plan, as amended.

31.1		Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated November 4, 2008 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 November 4, 2008 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 November 4, 2008 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 November 4, 2008 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.

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. Benzing
Jeffrey C. Benzing
Executive Vice President and Chief Administrative Officer
(Principal Financial Officer)
November 4, 2008

EXHIBIT INDEX


*10.9		Novellus 2001 Stock Incentive Plan, as amended, together with forms of agreement thereunder.

*10.28		Amended Executive Voluntary Deferred Compensation Plan, as amended.

31.1		Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated November 4, 2008 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 November 4, 2008 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 November 4, 2008 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 November 4, 2008 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.

Exhibit 10.9

NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

(Amended and Restated February 15, 2007)

1. Purposes of the Plan . The purposes of this Stock Incentive Plan are to attract and retain the best available personnel, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company’s business.

2. Definitions . As used herein, the following definitions shall apply:

(a) “ Administrator ” means the Board or any of the Committees appointed to administer the Plan.

(b) “ Affiliate ” and “ Associate ” shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.

(c) “ Applicable Laws ” means the legal requirements relating to the administration of stock incentive plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Awards granted to residents therein.

(d) “ Award ” means the grant of an Option, Restricted Stock or Restricted Stock Unit under the Plan.

(e) “ Award Agreement ” means the written agreement evidencing the grant of an Award executed by the Company and the Grantee, including any amendments thereto.

(f) “ Board ” means the Board of Directors of the Company.

(g) “ Code ” means the Internal Revenue Code of 1986, as amended.

(h) “ Committee ” means any committee appointed by the Board to administer the Plan.

(i) “ Common Stock ” means the common stock of the Company.

(j) “ Company ” means Novellus Systems, Inc., a California corporation.

(k) “ Consultant ” means any person (other than an Employee or a Director, solely with respect to rendering services in such person’s capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity.

(l) “ Continuous Service ” means that the provision of services to the Company or a Related Entity in any capacity of Employee, Director or Consultant is not interrupted or terminated. In jurisdictions requiring notice in advance of an effective termination as an Employee, Director or Consultant, Continuous Service shall be deemed terminated upon the actual cessation of providing services to the Company or a Related Entity notwithstanding any required notice period that must be fulfilled before a termination as an Employee, Director or Consultant can be effective under Applicable Laws. A Grantee’s Continuous Service shall be deemed to have terminated either upon an actual termination of Continuous Service or upon the entity for which the Grantee provides services ceasing to be a Related Entity. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement). An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave. For purposes of each Incentive Stock Option granted under the Plan, if such leave exceeds three (3) months, and reemployment upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option shall be treated as a Nonstatutory Stock Option on the day three (3) months and one (1) day following the expiration of such three (3) month period.

(m) “ Corporate Transaction ” means any of the following transactions:

(i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;

(ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company’s subsidiary corporations);

(iii) approval by the Company’s shareholders of any plan or proposal for the complete liquidation or dissolution of the Company;

(iv) any reverse merger or series of related transactions culminating in a reverse merger (including, but not limited to, a tender offer followed by a reverse merger) in which the Company is the surviving entity but (A) the shares of Common Stock outstanding immediately prior to such merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (B) in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger or the initial transaction culminating in such merger; or

(v) acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the

Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities but excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction.

(n) “ Covered Employee ” means an Employee who is a “covered employee” under Section 162(m)(3) of the Code.

(o) “ Director ” means a member of the Board or the board of directors of any Related Entity.

(p) “ Disability ” means a Grantee would qualify for benefit payments under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy. If the Company or the Related Entity to which the Grantee provides service does not have a long-term disability plan in place, “Disability” means that a Grantee is permanently unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment. A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion.

(q) “ Employee ” means any person, including an Officer or Director, who is an employee of the Company or any Related Entity. The payment of a director’s fee by the Company or a Related Entity shall not be sufficient to constitute “employment” by the Company.

(r) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(s) “ Fair Market Value ” means, that as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on one or more established stock exchanges or national market systems, including without limitation The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market of The NASDAQ Stock Market LLC, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on the principal exchange or system on which the Common Stock is listed (as determined by the Administrator) on the date of determination (or, if no closing sales price or closing bid was reported on that date, as applicable, on the last trading date such closing sales price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a recognized securities dealer, its Fair Market Value shall be the closing sales price for such stock as quoted on such system or by such securities dealer on the date of determination, but if selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination (or, if no such prices were reported on that date, on the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(iii) In the absence of an established market for the Common Stock of the type described in (i) and (ii), above, the Fair Market Value thereof shall be determined by the Administrator in good faith.

(t) “ Grantee ” means an Employee, Director or Consultant who receives an Award pursuant to an Award Agreement under the Plan.

(u) “ Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(v) “ Nonstatutory Stock Option ” means an Option not intended to qualify as an Incentive Stock Option.

(w) “ Officer ” means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(x) “ Option ” means an option to purchase Shares pursuant to an Award Agreement granted under the Plan.

(y) “ Outside Director ” means a Director who is not an Employee.

(z) “ Parent ” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(aa) “ Performance - Based Compensation ” means compensation qualifying as “performance-based compensation” under Section 162(m) of the Code.

(bb) “ Plan ” means this 2001 Stock Incentive Plan.

(cc) “ Related Entity ” means any Parent, Subsidiary and any business, corporation, partnership, limited liability company or other entity in which the Company, a Parent or a Subsidiary holds a substantial ownership interest, directly or indirectly.

(dd) “ Related Entity Disposition ” means the sale, distribution or other disposition by the Company, a Parent or a Subsidiary of all or substantially all of the interests of the Company, a Parent or a Subsidiary in any Related Entity effected by a sale, merger or consolidation or other transaction involving that Related Entity or the sale of all or substantially all of the assets of that Related Entity, other than any Related Entity Disposition to the Company, a Parent or a Subsidiary.

(ee) “ Restricted Stock ” means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator.

(ff) “ Restricted Stock Units ” means an Award which may be earned in whole or in part upon the passage of time or the attainment of performance criteria established by the Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares or other securities as established by the Administrator.

(gg) “ Rule 16b-3 ” means Rule 16b-3 promulgated under the Exchange Act or any successor thereto.

(hh) “ Share ” means a share of the Common Stock.

(ii) “ Subsidiary ” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan .

(a) Subject to the provisions of Section 10, below, the maximum aggregate number of Shares which may be issued pursuant to all Awards is 14,860,000 Shares, plus the number of Shares that remain available for grants of awards under the Company’s 2001 Non-Qualified Stock Option Plan (the “2001 NQ Plan”) as of May 11, 2007, plus any Shares that would otherwise return to the 2001 NQ Plan as a result of forfeiture, termination or expiration of awards previously granted under the 2001 NQ Plan; provided, however, that the maximum aggregate number of Shares which may be issued pursuant to all Awards of Restricted Stock and Restricted Stock Units is 4,636,000 and that the maximum aggregate number of Shares which may be issued pursuant to all Awards of Incentive Stock Options is 14,000,000 Shares (with all such Share amounts and limits subject to the provisions of Section 10, below). The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock.

(b) Any Shares covered by an Award (or portion of an Award) which is forfeited or canceled, expires or is settled in cash, shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan. Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at the lower of their original purchase price or their Fair Market Value at the time of repurchase, such Shares shall become available for future grant under the Plan. Notwithstanding anything to the contrary contained herein: (i) Shares tendered or withheld in payment of an Option exercise price shall not be returned to the Plan and shall not become available for future issuance under the Plan; and (ii) Shares withheld by the Company to satisfy any tax withholding obligation shall not be returned to the Plan and shall not become available for future issuance under the Plan.

4. Administration of the Plan .

(a) Plan Administrator.

(i) Administration with Respect to Directors and Officers . With respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

(ii) Administration With Respect to Consultants and Other Employees . With respect to grants of Awards to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

(iii) Administration With Respect to Covered Employees . Notwithstanding the foregoing, grants of Awards to any Covered Employee intended to qualify as Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more Directors eligible to serve on a committee making Awards qualifying as Performance-Based Compensation. In the case of such Awards granted to Covered Employees, references to the “Administrator” or to a “Committee” shall be deemed to be references to such Committee or subcommittee.

(iv) Administration Errors . In the event an Award is granted in a manner inconsistent with the provisions of this subsection (a), such Award shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws.

(b) Powers of the Administrator . Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion:

(i) to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder;

(ii) to determine whether and to what extent Awards are granted hereunder;

(iii) to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder;

(iv) to approve forms of Award Agreements for use under the Plan;

(v) to determine the terms and conditions of any Award granted hereunder;

(vi) to amend the terms of any outstanding Award granted under the Plan, provided that (A) any amendment that would adversely affect the Grantee’s rights under an outstanding Award shall not be made without the Grantee’s written consent, provided, however, that an amendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option shall not be treated as adversely affecting the rights of the Grantee, (B) the reduction of the exercise price of any Option awarded under the Plan shall be subject to shareholder approval and (C) canceling an Option at a time when its exercise price exceeds the Fair Market Value of the underlying Shares, in exchange for another Option, Restricted Stock or other Award shall be subject to shareholder approval, unless the cancellation and exchange occurs in connection with a Corporate Transaction;

(vii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan, including without limitation, any notice of Award or Award Agreement, granted pursuant to the Plan;

(viii) to grant Awards to Employees, Directors and Consultants employed outside the United States on such terms and conditions different from those specified in the Plan as may, in the judgment of the Administrator, be necessary or desirable to further the purpose of the Plan; and

(ix) to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate.

The express grant in the Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator; provided that the Administrator may not exercise any right or power reserved to the Board. Any decision made, or action taken, by the Administrator or in connection with the administration of this Plan shall be final, conclusive and binding on all persons having an interest in the Plan.

5. Eligibility . Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees of the Company, a Parent or a Subsidiary. An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors or Consultants who are residing in foreign jurisdictions as the Administrator may determine from time to time.

6. Terms and Conditions of Awards .

(a) Type of Awards . The Administrator is authorized under the Plan to award Options, Restricted Stock and Restricted Stock Units with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions.

(b) Designation of Award . Each Award shall be designated in the Award Agreement. In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, an Option

will qualify as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded. The $100,000 limitation of Section 422(d) of the Code is calculated based on the aggregate Fair Market Value of the Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company). For purposes of this calculation, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the grant date of the relevant Option.

(c) Conditions of Award . Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria. The performance criteria established by the Administrator may be based on any one of, or combination of, the following: (i) increase in share price, (ii) earnings per share, (iii) total shareholder return, (iv) operating margin, (v) gross margin, (vi) return on equity, (vii) return on assets, (viii) return on investment, (ix) operating income, (x) net operating income, (xi) pre-tax profit, (xii) cash flow, (xiii) revenue, (xiv) expenses, (xv) earnings before interest, taxes and depreciation, (xvi) economic value added and (xvii) market share. For Awards that are not intended to qualify as Performance-Based Compensation, the performance criteria established by the Administrator may be based on personal management objectives, or other measures of performance selected by the Administrator. The performance criteria may be applicable to the Company, Related Entities and/or any individual business units of the Company or any Related Entity. Partial achievement of the specified criteria may result in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement.

(d) Acquisitions and Other Transactions . The Administrator may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction.

(e) Deferral of Award Payment . The Administrator may establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award. The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program.

(f) Separate Programs . The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time.

(g) Individual Limitations on Awards .

(i) Individual Limit for Options . The maximum number of Shares with respect to which Options may be granted to any Grantee in any fiscal year of the Company shall be 600,000 Shares. In connection with a Grantee’s commencement of Continuous Service, a Grantee may be granted Options for up to an additional 1,200,000 Shares which shall not count against the limit set forth in the previous sentence. The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below. To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitations with respect to a Grantee, if any Option is canceled, the canceled Option shall continue to count against the maximum number of Shares with respect to which Options may be granted to the Grantee. For this purpose, the repricing of an Option shall be treated as the cancellation of the existing Option and the grant of a new Option (if approved by shareholders).

(ii) Individual Limit for Restricted Stock and Restricted Stock Units . For awards of Restricted Stock and Restricted Stock Units that are intended to be Performance-Based Compensation, the maximum number of Shares with respect to which such Awards may be granted to any Grantee in any fiscal year of the Company shall be 600,000 Shares. The foregoing limitation shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below.

(iii) Deferral . If the vesting or receipt of Shares under an Award is deferred to a later date, any amount (whether denominated in Shares or cash) paid in addition to the original number of Shares subject to such Award will not be treated as an increase in the number of Shares subject to the Award if the additional amount is based either on a reasonable rate of interest or on one or more predetermined actual investments such that the amount payable by the Company at the later date will be based on the actual rate of return of a specific investment (including any decrease as well as any increase in the value of an investment).

(h) Early Exercise . The Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate.

(i) Term of Award . The term of each Award shall be the term stated in the Award Agreement provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement. Notwithstanding the foregoing, the specified term of any Award shall not include any period for which the Grantee has elected to defer the receipt of the Shares or cash issuable pursuant to the Award.

(j) Transferability of Awards . Incentive Stock Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee. Other Awards shall be transferable (i) by will and by the laws of descent and distribution and (ii) during the lifetime of the Grantee, to the extent and in the manner authorized by the Administrator, but only to the extent such transfers are made to family members, to family trusts, to family controlled entities, to charitable organizations, and pursuant to domestic relations orders or agreements, in all cases without payment for such transfers to the Grantee. Notwithstanding the foregoing, the Grantee may designate one or more beneficiaries of the Grantee’s Award in the event of the Grantee’s death on a beneficiary designation form provided by the Administrator.

(k) Time of Granting Awards . The date of grant of an Award shall for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other date as is determined by the Administrator. Notice of the grant determination shall be given to each Employee, Director or Consultant to whom an Award is so granted within a reasonable time after the date of such grant.

7. Award Exercise or Purchase Price, Consideration and Taxes .

(a) Exercise or Purchase Price . The exercise or purchase price, if any, for an Award shall be as follows:

(i) In the case of an Incentive Stock Option granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant.

(ii) In cases other than the case described in the preceding paragraph, the per Share exercise price of an Option shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(iii) In the case of Awards intended to qualify as Performance-Based Compensation, the exercise or purchase price, if any, shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(iv) In the case of a Restricted Stock or Restricted Stock Units grant, such price, if any, shall be determined by the Administrator.

(v) Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(d), above, the exercise or purchase price for the Award shall be determined in accordance with the provisions of the relevant instrument evidencing the agreement to issue such Award.

(b) Consideration . Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following:

(i) cash;

(ii) check;

(iii) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Award) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised (but only to the extent that such exercise of the Award would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Administrator);

(iv) with respect to Options, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction;

(v) with respect to Options, payment through a “net exercise” such that, without the payment of any funds, the Grantee may exercise the Option and receive the net number of Shares equal to (i) the number of Shares as to which the Option is being exercised, multiplied by (ii) a fraction, the numerator of which is the Fair Market Value per Share (on such date as is determined by the Administrator) less the Exercise Price per Share, and the denominator of which is such Fair Market Value per Share (the number of net Shares to be received shall be rounded down to the nearest whole number of Shares); or

(vi) any combination of the foregoing methods of payment.

The Administrator may at any time or from time to time, by adoption of or by amendment to the standard forms of Award Agreement described in Section 4(b)(iv), or by other means, grant Awards which do not permit all of the foregoing forms of consideration to be used in payment for the Shares or which otherwise restrict one or more forms of consideration.

(c) Taxes . No Shares shall be delivered under the Plan to any Grantee or other person until such Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of any foreign, federal, state, or local income and employment tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option. Upon exercise of an Award, the Company shall withhold or collect from Grantee an amount sufficient to satisfy such tax obligations.

8. Exercise of Award .

(a) Procedure for Exercise; Rights as a Shareholder .

(i) Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Award Agreement.

(ii) An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(v).

(b) Exercise of Award Following Termination of Continuous Service .

(i) An Award may not be exercised after the termination date of such Award set forth in the Award Agreement and may be exercised following the termination of a Grantee’s Continuous Service only to the extent provided in the Award Agreement.

(ii) Where the Award Agreement permits a Grantee to exercise an Award following the termination of the Grantee’s Continuous Service for a specified period, the Award shall terminate to the extent not exercised on the last day of the specified period or the last day of the original term of the Award, whichever occurs first.

(iii) Any Award designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of a Grantee’s Continuous Service shall convert automatically to a Nonstatutory Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Award Agreement.

9. Conditions Upon Issuance of Shares .

(a) If at any time the Administrator determines that the delivery of Shares pursuant to the exercise, vesting or any other provision of an Award is or may be unlawful under Applicable Laws, the vesting or right to exercise an Award or to otherwise receive Shares pursuant to the terms of an Award shall be suspended until the Administrator determines that such delivery is lawful and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Company shall have no obligation to effect any registration or qualification of the Shares under federal or state laws.

(b) As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws.

10. Adjustments Upon Changes in Capitalization . Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, the maximum number of Shares with respect to which Awards may be granted to any Grantee in any fiscal year of the Company, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Shares, or similar event affecting the Shares, (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company, or (iii) any other transaction with respect to Common Stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or other distribution of stock or property), reorganization, liquidation (whether partial or complete) or any similar transaction; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” In connection with the foregoing adjustments, the Administrator may, in its discretion, prohibit the exercise of Awards or other issuance of Shares, cash or other consideration pursuant to Awards during certain periods of time. Except as the Administrator determines, no issuance by the Company of shares of any class, or securities convertible into shares of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award.

11. Corporate Transactions and Related Entity Dispositions . Except as may be provided in an Award Agreement:

(a) The Administrator shall have the authority, exercisable either in advance of any actual or anticipated Corporate Transaction or Related Entity Disposition or at the time of an actual Corporate Transaction or Related Entity Disposition and exercisable at the time of the grant of an Award under the Plan or any time while an Award remains outstanding, to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested Awards under the Plan and the full or partial release from restrictions on transfer and repurchase or forfeiture rights of such Awards in connection with a Corporate Transaction or Related Entity Disposition, on such terms and conditions as the Administrator may specify. The Administrator also shall have the authority to condition any such Award vesting and exercisability or release from such limitations upon the subsequent termination of the Continuous Service of the Grantee within a specified period following the effective date of the Corporate Transaction or Related Entity Disposition. The Administrator may provide that any Awards so vested or released from such limitations in connection with a Related Entity Disposition, shall remain fully exercisable until the expiration or sooner termination of the Award. Effective upon the consummation of a Corporate Transaction, all outstanding Awards under the Plan shall terminate unless assumed by the successor company or its parent.

(b) The portion of any Incentive Stock Option accelerated under this Section 11 in connection with a Corporate Transaction or Related Entity Disposition shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded. To the extent such dollar limitation is exceeded, the accelerated excess portion of such Option shall be exercisable as a Nonstatutory Stock Option.

12. Effective Date and Term of Plan . The Plan became effective in 2001. It shall continue in effect for a term of ten (10) years unless sooner terminated. Subject to Applicable Laws, Awards may be granted under the Plan upon its becoming effective.

13. Amendment, Suspension or Termination of the Plan .

(a) The Board may at any time amend, suspend or terminate the Plan; provided, however, that no such amendment shall be made without the approval of the Company’s shareholders to the extent such approval is required by Applicable Laws , or if such amendment would:

(i) lessen the shareholder approval requirements of Section 4(b)(vi) or this Section 13(a);

(ii) increase the benefits accrued to participants under the Plan;

(iii) increase the number of securities which may be issued under the Plan; or

(iv) modify the requirements for participation in the Plan.

(b) No Award may be granted during any suspension of the Plan or after termination of the Plan.

(c) No suspension or termination of the Plan (including termination of the Plan under Section 11 above) shall adversely affect any rights under Awards already granted to a Grantee.

14. Reservation of Shares .

(a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

(b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

15. No Effect on Terms of Employment/Consulting Relationship . The Plan shall not confer upon any Grantee any right with respect to the Grantee’s Continuous Service, nor shall it interfere in any way with his or her right or the Company’s right to terminate the Grantee’s Continuous Service at any time, with or without cause.

16. No Effect on Retirement and Other Benefit Plans . Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a “Retirement Plan” or “Welfare Plan” under the Employee Retirement Income Security Act of 1974, as amended.

17. Plan History . The Plan was initially approved by the Board and shareholders of the Company in 2001. In February 2003, the Board approved an amendment to the Plan to increase the automatic option grant to Outside Directors under Section 6(e) of the Plan from 10,000 shares to 18,000 shares, which amendment was not subject to shareholder approval. In March 2005, subject to shareholder approval, the Board approved an amendment to the Plan in order to (i) increase the number of shares available for issuance thereunder by 4,500,000 shares from 6,360,000 shares to 10,860,00 shares, (ii) provide that the maximum number of Shares which may be issued pursuant to all Awards of Restricted Stock is 2,136,000 Shares, (iii) remove the automatic option grant program for Outside Directors under Section 6(e) in order to permit greater flexibility in the granting of awards to Outside Directors under the Plan and (iv) amend certain other administrative provisions of the Plan. On July 20, 2006, the Board approved an amendment to the Plan to permit the grant of Restricted Stock Units and to make such other changes to reflect current Applicable Laws. On February 15, 2007, the Board approved an amendment and restatement of the Plan, subject to the approval of the Company’s shareholders, (i) to increase the maximum number of Shares available under the Plan; (ii) to impose a per person limit on the number of Shares subject to Awards of Restricted Stock and Restricted Stock Units intended to qualify as Performance-Based Compensation in any fiscal year of the Company; and (iii) to expand the definition of Corporate Transaction, which shall take effect only for Awards granted on and after the date on which the Company’s shareholders approve the amendment and restatement of the Plan.

18. Unfunded Obligation . Grantees shall have the status of general unsecured creditors of the Company. Any amounts payable to Grantees pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974, as amended. Neither the Company nor any Related Entity shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Grantee account shall not create or constitute a trust or fiduciary relationship between the Administrator, the Company or any Related Entity and a Grantee, or otherwise create any vested or beneficial interest in any Grantee or the Grantee’s creditors in any assets of the Company or a Related Entity. The Grantees shall have no claim against the Company or any Related Entity for any changes in the value of any assets that may be invested or reinvested by the Company with respect to the Plan.

19. Construction . Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

STOCK OPTION AWARD AGREEMENT

1. Grant of Option . Novellus Systems, Inc., a California corporation (the “Company”), hereby grants to the Grantee (the “Grantee”) named in the Notice of Stock Option Award (the “Notice”), an option (the “Option”) to purchase the number of Shares of Common Stock subject to the Option (the “Shares”) set forth in the Notice, at the exercise price per Share set forth in the Notice (the “Exercise Price”) subject to the terms and provisions of the Notice, this Stock Option Award Agreement (the “Option Agreement”) and the Company’s 2001 Stock Incentive Plan, as amended from time to time (the “Plan”), which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement.

If designated in the Notice as an Incentive Stock Option, the Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by the Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Nonstatutory Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is awarded.

2. Exercise of Option .

(a) Right to Exercise . The Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Option Agreement. The Option shall be subject to the provisions of Section 11 of the Plan relating to the exercisability or termination of the Option in the event of a Corporate Transaction or Related Entity Disposition. The Grantee shall be subject to reasonable limitations on the number of requested exercises during any monthly or weekly period as determined by the Administrator. In no event shall the Company issue fractional Shares.

(b) Vesting . THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). NOTHING IN THE NOTICE, THIS OPTION AGREEMENT, OR THE PLAN SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO FUTURE AWARDS OR CONTINUATION OF THE GRANTEE’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE’S RIGHT OR THE RIGHT OF THE GRANTEE’S EMPLOYER TO TERMINATE THE GRANTEE’S CONTINUOUS SERVICE, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEE’S STATUS

IS AT WILL. IN THE EVENT OF THE TERMINATION OF THE GRANTEE’S CONTINUOUS SERVICE WITH THE COMPANY OR ANY RELATED ENTITY FOR ANY REASON, THE COMPANY SHALL NOT BE LIABLE FOR THE LOSS OF EXISTING OR POTENTIAL PROFIT FROM THIS OPTION OR ANY OTHER OPTION GRANTED UNDER THE PLAN OR OTHERWISE. THE GRANTEE SHALL HAVE NO CLAIM TO BE GRANTED ANY OPTION UNDER THE PLAN EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, AND THERE IS NO OBLIGATION ON THE PART OF THE COMPANY AND ANY RELATED ENTITY FOR UNIFORMITY OF TREATMENT OF THE GRANTEE WITH OTHER EMPLOYEES OF THE COMPANY AND ANY RELATED ENTITY OR OTHER PARTICIPANTS UNDER THE PLAN.

(c) Post - Termination Exercise Period . The Post-Termination Exercise Period shall be three (3) months except in the event of death or Disability. In such cases, the Post-Termination Exercise Period shall be extended to twelve (12) months provided in Section 6 and Section 7 below.

(d) Leave of Absence . During any authorized leave of absence, the continued vesting of the Shares shall be determined in accordance with the Company’s leave of absence policy as may be amended from time to time.

(e) Change in Status . In the event of the Grantee’s change in status from Employee to Consultant or from an Employee whose customary employment is 20 hours or more per week to an Employee whose customary employment is fewer than 20 hours per week, the Option shall continue to vest unless affirmatively determined otherwise by the Administrator.

(f) Method of Exercise . The Option shall be exercisable only by delivery of an Exercise Notice in such form as determined by the Administrator (including an Exercise Notice in electronic form) which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, such other representations and agreements as to the holder’s investment intent with respect to such Shares and such other provisions as may be required by the Administrator. The Exercise Notice shall be delivered in person, by certified mail, or by such other method (including electronic transmission) as determined from time to time by the Administrator to the Company accompanied by payment of the Exercise Price. The Option shall be deemed to be exercised upon receipt by the Company of such notice accompanied by the Exercise Price, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d), below.

(g) Taxes . No Shares will be delivered to the Grantee or other person pursuant to the exercise of the Option until the Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of applicable income tax, employment tax, and social security tax withholding obligations, including, without limitation, such other tax obligations of the Grantee incident to the receipt of Shares. Upon exercise of the Option, the Company or the Grantee’s employer may offset or withhold (from any amount owed by the Company or the Grantee’s employer to the Grantee) or collect from the Grantee or other person an amount sufficient to satisfy such tax obligations and/or the employer’s withholding obligations.

3. Method of Payment . Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Grantee; provided, however, that such exercise method does not then violate any Applicable Law:

(a) cash;

(b) check;

(c) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require which have a Fair Market Value on the date of surrender or attestation equal to the aggregate Exercise Price of the Shares as to which the Option is being exercised, provided, however, that Shares acquired under the Plan or any other equity compensation plan or agreement of the Company must have been held by the Grantee for a period of more than six (6) months (and not used for another option exercise by attestation during such period); or

(d) payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (i) shall provide written instructions to a Company-designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (ii) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction.

4. Restrictions on Exercise . The Option may not be exercised if the issuance of the Shares subject to the Option upon such exercise would constitute a violation of any Applicable Laws.

5. Termination of Continuous Service . In the event the Grantee’s Continuous Service terminates, the Grantee may, but only during the Post-Termination Exercise Period, exercise the portion of the Option that was vested at the date of such termination (the “Termination Date”). In no event shall the Option be exercised later than the Expiration Date set forth in the Notice. Except as provided in Sections 6 and 7 below, to the extent that the Option was unvested on the Termination Date, or if the Grantee does not exercise the vested portion of the Option within the Post-Termination Exercise Period, the Option shall terminate.

6. Disability of Grantee . In the event the Grantee’s Continuous Service terminates as a result of his or her Disability, the Grantee may, but only within twelve (12) months from the Termination Date (and in no event later than the Expiration Date), exercise the portion of the Option that was vested on the Termination Date; provided, however, that if such Disability is not a “disability” as such term is defined in Section 22(e)(3) of the Code and the Option is an Incentive Stock Option, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Nonstatutory Stock Option on the day three (3) months and one (1) day following the Termination Date. To the extent that the Option was unvested on the

Termination Date, or if the Grantee does not exercise the vested portion of the Option within the time specified herein, the Option shall terminate. Section 22(e)(3) of the Code provides that an individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months.

7. Death of Grantee . In the event of the termination of the Grantee’s Continuous Service as a result of his or her death, or in the event of the Grantee’s death during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee’s termination of Continuous Service as a result of his or her Disability, the person who acquired the right to exercise the Option pursuant to Section 8 may exercise the portion of the Option that was vested at the date of termination within twelve (12) months from the date of death (but in no event later than the Expiration Date). To the extent that the Option was unvested on the date of death, or if the vested portion of the Option is not exercised within the time specified herein, the Option shall terminate.

8. Transferability of Option . The Option, if an Incentive Stock Option, may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the Grantee only by the Grantee. The Option, if a Nonstatutory Stock Option, may not be transferred in any manner other than by will or by the laws of descent and distribution, provided, however, that a Nonstatutory Stock Option may be transferred during the lifetime of the Grantee by gift and pursuant to a domestic relations order to members of the Grantee’s Immediate Family to the extent and in the manner determined by the Administrator. Notwithstanding the foregoing, the Grantee may designate a beneficiary of the Grantee’s Incentive Stock Option or Nonstatutory Stock Option in the event of the Grantee’s death on a beneficiary designation form provided by the Administrator. Following the death of the Grantee, the Option, to the extent provided in Section 7, may be exercised (a) by the person or persons designated under the deceased Grantee’s beneficiary designation or (b) in the absence of an effectively designated beneficiary, by the Grantee’s legal representative or by any person empowered to do so under the deceased Grantee’s will or under the then applicable laws of descent and distribution. The terms of the Option shall be binding upon the executors, administrators, heirs, successors and transferees of the Grantee.

9. Term of Option . The Option must be exercised no later than the Expiration Date set forth in the Notice or such earlier date as otherwise provided herein. After the Expiration Date or such earlier date, the Option shall be of no further force or effect and may not be exercised.

10. Tax Consequences . The Grantee may incur tax liability as a result of the Grantee’s purchase or disposition of the Shares. THE GRANTEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

11. Entire Agreement: Governing Law . The Notice, the Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the

Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee’s interest except by means of a writing signed by the Company and the Grantee. Nothing in the Notice, the Plan and this Option Agreement (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. The Notice, the Plan and this Option Agreement are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice, the Plan or this Option Agreement be determined to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable.

12. Headings . The captions used in the Notice and this Option Agreement are inserted for convenience and shall not be deemed a part of the Option for construction or interpretation.

13. Administration and Interpretation . Any question or dispute regarding the administration or interpretation of the Notice, the Plan or this Option Agreement shall be submitted by the Grantee or by the Company to the Administrator. The resolution of such question or dispute by the Administrator shall be final and binding on all persons.

14. Venue . The Company, the Grantee, and the Grantee’s assignees pursuant to Section 8 (the “parties”) agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Option Agreement shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of Santa Clara) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Section 14 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

15. Notices . Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if the parties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to such other address as such party may designate in writing from time to time to the other party.

END OF AGREEMENT

NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

NOTICE OF STOCK OPTION AWARD


Grantee’s Name and Address		%%FIRST_NAME%-% %%LAST_NAME%%

		%%ADDRESS_LINE_1%-%

		%%ADDRESS_LINE_2%-%

		%%ADDRESS_LINE_3%-%

		%%CITY%-% %%STATE%-% %%ZIPCODE%-%

		%%COUNTRY%-%

You (the “Grantee”) have been granted an option to purchase shares of Common Stock, subject to the terms and conditions of this Notice of Stock Option Award (the “Notice”), the Novellus Systems, Inc. 2001 Stock Incentive Plan, as amended from time to time (the “Plan”) and the Stock Option Award Agreement (the “Option Agreement”) attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice.


Option Number		%%OPTION_NUMBER%-%

Date of Grant		%%OPTION_DATE, ‘MM/DD/YYYY’%-%

Vesting Commencement Date		%%VEST_BASE_DATE, ‘MM/DD/YYYY’%-%

Exercise Price per Share		%%OPTION_PRICE, ‘$999,999,999.99’%-%

Total Number of Shares Subject to the Option (the “Shares”)		%%TOTAL_SHARES_GRANTED, ‘999,999,999’%-%

Total Exercise Price		%%TOTAL_OPTION_PRICE ‘$999,999,999.99’%-%

Type of Option:		¨ Incentive Stock Option

		¨ Non-Qualified Stock Option

Expiration Date:		%%EXPIRE_DATE_PERIOD1 ‘MM/DD/YYYY’%-%

Vesting Schedule :

Subject to the Grantee’s Continuous Service and other limitations set forth in this Notice, the Plan and the Option Agreement, the Option may be exercised, in whole or in part, in accordance with the following schedule:

Shares Vest Type Vest Date

%%SHARES_PERIOD1, ‘999,999,999’%-%

%%VEST_TYPE_PERIOD1%-%

%%VEST_DATE_PERIOD1 ‘MM/DD/YYYY’%-%

%%SHARES_PERIOD2, ‘999,999,999’%-%

%%VEST_TYPE_PERIOD2%-%

%%VEST_DATE_PERIOD2 ‘MM/DD/YYYY’%-%

%%SHARES_PERIOD3, ‘999,999,999’%-%

%%VEST_TYPE_PERIOD3%-%

%%VEST_DATE_PERIOD3 ‘MM/DD/YYYY’%-%

%%SHARES_PERIOD4, ‘999,999,999’%-%

%%VEST_TYPE_PERIOD4%-%

%%VEST_DATE_PERIOD4 ‘MM/DD/YYYY’%-%

%%SHARES_PERIOD5, ‘999,999,999’%-%

%%VEST_TYPE_PERIOD5%-%

%%VEST_DATE_PERIOD5 ‘MM/DD/YYYY’%-%

By the Grantee’s electronic acceptance of this Option and by the acceptance of the Company’s representative below, the Company and the Grantee have executed this Notice and agree that the Option is to be governed by the terms and conditions of this Notice, the Plan, and the Option Agreement.


Novellus Systems, Inc., a California corporation

By:
Name:
Title:

THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS AWARD OR ACQUIRING SHARES

HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, IN THE AGREEMENT OR IN THE PLAN SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF THE GRANTEE’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE’S RIGHT OR THE RIGHT OF THE COMPANY OR ANY RELATED ENTITY TO WHICH THE GRANTEE PROVIDES SERVICES TO TERMINATE THE GRANTEE’S CONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEE’S EMPLOYMENT STATUS IS AT WILL. IN THE EVENT OF THE TERMINATION OF THE GRANTEE’S CONTINUOUS SERVICE FOR ANY REASON, THE COMPANY SHALL NOT BE LIABLE FOR THE LOSS OF EXISTING OR POTENTIAL PROFIT FROM THIS AWARD OR ANY OTHER AWARD GRANTED UNDER THE PLAN OR OTHERWISE. THE GRANTEE SHALL HAVE NO CLAIM TO BE GRANTED ANY AWARD UNDER THE PLAN EXCEPT AS EXPRESSLY SET FORTH IN THIS NOTICE AND THE AGREEMENT, AND THERE IS NO OBLIGATION ON THE PART OF THE COMPANY OR ANY RELATED ENTITY FOR UNIFORMITY OF TREATMENT OF THE GRANTEE WITH OTHER EMPLOYEES OF THE COMPANY AND ANY RELATED ENTITY OR OTHER PARTICIPANTS UNDER THE PLAN.

The Grantee understands that the Option is subject to the Grantee’s consent to access, and acknowledgement of having accessed, the Plan prospectus in connection with the Form S-8 registration statement for the Plan, any updates thereto, the Plan, the Option Agreement and this Notice (collectively, the “Plan Documents”) in electronic form through the E*Trade Financial web page at the following address: www.etrade.com or such other address as is provided by notification from time to time. By accepting the grant of the Option, the Grantee hereby: (i) consents to access electronic copies (instead of receiving paper copies) of the Plan Documents via the E*Trade Financial web page or such other web page as is provided by notification from time to time, (ii) represents that the Grantee has access to the internet generally; (iii) acknowledges receipt of electronic copies, or that the Grantee is already in possession of paper copies, of the Plan Documents and the Company’s most recent annual report to shareholders; and (iv) represents that the Grantee is familiar with the terms and provisions of the Plan Documents and accepts the Option subject to all of the terms and provisions of the Plan Documents.

The Grantee may receive, without charge, upon written or oral request, paper copies of any or all of the Plan Documents, documents incorporated by reference in the Form S-8 registration statement for the Plan, and the Company’s most recent annual report to shareholders by requesting them from Stock Administration at Novellus Systems, Incorporated, 4000 North First Street, San Jose, CA 95134, Attn. Stock Administration M/S 90-2B. Telephone (408) 570-6336, email: stock.administration@novellus.com.

The Grantee has reviewed this Notice, the Plan, and the Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Option Agreement. The Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Option Agreement shall be resolved by the Administrator in accordance with Section 13 of the Option Agreement. The Grantee further agrees to the venue selection in accordance with Section 14 of the Option Agreement. The Grantee further agrees to notify the Company upon any change in the residence address indicated in this Notice.

* * *

NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

NOTICE OF RESTRICTED STOCK BONUS AWARD


Grantee’s Name and Address:

You (the “Grantee”) have been granted shares of Common Stock of the Company (the “Award”), subject to the terms and conditions of this Notice of Restricted Stock Bonus Award (the “Notice”), the Novellus Systems, Inc. 2001 Stock Incentive Plan, as amended from time to time (the “Plan”) and the Restricted Stock Bonus Award Agreement (the “Agreement”) attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice.


Award Number

Date of Award

Total Number of Shares of Common Stock Awarded

Fair Market Value per Share		$

Vesting Schedule :

Subject to the Grantee’s Continuous Service and other limitations set forth in this Notice, the Agreement and the Plan, the Shares will “vest” in accordance with the following conditions:

[INSERT VESTING SCHEDULE]

Notwithstanding the foregoing, 50% of the Total Number of Shares of Common Stock Awarded shall vest if the Grantee’s Continuous Service is terminated as a result of the Grantee’s death or Disability.

In the event of the Grantee’s change in status from Employee to Consultant or Director or from an Employee whose customary employment is 20 hours or more per week to an Employee whose customary employment is fewer than 20 hours per week, vesting of the Shares shall continue in accordance with the Vesting Schedule set forth above and terms of this Notice, the Agreement and the Plan, unless affirmatively determined otherwise by the Administrator.

For purposes of this Notice and the Agreement, the term “vest” shall mean, with respect to any Shares, that such Shares are no longer subject to forfeiture to the Company. Shares that have not vested are deemed “Restricted Shares.” If the Grantee would become vested in a fraction of a Restricted Share, such Restricted Share shall not vest until the Grantee becomes vested in the entire Share.

Vesting shall cease upon the date of termination of the Grantee’s Continuous Service for any reason, other than death or Disability. If the Grantee’s Continuous Service is terminated as a result of the Grantee’s death or Disability, 50% of the Total Number of Shares of Common Stock Awarded shall vest upon the Grantee’s termination of Continuous Service. In the event the Grantee’s Continuous Service is terminated for any reason, including death or Disability, any Restricted Shares held by the Grantee immediately following such termination of Continuous Service shall be deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of the Restricted Shares and shall have all rights and interest in or related thereto without further action by the Grantee. The foregoing forfeiture provisions set forth in this Notice as to Restricted Shares shall apply to the new capital stock or other property (including cash paid other than as a regular cash dividend) received in exchange for the Shares in consummation of any transaction described in Section 10 or 11 of the Plan and such stock or property shall be deemed Additional Securities (as defined in the Agreement) for purposes of the Agreement, but only to the extent the Shares are at the time covered by such forfeiture provisions.

By the Grantee’s electronic acceptance of this Award and by the acceptance of the Company’s representative below, the Company and the Grantee have executed this Notice and agree that the Award is to be governed by the terms and conditions of this Notice, the Plan, and the Agreement.


Novellus Systems, Inc., a California corporation

By:
Title:
Date:

THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS AWARD OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE AGREEMENT, NOR IN THE PLAN, SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF THE GRANTEE’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE GRANTEE’S CONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEE’S STATUS IS AT WILL.

IN THE EVENT OF THE TERMINATION OF THE GRANTEE’S CONTINUOUS SERVICE FOR ANY REASON, THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE COMPANY SHALL NOT BE LIABLE TO THE GRANTEE FOR THE LOSS OF ANY EXISTING OR POTENTIAL GAIN FROM THIS AWARD OR ANY OTHER AWARD GRANTED UNDER THE PLAN OR OTHERWISE. THE GRANTEE FURTHER

ACKNOWLEDGES AND AGREES THAT GRANTEE SHALL HAVE NO RIGHT OR CLAIM TO ANY AWARDS UNDER THE PLAN EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR OTHER AGREEMENT WITH THE COMPANY. THERE IS NO OBLIGATION ON THE PART OF THE COMPANY OR ANY RELATED ENTITY FOR UNIFORMITY OF TREATMENT OF THE GRANTEE WITH OTHER PARTICIPANTS IN THE PLAN OR WITH OTHER EMPLOYEES OF THE COMPANY OR ANY RELATED ENTITY.

The Grantee understands that the Award is subject to the Grantee’s consent to access, and acknowledgement of having accessed: the Plan, the Agreement and this Notice (collectively, the “Plan Documents”) in electronic form through the E*Trade Financial web page at the following address: [www.etrade.com] or such other address as is provided by notification from time to time. By accepting the grant of the Award, the Grantee hereby: (i) consents to access electronic copies of the Plan Documents via the E*Trade Financial web page or such other web page as is provided by notification from time to time, (ii) represents that the Grantee has access to the internet generally; (iii) acknowledges receipt of electronic copies of the Plan Documents; and (iv) represents that the Grantee is familiar with the terms and provisions of the Plan Documents and accepts the Award subject to all of the terms and provisions of the Plan Documents.

The Grantee may receive, without charge, upon written or oral request, paper copies of any or all of the Plan Documents by requesting them from Stock Administration at Novellus Systems, Incorporated, 4000 North First Street, San Jose, CA 95134, Attn. Stock Administration M/S 90-2B. Telephone (408) 943-9700, email: stock.administration@novellus.com.

The Grantee has reviewed this Notice, the Plan, and the Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Agreement. The Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Agreement shall be resolved by the Administrator in accordance with Section 12 of the Agreement. The Grantee further agrees to the venue selection in accordance with Section 13 of the Agreement. The Grantee further agrees to notify the Company upon any change in the residence address indicated in this Notice.

NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

RESTRICTED STOCK BONUS AWARD AGREEMENT

1. Issuance of Shares . Novellus Systems, Inc., a California corporation (the “Company”), hereby issues to the Grantee (the “Grantee”) named in the Notice of Restricted Stock Bonus Award (the “Notice”), the Total Number of Shares of Common Stock Awarded set forth in the Notice (the “Shares”), subject to the Notice, this Restricted Stock Bonus Award Agreement (the “Agreement”) and the terms and provisions of the Company’s 2001 Stock Incentive Plan, as amended from time to time (the “Plan”), which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement. All Shares issued hereunder will be deemed issued to the Grantee as fully paid and nonassessable shares, and the Grantee will have the right to vote the Shares at meetings of the Company’s shareholders. The Company shall pay any applicable stock transfer taxes imposed upon the issuance of the Shares to the Grantee hereunder.

2. Transfer Restrictions . The Shares issued to the Grantee hereunder may not be sold, transferred by gift, pledged, hypothecated, or otherwise transferred or disposed of by the Grantee prior to the date when the Shares become vested pursuant to the Vesting Schedule set forth in the Notice. Any attempt to transfer Restricted Shares in violation of this Section 2 will be null and void and will be disregarded.

3. Escrow of Stock . For purposes of facilitating the enforcement of the provisions of this Agreement and the payment of withholding taxes (if any) pursuant to Section 5 of this Agreement, the Grantee agrees, immediately upon receipt of the certificate(s) for the Restricted Shares, to deliver such certificate(s), together with an Assignment Separate from Certificate in the form attached hereto as Exhibit A , executed in blank by the Grantee with respect to each such stock certificate, to the Secretary or Assistant Secretary of the Company, or their designee, to hold in escrow for so long as such Restricted Shares have not vested pursuant to the Vesting Schedule set forth in the Notice, with the authority to take all such actions and to effectuate all such transfers and/or releases as may be necessary or appropriate to accomplish the objectives of this Agreement in accordance with the terms hereof. The Grantee hereby acknowledges that the appointment of the Secretary or Assistant Secretary of the Company (or their designee) as the escrow holder hereunder with the stated authorities is a material inducement to the Company to make this Agreement and that such appointment is coupled with an interest and is accordingly irrevocable. The Grantee agrees that such escrow holder shall not be liable to any party hereto (or to any other party) for any actions or omissions unless such escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Upon the vesting of the Restricted Shares, the escrow holder will, without further order or instruction, transmit to the Grantee the certificate evidencing such Shares, subject, however, to satisfaction of any withholding obligations provided in Section 5 below.

4. Distributions . The Company shall disburse to the Grantee all regular cash dividends with respect to the Shares and Additional Securities (whether vested or not), less any applicable withholding obligations.

5. Withholding of Taxes .

(a) General . The Grantee is ultimately liable and responsible for all taxes owed by the Grantee in connection with the Award, regardless of any action the Company or any Related Entity takes with respect to any tax withholding obligations that arise in connection with the Award. Neither the Company nor any Related Entity makes any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of the Award or the subsequent sale of Shares subject to the Award. The Company and its Related Entities do not commit and are under no obligation to structure the Award to reduce or eliminate the Grantee’s tax liability.

(b) Payment of Withholding Taxes . Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any tax withholding obligation, whether United States federal, state, local or non-U.S., including any employment tax obligation (the “Tax Withholding Obligation”), the Grantee must arrange for the satisfaction of the minimum amount of such Tax Withholding Obligation in a manner acceptable to the Company.

(i) By Share Withholding. To the extent the vesting of any Shares occurs during a “blackout period” of the Company wherein certain Employees are precluded from selling Shares and unless the Grantee determines to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, the Grantee authorizes the Company to withhold from those Shares issuable to the Grantee the whole number of Shares sufficient to satisfy the minimum applicable Tax Withholding Obligation. The Grantee acknowledges that the withheld Shares may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of Shares described above.

(ii) By Sale of Shares . Unless the Grantee determines to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, the Grantee’s acceptance of this Award constitutes the Grantee’s instruction and authorization to the Company and any brokerage firm determined acceptable to the Company for such purpose to sell on the Grantee’s behalf a whole number of Shares from those Shares issuable to the Grantee as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the minimum applicable Tax Withholding Obligation. Such Shares will be sold on the day such Tax Withholding Obligation arises (e.g., a vesting date) or as soon thereafter as practicable. The Grantee will be responsible for all broker’s fees and other costs of sale, and the Grantee agrees to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed the Grantee’s minimum Tax Withholding Obligation, the Company agrees to pay such excess in cash to the Grantee. The Grantee acknowledges that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the sale of Shares described above.

(iii) By Check, Wire Transfer or Other Means . At any time not less than five (5) business days before any Tax Withholding Obligation arises (e.g., a vesting date), the Grantee may elect to satisfy the Grantee’s Tax Withholding Obligation by delivering to the Company an amount that the Company determines is sufficient to satisfy the Tax Withholding Obligation by (x) wire transfer to such account as the Company may direct, (y) delivery of a certified check payable to the Company, or (z) such other means as specified from time to time by the Administrator.

6. Additional Securities . Any securities or cash received (other than a regular cash dividend) as the result of ownership of the Restricted Shares (the “Additional Securities”), including, but not by way of limitation, warrants, options and securities received as a stock dividend or stock split, or as a result of a recapitalization or reorganization or other similar change in the Company’s capital structure, shall be retained in escrow in the same manner and subject to the same conditions and restrictions as the Restricted Shares with respect to which they were issued, including, without limitation, the Vesting Schedule set forth in the Notice. The Grantee shall be entitled to direct the Company to exercise any warrant or option received as Additional Securities upon supplying the funds necessary to do so, in which event the securities so purchased shall constitute Additional Securities, but the Grantee may not direct the Company to sell any such warrant or option. If Additional Securities consist of a convertible security, the Grantee may exercise any conversion right, and any securities so acquired shall constitute Additional Securities. In the event of any change in certificates evidencing the Shares or the Additional Securities by reason of any recapitalization, reorganization or other transaction that results in the creation of Additional Securities, the escrow holder is authorized to deliver to the issuer the certificates evidencing the Shares or the Additional Securities in exchange for the certificates of the replacement securities.

7. Stop-Transfer Notices . In order to ensure compliance with the restrictions on transfer set forth in this Agreement, the Notice or the Plan, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

8. Refusal to Transfer . The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

9. Restrictive Legends . The Grantee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws:

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THAT CERTAIN RESTRICTED STOCK BONUS AWARD AGREEMENT BETWEEN THE COMPANY AND THE NAMED SHAREHOLDER. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH SUCH AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

10. Entire Agreement: Governing Law . The Notice, the Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee’s interest except by means of a writing signed by the Company and the Grantee. These agreements are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice or this Agreement be determined to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

11. Headings . The captions used in this Agreement are inserted for convenience and shall not be deemed a part of this Agreement for construction or interpretation.

12. Administration and Interpretation . Any question or dispute regarding the administration or interpretation of the Notice, the Plan or this Agreement shall be submitted by the Grantee or by the Company to the Administrator. The resolution of such question or dispute by the Administrator shall be final and binding on all persons.

13. Venue . The parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Agreement shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of San Mateo) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Section 13 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

14. Notices . Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if the parties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to such other address as such party may designate in writing from time to time to the other party.

END OF AGREEMENT

EXHIBIT A

STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE

[Please print out and sign this document but do not date it. The date and information of the transferee will be completed if and when the shares are assigned.]

FOR VALUE RECEIVED, hereby sells, assigns and transfers unto , ( ) shares of the Common Stock of Novellus Systems, Inc., a California Company (the “Company”), standing in his name on the books of, the Company represented by Certificate No. herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company attorney to transfer the said stock in the books of the Company with full power of substitution.

DATED:



By



Award Number

Grantee’s Name and Address

NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

NOTICE OF RESTRICTED STOCK BONUS AWARD


Grantee’s Name and Address:


Award Number

Date of Award

Total Number of Shares of Common Stock Awarded

Aggregate Fair Market Value of the Shares		$

Vesting Schedule :

Subject to the Grantee’s Continuous Service and other limitations set forth in this Notice, the Agreement and the Plan, the Shares will “vest” in accordance with the following schedule:

[INSERT VESTING SCHEDULE]

In the event of a Corporate Transaction, one hundred percent (100%) of the Shares shall become vested immediately prior to the effective date of such Corporate Transaction.

At the time of the termination of the Grantee’s Continuous Service, the Board of Directors may, in the exercise of its sole discretion, accelerate the vesting of all or some portion of the remaining unvested Shares as the Board of Directors determines is appropriate taking into account the circumstances of such termination.

Except as set forth above, vesting shall cease upon the date of termination of the Grantee’s Continuous Service for any reason, including death or Disability. Except as set forth above, in the event the Grantee’s Continuous Service is terminated for any reason, including death or Disability, any Restricted Shares held by the Grantee immediately following such termination of Continuous Service shall be deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of the Restricted Shares and shall have all rights and interest in or related thereto without further action by the Grantee. The foregoing forfeiture provisions set forth in this Notice as to Restricted Shares shall apply to the new capital stock or other property (including cash paid other than as a regular cash dividend) received in exchange for the Shares in consummation of any transaction described in Section 10 of the Plan and such stock or property shall be deemed Additional Securities (as defined in the Agreement) for purposes of the Agreement, but only to the extent the Shares are at the time covered by such forfeiture provisions.


Novellus Systems, Inc., a California corporation

By:
Title:
Date:

THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE.

The Grantee understands that the Award is subject to the Grantee’s consent to access, and acknowledgement of having accessed, the Plan prospectus in connection with the Form S-8 registration statement for the Plan, any updates thereto, the Plan, the Agreement and this Notice (collectively, the “Plan Documents”) in electronic form through the E*Trade Financial web page at the following address: [www.etrade.com] or such other address as is provided by notification from time to time. By accepting the grant of the Award, the Grantee hereby: (i) consents to access electronic copies (instead of receiving paper copies) of the Plan Documents via the E*Trade Financial web page or such other web page as is provided by notification from time to time, (ii) represents that the Grantee has access to the internet generally; (iii) acknowledges receipt of electronic copies, or that the Grantee is already in possession of paper copies, of the Plan Documents and the Company’s most recent annual report to shareholders; and (iv) represents that the Grantee is familiar with the terms and provisions of the Plan Documents and accepts the Award subject to all of the terms and provisions of the Plan Documents.

The Grantee may receive, without charge, upon written or oral request, paper copies of any or all of the Plan Documents, documents incorporated by reference in the Form S-8 registration statement for the Plan, and the Company’s most recent annual report to shareholders by requesting them from Stock Administration at Novellus Systems, Incorporated, 4000 North First Street, San Jose, CA 95134, Attn. Stock Administration M/S 90-2B. Telephone (408) 943-9700, email: stock.administration@novellus.com.



Dated:						Signed:

NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

RESTRICTED STOCK BONUS AWARD AGREEMENT

5. Withholding of Taxes .

11. Headings . The captions used in this Agreement are inserted for convenience and shall not be deemed a part of this Agreement for construction or interpretation.

END OF AGREEMENT

EXHIBIT A

STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE

[Please print out and sign this document but do not date it. The date and information of the transferee will be completed if and when the shares are assigned.]

DATED:



By



Award Number

Grantee’s Name and Address

NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

NOTICE OF RESTRICTED STOCK UNIT AWARD


Grantee’s Name and Address:

You (the “Grantee”) have been granted an award of Restricted Stock Units (the “Award”), subject to the terms and conditions of this Notice of Restricted Stock Unit Award (the “Notice”), the Novellus Systems, Inc. 2001 Stock Incentive Plan, as amended from time to time (the “Plan”) and the Restricted Stock Unit Agreement (the “Agreement”) attached hereto, as follows. Unless otherwise provided herein, the terms in this Notice shall have the same meaning as those defined in the Plan.


Award Number

Date of Award

Vesting Commencement Date

Total Number of Restricted Stock Units Awarded (the “Units”)

Vesting Schedule :

Subject to the Grantee’s Continuous Service and other limitations set forth in this Notice, the Agreement and the Plan, the Units will “vest” in accordance with the following schedule (the “Vesting Schedule”):

[INSERT VESTING SCHEDULE]

In the event the Grantee’s Continuous Service terminates due to death or Disability, fifty percent (50%) of the total number of Units awarded will accelerate and vest immediately prior to such termination of Continuous Service.

In the event of the Grantee’s change in status from Employee to Consultant or Director, or from an Employee whose customary employment is 20 hours or more per week to an Employee whose customary employment is fewer than 20 hours per week, vesting of the Units shall continue in accordance with the Vesting Schedule set forth above and terms of this Notice, the Agreement and the Plan, unless affirmatively determined otherwise by the Administrator; provided, however, that the determination of whether such change in status results in a termination of Continuous Service (resulting in forfeiture of unvested Units) will be determined in accordance with Section 409A of the Code.

During any authorized leave of absence, the vesting of the Units as provided in this schedule shall be suspended (to the extent permitted under Section 409A of the Code) after the leave of absence exceeds a period of thirty (30) days. The Vesting Schedule of the Units shall be extended by the length of the suspension. Vesting of the Units shall resume upon the Grantee’s

termination of the leave of absence and return to service to the Company or a Related Entity; provided, however, that if the leave of absence exceeds six (6) months, and a return to service upon expiration of such leave is not guaranteed by statute or contract, then (a) the Grantee’s Continuous Service shall be deemed to terminate on the first date following such six-month period and (b) the Grantee will forfeit the Units that are unvested on the date of the Grantee’s termination of Continuous Service. An authorized leave of absence shall include sick leave, military leave, or other bona fide leave of absence (such as temporary employment by the government).

For purposes of this Notice and the Agreement, the term “vest” shall mean, with respect to any Units, that such Units are no longer subject to forfeiture to the Company. If the Grantee would become vested in a fraction of a Unit, such Unit shall not vest until the Grantee becomes vested in the entire Unit.

Vesting shall cease upon the date the Grantee terminates Continuous Service for any reason, excluding death or Disability. In the event the Grantee terminates Continuous Service for any reason, excluding death or Disability, any unvested Units held by the Grantee immediately following such termination of the Grantee’s Continuous Service shall be forfeited and deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of such reconveyed Units and shall have all rights and interest in or related thereto without further action by the Grantee. In the event the Grantee terminates Continuous Service due to death or Disability, fifty percent (50%) of the total number of Units awarded will accelerate and vest immediately prior to such termination and all remaining unvested Units, if any, shall be forfeited and deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of such reconveyed Units and shall have all rights and interest in or related thereto without further action by the Grantee.

IN WITNESS WHEREOF, the Company and the Grantee have executed this Notice and agree that the Award is to be governed by the terms and conditions of this Notice, the Plan, and the Agreement.


Novellus Systems, Inc., a California corporation

By:
Title:
Date:

THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE UNITS SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE OR AS OTHERWISE SPECIFICALLY PROVIDED HEREIN (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS AWARD OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE AGREEMENT, NOR IN THE PLAN, SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF THE GRANTEE’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH

THE GRANTEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE GRANTEE’S CONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEE’S STATUS IS AT WILL.

Grantee Acknowledges and Agrees :

The Grantee acknowledges receipt of a copy of the Plan and the Agreement and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Award subject to all of the terms and provisions hereof and thereof. The Grantee has reviewed this Notice, the Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice and fully understands all provisions of this Notice, the Agreement and the Plan. The Grantee further agrees and acknowledges that this Award is a non-elective arrangement pursuant to Section 409A of the Code.

The Grantee further acknowledges that, from time to time, the Company may be in a “blackout period” and/or subject to applicable federal securities laws that could subject the Grantee to liability for engaging in any transaction involving the sale of the Company’s Shares. The Grantee further acknowledges and agrees that, prior to the sale of any Shares acquired under this Award, it is the Grantee’s responsibility to determine whether or not such sale of Shares will subject the Grantee to liability under insider trading rules or other applicable federal securities laws.

The Grantee may receive, without charge, upon written or oral request, paper copies of any or all of the Plan Documents, documents incorporated by reference in the Form S-8 registration statement for the Plan, and the Company’s most recent annual report to shareholders by requesting them from Stock Administration at Novellus Systems, Incorporated, 4000 North First Street, San Jose, CA 95134, Attn. Stock Administration M/S 90-2B. Telephone (408) 943-9700, email: stock.administration@novellus.com.

The Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Agreement shall be resolved by the Administrator in accordance with Section 8 of the Agreement. The Grantee further agrees to the venue and jurisdiction selection in accordance with Section 9 of the Agreement. The Grantee further agrees to notify the Company upon any change in his or her residence address indicated in this Notice.



Date:
				Grantee’s Signature


				Grantee’s Printed Name


				Address

Award Number:

NOVELLUS SYSTEMS, INC.

2001 STOCK INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

1. Issuance of Units . Novellus Systems, Inc., a California corporation (the “Company”), hereby issues to the Grantee (the “Grantee”) named in the Notice of Restricted Stock Unit Award (the “Notice”) an award (the “Award”) of the Total Number of Restricted Stock Units Awarded set forth in the Notice (the “Units”), subject to the Notice, this Restricted Stock Unit Agreement (the “Agreement”) and the terms and provisions of the Novellus Systems, Inc. 2001 Stock Incentive Plan, as amended from time to time (the “Plan”), which is incorporated herein by reference. Unless otherwise provided herein, the terms in this Agreement shall have the same meaning as those defined in the Plan.

2. Transfer Restrictions . The Units may not be transferred in any manner other than by will or by the laws of descent and distribution.

3. Conversion of Units and Issuance of Shares .

(a) General . Subject to Sections 3(b) and 3(c), one share of Common Stock shall be issuable for each Unit subject to the Award (the “Shares”) upon the earlier of: (i) vesting; or (ii) immediately prior to the specified effective date of a Change in Control or a Corporate Transaction (each as defined in the Plan) which also constitutes a “change in the ownership or effective control, or in the ownership of a substantial portion of the assets” (as defined in Section 409A of the Code) of the Company. Immediately thereafter, or as soon as administratively feasible, the Company will transfer the appropriate number of Shares to the Grantee after satisfaction of any required tax or other withholding obligations. Any fractional Unit remaining after the Award is fully vested shall be discarded and shall not be converted into a fractional Share. Effective upon the consummation of a Corporate Transaction, the Award shall terminate unless it is Assumed in connection with the Corporate Transaction.

(b) Delay of Conversion . The conversion of the Units into the Shares under Section 3(a), above, shall be delayed in the event the Company reasonably anticipates that the issuance of the Shares would constitute a violation of federal securities laws or other Applicable Law. If the conversion of the Units into the Shares is delayed by the provisions of this Section 3(b), the conversion of the Units into the Shares shall occur at the earliest date at which the Company reasonably anticipates issuing the Shares will not cause a violation of federal securities laws or other Applicable Law. For purposes of this Section 3(b), the issuance of Shares that would cause inclusion in gross income or the application of any penalty provision or other provision of the Code is not considered a violation of Applicable Law.

(c) Delay of Issuance of Shares . The Company shall delay the issuance of any Shares under this Section 3 to the extent necessary to comply with Section 409A(a)(2)(B)(i) of the Code (relating to payments made to certain “specified employees” of certain publicly-traded companies); in such event, any Shares to which the Grantee would otherwise be entitled during the six (6) month period following the date of the Grantee’s termination of Continuous Service will be issuable on the first business day following the expiration of such six (6) month period.

4. Right to Shares . The Grantee shall not have any right in, to or with respect to any of the Shares (including any voting rights or rights with respect to dividends paid on the Common Stock) issuable under the Award until the Award is settled by the issuance of such Shares to the Grantee.

5. Taxes .

(a) Tax Liability . The Grantee is ultimately liable and responsible for all taxes owed by the Grantee in connection with the Award, regardless of any action the Company or any Related Entity takes with respect to any tax withholding obligations that arise in connection with the Award. Neither the Company nor any Related Entity makes any representation or undertaking regarding the treatment of any tax withholding in connection with any aspect of the Award, including the grant, vesting, assignment, release or cancellation of the Units, the delivery of Shares, the subsequent sale of any Shares acquired upon vesting and the receipt of any dividends or dividend equivalents. The Company does not commit and is under no obligation to structure the Award to reduce or eliminate the Grantee’s tax liability.

(b) Payment of Withholding Taxes . Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any tax withholding obligation, whether United States federal, state, local or non-U.S., including any social insurance, employment tax, payment on account or other tax-related obligation (the “Tax Withholding Obligation”), the Grantee must arrange for the satisfaction of the minimum amount of such Tax Withholding Obligation in a manner acceptable to the Company.

(i) By Share Withholding. The Grantee authorizes the Company to, upon the exercise of its sole discretion, withhold from those Shares issuable to the Grantee the whole number of Shares sufficient to satisfy the minimum applicable Tax Withholding Obligation. The Grantee acknowledges that the withheld Shares may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the withholding of Shares described above.

or as soon thereafter as practicable. The Grantee will be responsible for all broker’s fees and other costs of sale, and the Grantee agrees to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed the Grantee’s minimum Tax Withholding Obligation, the Company agrees to pay such excess in cash to the Grantee. The Grantee acknowledges that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy the Grantee’s minimum Tax Withholding Obligation. Accordingly, the Grantee agrees to pay to the Company or any Related Entity as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the sale of Shares described above.

(iii) By Check, Wire Transfer or Other Means . At any time not less than five (5) business days (or such fewer number of business days as determined by the Administrator) before any Tax Withholding Obligation arises (e.g., a vesting date), the Grantee may elect to satisfy the Grantee’s Tax Withholding Obligation by delivering to the Company an amount that the Company determines is sufficient to satisfy the Tax Withholding Obligation by (x) wire transfer to such account as the Company may direct, (y) delivery of a certified check payable to the Company, or (z) such other means as specified from time to time by the Administrator.

Notwithstanding the foregoing, the Company or a Related Entity also may satisfy any Tax Withholding Obligation by offsetting any amounts (including, but not limited to, salary, bonus and severance payments) payable to the Grantee by the Company and/or a Related Entity. Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the Award, the Grantee agrees to pay the Company the amount of such deficiency in cash within five (5) days after receiving a written demand from the Company to do so, whether or not the Grantee is an employee of the Company at that time.

6. Entire Agreement; Governing Law . The Notice, the Plan and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee’s interest except by means of a writing signed by the Company and the Grantee. These agreements are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice or this Agreement be determined to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

7. Construction . The captions used in the Notice and this Agreement are inserted for convenience and shall not be deemed a part of the Award for construction or interpretation. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

8. Administration and Interpretation . Any question or dispute regarding the administration or interpretation of the Notice, the Plan or this Agreement shall be submitted by the Grantee or by the Company to the Administrator. The resolution of such question or dispute by the Administrator shall be final and binding on all persons.

9. Venue and Jurisdiction . The parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Agreement shall be brought exclusively in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of San Mateo) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Section 9 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

10. Notices . Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if the parties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to such other address as such party may designate in writing from time to time to the other party.

11. Data Privacy . The Grantee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Grantee’s personal data as described in this Agreement by and among, as applicable, the Grantee’s employer, the Company, and any Related Entity for the exclusive purpose of implementing, administering and managing the Grantee’s participation in the Plan. The Grantee understands that the Company or any Related Entity may hold certain personal information about the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, date of birth, social security/insurance number or other identification number, salary, nationality, job title, any shares of Common Stock or directorships held in the Company, details of all awards or any other entitlement to shares awarded, canceled, vested, unvested or outstanding in the Grantee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). The Grantee understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Grantee’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Grantee’s country. The Grantee understands that the Grantee may request a list with the names and addresses of any potential recipients of the Data by contacting the Grantee’s local human resources representative. The Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Grantee’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker, escrow agent or other third party with whom the Shares received upon vesting of the Units may be deposited. The Grantee understands that Data will be held pursuant to this Section 11 only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan. The Grantee understands that the Grantee may, at any time, view Data, request additional information about

the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Grantee’s local human resources representative. The Grantee understands that refusal or withdrawal of consent may affect the Grantee’s ability to participate in the Plan. For more information on the consequences of the Grantee’s refusal to consent or withdrawal of consent, the Grantee understands that the Grantee may contact the Grantee’s local human resources representative.

12. Amendment and Delay to Meet the Requirements of Section 409A . The Grantee acknowledges that the Company, in the exercise of its sole discretion and without the consent of the Grantee, may amend or modify this Agreement in any manner and delay the issuance of any Shares issuable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Treasury regulations or guidance from the Internal Revenue Service as the Company deems appropriate or advisable. In addition, the Company makes no representation that the Award will comply with Section 409A of the Code and makes no undertaking to prevent Section 409A of the Code from applying to the Award or to mitigate its effects on any deferrals or payments made in respect of the Units. The Grantee is encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Code.

END OF AGREEMENT

Exhibit 10.28

NOVELLUS SYSTEMS, INC.

EXECUTIVE VOLUNTARY DEFERRED COMPENSATION PLAN

Amended and Restated Effective January 1, 2005


ARTICLE 1	PURPOSE; EFFECTIVE DATE	1

1.1	Purpose	1

1.2	Effective Date	1

ARTICLE 2	DEFINITIONS	2

ARTICLE 3	ELIGIBILITY AND PARTICIPATION	7

3.1	Eligibility and Participation	7

3.2	Form of Deferral	8

3.3	Period of Deferral Commitment	9

3.4	Commitment Limited by Termination or Disability	9

3.5	Modification of Deferral Election	9

3.6	Adverse Change in Performance Status	9

3.7	Default Elections in Event of Incomplete or Inaccurate Deferral Election	9

ARTICLE 4	DEFERRED COMPENSATION ACCOUNT	11

4.1	Accounts	11

4.2	Timing of Credits; Tax Withholding on Deferred Amounts	11

4.3	Valuation Funds	11

4.4	Determination of Accounts	12

4.5	Vesting of Accounts	12

4.6	Statement of Accounts	12

ARTICLE 5	PLAN BENEFITS	13

5.1	Distribution of Account Balances	13

5.2	Death Benefit	14

5.3	Form of Payment	14

5.4	Permissible Acceleration Events	16

5.5	Delay of Distributions	17

5.6	Payments from Grandfathered Accounts	18

5.7	Effect of Payment	19


ARTICLE 6	BENEFICIARY DESIGNATION	19

6.1	Beneficiary Designation	19

6.2	Changing Beneficiary	19

6.3	Change in Marital Status	20

6.4	No Beneficiary Designation	20

ARTICLE 7	ADMINISTRATION	21

7.1	Committee; Duties	21

7.2	Administrative Authority	21

7.3	Agents	21

7.4	Expenses of Administration	22

7.5	Insurance	22

7.6	Notices	22

7.7	Indemnity of Committee	22

7.8	Election of Committee After Change in Control	23

ARTICLE 8	CLAIMS AND APPEALS PROCEDURES	23

8.1	Claims Procedures	23

8.2	Appeal Procedures	23

8.3	Subsequent Proceedings	24

ARTICLE 9	AMENDMENT AND TERMINATION OF PLAN	25

9.1	Amendment	25

9.2	Company’s Right to Terminate	25

9.3	Liquidation of Plan	26

9.4	Termination in the Event of Insolvency	26

9.5	Other Termination Events	27

ARTICLE 10	MISCELLANEOUS	27

10.1	Unfunded Plan	27

10.2	Tax Withholding	28

10.3	Unsecured General Creditor	28


10.4	Trust Fund	28

10.5	Nonassignability	28

10.6	Not a Contract of Employment	29

10.7	Alternative Acts and Times	29

10.8	Provision of Information	29

10.9	Facility of Payment	29

10.10	Correction of Errors	30

10.11	Missing Persons	30

10.12	Governing Law; Severability	30

10.13	Validity	31

10.14	Notice	31

10.15	Successors	31

10.16	Headings	31

10.17	Status of Participants	31

iii

NOVELLUS SYSTEMS, INC.

EXECUTIVE VOLUNTARY DEFERRED COMPENSATION PLAN

ARTICLE 1

PURPOSE; EFFECTIVE DATE

1.1 Purpose . The purpose of this Executive Voluntary Deferred Compensation Plan (hereinafter, the “ Plan ”) is to permit a select group of management and highly compensated employees of Novellus Systems, Inc. (the “ Company ”) and its subsidiaries to defer the receipt of income which would otherwise become payable to them through an unfunded “top hat” arrangement exempt from the fiduciary, funding, vesting, and plan termination insurance provisions of Title I and Title IV of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”). It is intended that this Plan, by providing to eligible employees an opportunity to defer the receipt of income, will assist in the retaining and attracting individuals of exceptional ability.

1.2 Effective Date . The effective date of this amended and restated Plan, as it applies to Compensation deferred on or after January 1, 2005 (and any earnings on such amounts). shall be January 1, 2005 (“ Effective Date ”); the Company first adopted the Plan effective as of October 1, 2001. The amended and restated Plan provisions set forth herein apply to any Compensation first earned on or after the Effective Date (inclusive of any earnings on such amounts); provided, however, that the terms of the prior Plan document as in effect on December 31, 2004 (the “ Prior Plan ”) will continue to apply to amounts (inclusive of earnings) maintained in Accounts under the Plan as of December 31, 2004. All references herein to the term “Plan” shall apply only to the Plan as amended and restated effective January 1, 2005 and not to the Prior Plan. Together, this document and the documents for the Prior Plan describe the terms of a single non-qualified deferred compensation plan. However, amounts subject to the terms of this Plan (as amended and restated herein) and amounts subject to the terms of the Prior Plan shall be accounted for separately at all times. No amendment to the Prior Plan as in effect on October 3, 2004 that would constitute a “material modification” (within the meaning of Section 1.409A-6(a)(4) of the Treasury regulations or subsequent administrative or regulatory guidance) shall be effective with respect to amounts that were deferred in taxable years beginning before January 1, 2005 (inclusive of any earnings on such deferred amounts).

ARTICLE 2

DEFINITIONS

For the purpose of this Plan, the following terms shall have the meanings indicated, unless the context clearly indicates otherwise:

2.1 Account . “Account” means the bookkeeping account maintained on the books of the Company used solely to calculate the amount payable to each Participant or Beneficiary under this Plan and shall not constitute a separate fund of assets. Each Participant’s Account shall consist of the following sub-accounts: (1) a Retirement Account; (2) an In-Service Account; and (3) if applicable, a Grandfathered Account. Undistributed amounts credited to Participants under the Prior Plan, if any, shall be tracked separately and retained in each such Participant’s Grandfathered Account.

2.2 Accrual . “Accrual” means the amount credited to a Participant’s Account (or, if such amount should be negative, debited from the Account) on each Determination Date, which shall be based on the Valuation Funds chosen by the Participant as provided in Section 2.27, below and in a manner consistent with Section 4.3, below.

2.3 Beneficiary . “Beneficiary” means the person, persons or entity as designated by a Participant, entitled under Article 6 to receive any Plan benefits payable after the Participant’s death.

2.4 Board . “Board” means the Board of Directors of the Company.

2.5 Change in Control . A “Change in Control” shall occur if any of the following transactions occurs:

(a) a merger or consolidation in which the Company is not the surviving entity, except for a transaction, the principal purpose of which is to change the state in which the Company is incorporated;

(b) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company’s subsidiary corporations);

(c) approval by the Company’s shareholders of any plan or proposal for the complete liquidation or dissolution of the Company; or

(d) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger.

Notwithstanding any provision herein to the contrary, no distributions under the Plan shall be triggered by any Change in Control that would not be deemed to constitute a “change in the ownership or effective control, or in the ownership of a substantial portion of the assets” as defined in Section 409A of the Code and its related Treasury regulations.

2.6 Claimant . “Claimant” shall have the meaning set forth in Section 8.1(b), below.

2.7 Code . “Code” means the Internal Revenue Code of 1986, as amended from time to time.

2.8 Committee . “Committee” means the administrative committee appointed by the Board to administer the Plan pursuant to Article 7. Notwithstanding any other provision of the Plan document, any member of the Committee or any other officer or employee of the Company who exercises discretion or authority on behalf of the Company shall not be a fiduciary of the Plan merely by virtue of his or her exercise of such discretion or authority. The Board (or its delegate) shall be responsible for appointing the members of the Committee. Because this Plan is a “top hat” arrangement, the Committee shall not be subject to the duties imposed by the provisions of Part 4 of Title I of ERISA.

2.9 Company . “Company” means Novellus Systems, Inc., a California corporation, and its successors in interest.

2.10 Compensation . “Compensation” means the base salary, bonus or incentive compensation, and/or Director Fees payable to a Participant with respect to services performed for the Company or its affiliates by the Participant. For purposes

of this Plan, Compensation shall be calculated before reduction for any amounts deferred by the Participant pursuant to the Company’s tax qualified plans which may be maintained under Section 401(k) or Section 125 of the Code, or pursuant to this Plan or any other non-qualified plan which permits the voluntary deferral of compensation. Inclusion of any other form of compensation is subject to Committee approval.

2.11 Deferral Election . “Deferral Election” means a commitment made by a Participant to defer a portion of his or her Compensation, as set forth in Article 3. A Participant’s Deferral Election shall apply to each payment of his or her Compensation. Such designation shall be made in whole percentages and shall be made in the form set forth as Exhibit “A” hereto or in another substantially-equivalent form acceptable to the Committee. A Deferral Election shall include the Participant’s election regarding the form and timing of payments to be made from his or her Account. A Deferral Election shall remain in effect for the immediately succeeding Deferral Period unless revoked or modified in accordance with Section 5.1(b)(ii), below.

2.12 Deferral Period . “Deferral Period” means each calendar year.

2.13 Determination Date . “Determination Date” means each business day of the calendar year.

2.14 Director . “Director” means a member of the Board who is not an Employee.

2.15 Director Fees . “Director Fees” means any cash fees or remuneration paid to a Director by the Company from time to time.

2.16 Disability or Disabled . “Disability” or “Disabled” means (i) a Participant’s inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (ii) a Participant’s receipt, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, of income replacement benefits for a period of not less than three (3) months under a plan or arrangement covering employees of the Company.

2.17 Employee . “Employee” means any “employee” of the Company within the meaning of Section 3121(d) of the Code who is determined by the Committee in its sole discretion to be a member of “a select group of highly compensated and management employees” of Company and its affiliates.

2.18 ERISA . “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

2.19 Grandfathered Account . “Grandfathered Account” means a Participant’s Account balance consisting of amounts credited and vested under the Prior Plan on or prior to December 31, 2004 and earnings and losses relating to the foregoing amounts (including earnings and losses accruing on or after January 1, 2005). Each Participant’s Grandfathered Account shall be accounted for separately within the Participant’s Account. It is intended that the Grandfathered Accounts will not be subject to the restrictions imposed by Section 409A of the Code. If applicable, a Participant’s Grandfathered Account will include separate sub-accounts consisting of a Grandfathered Retirement Account and a Grandfathered In-Service Account.

2.20 In-Service Account . “In-Service Account” means the sub-account established under a Participant’s Account into which the Participant elects to contribute deferred Compensation and from which, pursuant to Section 5.1(b), distributions are made.

2.21 Participant . “Participant” means any Employee or Director who is eligible, pursuant to Section 3.1, below, to participate in this Plan, and who has elected to defer Compensation under this Plan in accordance with Article 3, below. Any such Employee or Director shall remain a Participant in this Plan for the relevant Deferral Period(s) and until such time as all benefits payable under this Plan have been paid in accordance with the provisions hereof.

2.22 Plan . “Plan” means this “Novellus Systems, Inc. Executive Voluntary Deferred Compensation Plan,” as amended from time to time.

2.23 Prior Plan . “Prior Plan” means the “Executive Voluntary Deferred Compensation Plan” previously adopted by the Company effective as of October 1, 2001, as in effect through December 31, 2004.

2.24 Retirement Account . “Retirement Account” means the sub-account established under a Participant’s Account into which the Participant elects to contribute deferred Compensation and from which, pursuant to Section 5.1(a), distributions are made.

2.25 Termination of Service or Termination . “Termination of Service” or “Termination” means a Participant’s (i) separation from service with the Company, (ii) refusal or failure to return to work within three (3) working days after the date requested by the Company, (iii) failure to return to work at the conclusion of a leave of absence; or (iv) in the case of a Director, termination of service as a Director of the Company. Notwithstanding the foregoing, an Employee will not be deemed to have experienced a Termination of Service while absent on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six (6) months, or if longer, the period during which the Employee’s right to reemployment is guaranteed by statute or contract. If the period of leave exceeds six (6) months, and the Employee’s right to reemployment is not guaranteed by statute or contract, the Employee will be deemed to have experienced a Termination of Service as of the first day immediately following the end of such six-month period. In no event shall any distribution under the Plan be triggered by a Termination of Service that does not constitute a “separation from service” within the meaning of Section 1.409A-1(h) of the Treasury regulations.

2.26 Unforeseeable Emergency . “Unforeseeable Emergency” shall mean an unforeseeable emergency as defined in Section 409A(a)(2)(B)(ii)(I) of the Code (as limited by Section 409A(a)(2)(B)(ii)(II) of the Code), the Treasury regulations thereunder, and any other published interpretive authority, as issued or amended from time to time.

2.27 Valuation Funds . “Valuation Funds” means one or more of the independently-established funds or indices that are identified and listed by the Committee. These Valuation Funds are used solely to calculate the Accrual that is credited to each Participant’s Account(s) in accordance with Article IV, below, and do not represent, nor should it be interpreted to convey, any beneficial interest on the part of the Participant in any asset or other property. The determination of the increase or decrease in the performance of each Valuation Fund shall be made by the Committee in its reasonable discretion. The Committee shall select the various Valuation Funds available to the Participants with respect to this Plan and shall set forth a list of these Valuation Funds attached hereto as Exhibit “B” , which may be amended from time to time in the sole discretion of the Committee.

ARTICLE 3

ELIGIBILITY AND PARTICIPATION

3.1 Eligibility and Participation .

(a) Eligibility . Eligibility to participate in the Plan shall be limited to (i) Employees who are designated by the Committee for participation in this Plan; and (ii) Directors who are designated by the Committee for participation in this Plan. An individual’s eligibility to participate in the Plan does not confer upon the employee any right to any compensation, award, bonus, or other remuneration of any kind.

(b) Participation . An Employee’s or Director’s participation in the Plan shall be effective upon (i) his or her notification by the Committee of eligibility to participate, and (ii) completion and submission of a Deferral Election to the Committee no later than fifteen (15) days prior to the beginning of the Deferral Period in which it is to be effective, except as otherwise provided in Sections 3.1(c) or 3.1(d).

(c) First-Year Participation . If an individual first becomes eligible to participate in the Plan (and has not previously become eligible to participate under any other plan that would be aggregated with the Plan for purposes of Section 1.409A-1(c) of the Treasury regulations) during a Deferral Period, that individual may submit a Deferral Election to the Committee within thirty (30) days after his or her receipt of notice of eligibility to participate from the Committee. Such Deferral Election will be effective only with regard to Compensation earned and payable following submission of the Deferral Election to the Committee.

(d) Deferrals of Performance-Based Compensation . If the Committee, in its sole discretion, determines that all or any portion of a Participant’s Compensation qualifies as “performance-based compensation” within the meaning of Treasury regulation Section 1.409A-1(e), the Participant’s Deferral Election with respect to such Compensation may be made at such time as is permitted by the Committee (but in no event later than the deadline specified in Treasury regulation Section 1.409A-2(a)(8)), provided that the Participant performs services continuously

from the later of the beginning of the applicable performance period or the date the applicable performance criteria are established through the date the election is made. However, in no event may an election to defer any such performance-based Compensation be made after such Compensation has become readily ascertainable.

3.2 Form of Deferral . A Participant may make a Deferral Election as follows:

(a) Application of Deferral Election . A Deferral Election shall apply to each payment of Compensation by the Company or an affiliate to a Participant during the Deferral Period. The Participant shall separately set forth the amount of salary, bonus or incentive compensation, and/or Director Fees that are to be deferred in full percentage increments in his or her Deferral Election form. Deferral Elections relating to base salary payments shall be withheld in substantially equal amounts over the applicable Deferral Period.

(b) Allocation Among Sub-Accounts . Each Deferral Election shall specify how a Participant’s deferrals of Compensation for a particular Deferral Period are to be allocated between his or her Retirement Account and In-Service Account.

(c) Allocation to Valuation Funds . The Participant shall specify in a separate form (known as the “ Allocation Form ” and set forth in Exhibit “B” hereto) filed with the Committee, the Participant’s initial allocation and any subsequent re-allocations of each Account among the various available Valuation Funds.

(d) Maximum Deferral . Subject to Section 4.2, below, the maximum percentage of Compensation eligible for deferral under the Plan for each Deferral Period shall be: (i) in the case of base salary, eighty percent (80%); (ii) in the case of bonus or other incentive compensation, one hundred percent (100%); and (iii) in the case of Director Fees, one hundred percent (100%).

(e) Minimum Deferral . The minimum amount of base salary that may be deferred in a Deferral Period shall be five thousand dollars ($5,000). The minimum amount of each payment of bonus or incentive compensation that may be deferred in a Deferral Period shall be five thousand dollars ($5,000) unless an election to defer at least $5,000 of base salary has been made for the same Deferral Period, in which case the minimum deferral of bonus or incentive compensation shall be one dollar ($1.00). The minimum amount of Director Fees that may be deferred in a Deferral Period shall be five thousand dollars ($5,000).

3.3 Period of Deferral Commitment . Once a Participant has made a Deferral Election, that Commitment shall remain in effect for the succeeding Deferral Periods unless revoked or amended in writing by the Participant and delivered to the Committee no later than fifteen (15) days prior to the beginning of the subsequent Deferral Period for which it is to be effective; provided, however, that a Deferral Election relating to any performance-based Compensation for a Deferral Period shall not apply for payments of performance-based Compensation in subsequent Deferral Periods, and a separate Deferral Election shall be required for each Deferral Period’s payment of performance-based Compensation.

3.4 Commitment Limited by Termination or Disability . If a Participant becomes Disabled or experiences a Termination of Service prior to the end of a Deferral Period, the Deferral Period shall end as of the date of the Participant’s Disability or Termination, and no further deferrals of Compensation shall be made by the Participant thereafter unless he or she recommences active employment or service with the Company or its affiliates and is subsequently determined by the Committee to be eligible to participate under Section 3.1, above.

3.5 Modification of Deferral Election . Except as provided in Section 3.4, above, and Section 5.1(b)(ii), below, a Deferral Election shall be irrevocable by the Participant for the duration of a Deferral Period.

3.6 Adverse Change in Performance Status . If the Committee determines, in its sole discretion, that a Participant’s performance is no longer at a level that warrants reward through participation in this Plan, but does not terminate the Participant’s employment or service with Company, the Participant’s existing Deferral Election shall terminate at the end of the current Deferral Period, and no new Deferral Election may be made by such Participant after notice of such determination is given by the Committee, until and unless the Participant subsequently satisfies the requirements of Section 3.1, above.

3.7 Default Elections in Event of Incomplete or Inaccurate Deferral Election . In the event that a Participant submits a Deferral Election to the Committee that omits information necessary to the smooth operation of this Plan, as determined

in the sole discretion of the Committee, or contains information which the Committee, in its sole discretion, determines to be incomplete or inaccurate, the Committee shall be authorized conclusively to assume the following, and such assumptions shall be communicated to the Participant:


Incomplete/Inaccurate Information		Default Election
No Valuation Fund is specified		Default Valuation Fund specified in Exhibit B shall be applicable

Allocation among Valuation Funds totals less than 100%		Default Valuation Fund specified in Exhibit B shall be applicable to any unallocated amounts

Allocation among Valuation Funds totals more than 100%		Each specified allocation will be proportionately reduced

No allocation of deferrals specified as between Retirement Account and In-Service Account		All deferrals will be credited to the Participant’s Retirement Account.

No election as to the form of payments is specified or in effect		Lump-sum distribution for In-Service Account and three (3) year installment distribution schedule for Retirement Account

No distribution date specified or in effect for In-Service Account		Earliest distribution date available under Section 5.2 will be applicable

Notwithstanding the foregoing, no default election under this Section 3.7 shall be effective to require a distribution under the Plan to the extent an existing Deferral Election is in effect, except as may otherwise be permitted by Treasury regulation Section 1.409A-2(b).

ARTICLE 4

DEFERRED COMPENSATION ACCOUNT

4.1 Accounts . The Compensation deferred by a Participant under the Plan and any Accruals on such deferrals shall be credited to the Participant’s Account. Separate records may be maintained on the books of the Company to reflect the amounts credited to each applicable sub-account. Participant Accounts shall be used solely to calculate the amount payable to each Participant under this Plan and shall not constitute a separate fund of assets.

4.2 Timing of Credits; Tax Withholding on Deferred Amounts . A Participant’s deferred Compensation shall be credited to each Account (and allocated as directed by the Participant in his or her Deferral Election) on the last day of the month during which the compensation deferred would have otherwise been payable to the Participant. Any withholding of taxes or other amounts with respect to deferred Compensation that is required by local, state or federal law shall be withheld from the Participant’s corresponding non-deferred portion of Compensation to the maximum extent possible, and any remaining amount shall reduce the amount credited to the Participant’s Account in the manner specified by the Committee.

4.3 Valuation Funds . A Participant shall designate, using the Allocation Form or another substantially-equivalent means acceptable to the Committee, one or more Valuation Funds for his or her Account for the sole purpose of determining the Accruals to be credited or debited to such Account; as specified in his or her Allocation Form, a Participant may provide separate allocation instructions for his or her Retirement Account and In-Service Account. Upon notice to the Committee in accordance with the timing and procedure prescribed by the Committee from time to time, the Participant may also reallocate the balance in each Valuation Fund among the then-available Valuation Funds. The Committee reserves the right to impose reasonable limitations on the timing and procedures for reallocating Account balances within the Plan.

4.4 Determination of Accounts . The aggregate balance in each Participant’s Account as of each Determination Date shall consist of the sum of the balances of his or her Retirement Account and In-Service Account as of the immediately preceding Determination Date, adjusted as follows:

(a) New Deferrals . Each Account shall be increased by any deferred Compensation credited since the immediately-preceding Determination Date.

(b) Distributions . Each Account shall be reduced by the amount of each benefit payment made from that Account since the immediately-preceding Determination Date. Distributions shall be deemed to have been made proportionally from each of the Valuation Funds maintained within such Account based on the proportion that such Valuation Fund bears to the sum of all Valuation Funds maintained within such Account for that Participant as of the Determination Date immediately preceding the date of payment.

(c) Accruals . Each Account shall be increased or decreased by the Accrual allocable to such Account since the immediately-preceding Determination Date as though the balance of that Account had been invested in the applicable Valuation Funds chosen by the Participant.

4.5 Vesting of Accounts . Each Participant shall be vested in the amounts credited to such Participant’s Account as follows:

(a) Retirement Account . A Participant’s interest in his or her Retirement Account (including any Accruals relating thereto) shall be one hundred percent (100%) vested at all times.

(b) In-Service Account . A Participant’s interest in his or her In-Service Account (including any Accruals relating thereto) shall be one hundred percent (100%) vested at all times.

(c) Grandfathered Account . A Participant’s interest in his or her Grandfathered Account (including any Accruals relating thereto) shall be one hundred percent (100%) vested at all times.

4.6 Statement of Accounts . The Committee shall give to each Participant a statement showing the balances in the Participant’s Accounts on a periodic basis as determined by the Committee but in no event less frequently than annually.

ARTICLE 5

PLAN BENEFITS

5.1 Distribution of Account Balances .

(a) Distribution of Retirement Account . Except as provided in Section 5.2 below, the outstanding balance of a Participant’s Retirement Account shall be distributed to the Participant upon his or her Termination of Service. Benefits under this Section 5.1 shall be paid or commence to be paid as soon as administratively practicable after the Participant’s Termination of Employment but in no event later than sixty (60) days thereafter. The form of benefit payment shall be that form previously specified by the Participant in his or her Deferral Election pursuant to Section 5.3(a), below.

(b) Distribution of In-Service Account .

(i) Timing of Payments . The outstanding balance of a Participant’s In-Service Account shall be distributed to the Participant upon the date previously specified by the Participant in his or her first Deferral Election which designated a portion of the Compensation deferred be allocated to the In-Service Account; provided, however, that the date of payment commencement under this Section 5.1(b) shall be no earlier than the fifth (5 ^th ) anniversary of the Participant’s initial deferral that is allocated to the In-Service Account. The form of benefit payment shall be that form previously specified by the Participant in his or her Deferral Election pursuant to Section 5.3(b), below. In the event of a Participant’s Termination prior to the date specified in his or her initial Deferral Election, the Participant’s In-Service Account shall be added to his or her Retirement Account as of the date of Termination and shall be paid in accordance with the provisions of Section 5.1(a), above; provided, however, that in the event the Participant has submitted a modified Deferral Election pursuant to Section 5.1(b)(ii), below, the payment of his or her In-Service Account shall be made in accordance with such section and with Section 409A and its related Treasury regulations notwithstanding the intervening Termination.

(ii) Subsequent Modifications . A Participant may elect, in accordance with policies and procedures established by the Committee, to modify a Deferral Election governing the timing of payments from his or her In-Service

Account, provided that such modification shall not be effective unless (i) it is made at least one (1) year in advance of the date on which payments otherwise would have commenced under the initial Deferral Election; and (ii) that under such modified election, the initial payment shall occur no earlier than five (5) years after the initial payment would have otherwise been paid under the initial Deferral Election (i.e., five (5) years after the earlier of the original stated distribution date or the date of the Participant’s Termination). All modifications to Deferral Elections shall be made in conformance with Section 409A(a)(4)(C) of the Code, the Treasury regulations thereunder, and any other published interpretive authority, as issued or amended from time to time. For purposes of this Section 5.1(b), the payments to be made from a Participant’s In-Service Account shall be treated as the entitlement to a single payment.

5.2 Death Benefit . Upon the death of a Participant prior to the commencement of benefits under this Plan from any particular Account, Company shall pay or commence to pay to the Participant’s Beneficiary an amount equal to the Participant’s Account balance in the form manner chosen by the Participant in his or her currently-effective Deferral Election filed with the Committee; for this purpose, a Participant’s “currently-effective Deferral Election” shall be the most recently-submitted Deferral Election to which the Committee can give effect consistent with Section 409A of the Code and its related Treasury regulations . In the event of the death of the Participant after the commencement of benefits under this Plan from any Account, any remaining benefits from that Account shall be paid to the Participant’s Beneficiary at the same time and in the same manner as if the Participant had survived.

5.3 Form of Payment . Benefits payable from any Account under this Plan shall be paid in one of the forms of benefit as provided below and specified by the Participant in his or her initial Deferral Election or a subsequent Deferral Election made thereafter in accordance with Section 5.3(c), below.

(a) Retirement Accounts . The forms of benefit payments available under the Plan for a Participant’s Retirement Account are as follows:

(i) A lump sum amount which is equal to the Retirement Account balance; or

(ii) Annual installment payments for a period of up to fifteen (15) years where the annual payment shall be equal to the vested balance of the Account immediately prior to the payment, multiplied by a fraction, the numerator of which is one (1) and the denominator of which commences at the number of annual payment initially chosen and is reduced by one (1) in each succeeding year. Accruals on the unpaid balance shall be based on the most recent allocation among the available Valuation Funds chosen by the Participant, made in accordance with Section 4.3, above.

(b) In-Service Accounts . The forms of benefit payments available under the Plan for a Participant’s In-Service Account are as follows:

(i) A lump sum amount which is equal to the In-Service Account balance; or

(ii) Annual installment payments for a period of up to five (5) years where the annual payment shall be equal to the vested balance of the Account immediately prior to the payment, multiplied by a fraction, the numerator of which is one (1) and the denominator of which commences at the number of annual payment initially chosen and is reduced by one (1) in each succeeding year. Accruals on the unpaid balance shall be based on the most recent allocation among the available Valuation Funds chosen by the Participant, made in accordance with Section 4.3, above.

(c) Subsequent Modifications . A Participant may elect, in accordance with policies and procedures established by the Committee, to modify a Deferral Election governing the form of payments from his or her Retirement Account and/or In-Service Account, provided that such modification shall not be effective unless (i) it is made at least one (1) year in advance of the date on which payments otherwise would have commenced under the initial Deferral Election; and (ii) that under such modified election, the initial payment shall occur no earlier than five (5) years after the initial payment would have otherwise been paid under the initial Deferral Election. All modifications to Deferral Elections shall be made in conformance with Section 409A(a)(4)(C) of the Code, the Treasury regulations thereunder, and any other published interpretive authority, as issued or amended from time to time. For purposes of this Section 5.3(c), the payments to be made from a Participant’s Retirement Account and/or In-Service Account shall be treated as the entitlement to a single payment.

5.4 Permissible Acceleration Events . Notwithstanding the foregoing, the Committee may accelerate the payment of a Participant’s Account balance in any of the following circumstances.

(a) Unforeseeable Emergency . In the event of an Unforeseeable Emergency, the Committee may, in its sole discretion, permit distribution to a Participant from his or her Account of an amount no greater than the amount necessary to satisfy the emergency plus any taxes reasonably anticipated as a result of the distribution.

(b) Domestic Relations Order . In its sole discretion, the Committee may permit acceleration of the time or schedule of a payment under the Plan to an individual other than the Participant as may be necessary to fulfill a domestic relations order (as defined in Section 414(p)(1)(B) of the Code).

(c) Conflict of Interest . In its sole discretion, the Committee may permit the acceleration of the time or schedule of a payment under the Plan (i) to the extent necessary to permit any Participant who becomes employed in the Federal executive branch to comply with an ethics agreement with the Federal government; or (ii) to the extent reasonably necessary to avoid the violation of an applicable Federal, state, local, or foreign ethics or conflicts of interest law.

(d) De Minimis Distribution . In its sole discretion, the Committee may distribute a Participant’s entire outstanding Account balance in a single lump sum payment to the Participant, provided that (i) the balance of the Participant’s Account as of the relevant Determination Date does not exceed the applicable dollar amount then in effect under Section 402(g)(1)(B) of the Code; and (ii) the payment accompanies the termination of the entirety of the Participant’s interest in the Plan within the meaning of Section 1.409A-3(j)(4)(v) of the Treasury regulations.

(e) Employment Taxes . In its sole discretion, the Committee may permit acceleration of the time or schedule of a distribution under the Plan as may be necessary to pay the Federal Insurance Contributions Act (“ FICA ”) tax imposed under Sections 3101, 3121(a) and 3121(v)(2) of the Code (as applicable). In addition, the Committee may permit acceleration of the time or schedule of a distribution under the Plan as may be necessary to pay the income tax at source on wages imposed under Section 3401 of the Code or the corresponding withholding provisions of applicable

state, local, or non-U.S. tax laws as a result of the payment of the FICA tax, and to pay the additional income tax at source on wages attributable to the pyramiding Section 3401 wages and taxes. Notwithstanding the foregoing, the total accelerated distribution to a Participant under this Section 5.4(e) shall not exceed the aggregate amount of FICA taxes and the income tax withholding related to such amount of FICA taxes.

(f) Income Inclusion under Section 409A of the Code . In its sole discretion, the Committee may permit acceleration of the time or schedule of a distribution under the Plan at any time the Plan fails to meet the requirements of Section 409A of the Code and the corresponding Treasury regulations. Notwithstanding the foregoing, the total accelerated distribution to a Participant under this Section 5.4(f) shall not exceed the amount required to be included as income by the Participant as a result of the failure to meet the requirements of Section 409A of the Code and the applicable Treasury regulations.

5.5 Delay of Distributions . To the extent permitted under Section 409A of the Code, a scheduled distribution of a Participant’s Account shall be delayed to a date after the scheduled payment date under any of the following circumstances:

(a) Company’s Financial Exigency . A scheduled distribution of a Participant’s Account shall be delayed to a date after the scheduled payment date in the event the Committee reasonably anticipates that making the distribution will jeopardize the Company’s ability to continue as a going concern. Any such delayed distribution shall be made during the first taxable year of the Participant when the making of the distribution will not cause such a risk to the Company.

(b) Payments that would Violate Federal Securities Laws or other Applicable Law . A scheduled distribution of a Participant’s Account shall be delayed to a date after the scheduled payment date in the event the Committee reasonably anticipates that making the distribution will violate federal securities laws or other applicable law. The delayed distribution must be made at the earliest date at which the Committee reasonably anticipates that making the distribution will not cause such violation. For purposes of this Section 5.5(b), making a payment that would cause inclusion in gross income or the application of any penalty provision or other provision of the Code is not considered a violation of applicable law.

(c) Payments Limited by Section 162(m) of the Code . A scheduled distribution of a Participant’s Account shall be delayed to a date after the scheduled payment date to the extent that the Committee reasonably anticipates that making the distribution at the scheduled payment date will result in the loss or reduction of the Company’s deduction with respect to such payment under Section 162(m) of the Code; as provided in Section 1.409A-2(b)(7)(i) of the Treasury regulations. The delayed distribution shall be made in the at the earliest date the Committee reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Section 162(m) of the Code.

(d) Other Events and Conditions . The Committee may delay a scheduled distribution of the Participant’s Account upon such other events and conditions as may be prescribed in generally applicable guidance published in the Internal Revenue Bulletin relating to Section 409A of the Code.

5.6 Limitations on Payments from Grandfathered Accounts .

(a) Application of Prior Plan Terms . Notwithstanding any contrary provision of the Plan, the amounts and form and timing of all payments from a Participant’s Grandfathered Account shall be controlled by the terms of the Prior Plan and any elections made by the Participant thereunder (including any amended elections made in accordance with the terms of the Prior Plan), to the maximum extent permitted by Section 409A of the Code and its related Treasury regulations.

(b) Suspension of Participation . To the extent a Participant receives a distribution from his or her Grandfathered Account in accordance with the terms of Section 5.4 of the Prior Plan (relating to distributions in the event of “financial hardship”), the participation suspension period applicable to the Participant shall commence on the date of such distribution and shall end on the last day of the thirty-sixth (36 ^th ) calendar month thereafter. The Participant’s eligibility to recommence participation in the Plan during the Deferral Period beginning after the end of such suspension period shall be determined under Article 3.

(c) Prohibition on Elective Cash-Out Distributions . Notwithstanding Section 5.6(a) above, a Participant shall not be entitled to receive a distribution from his or her Grandfathered Account under Section 5.5 of the Prior Plan (relating to distributions upon an elective cessation of participation) nor shall such Participant be entitled to cease participation in the Plan on an elective basis, except to the extent otherwise provided herein and permitted by Code Section 409A and its related Treasury regulations.

5.7 Effect of Payment . The full payment of the applicable benefit under this Article 5 shall completely discharge all obligations on the part of the Company (and its affiliates) to the Participant (or the Participant’s Beneficiary) with respect to the operation of this Plan, and the Participant’s (or Participant’s Beneficiary’s) rights under this Plan shall terminate.

ARTICLE 6

BENEFICIARY DESIGNATION

6.1 Beneficiary Designation . Each Participant shall have the right, at any time, to designate one (1) or more persons or entity as Beneficiary (both primary and contingent) to whom benefits under this Plan shall be paid in the event of Participant’s death prior to complete distribution of the Participant’s vested Account balance. Each Beneficiary designation shall be in a written form prescribed by the Committee and shall be effective only when filed with the Committee during the Participant’s lifetime. Designation by a married Participant to the Participant’s spouse of less than a fifty percent (50%) interest in the benefit due shall not be effective unless the spouse executes a written consent that acknowledges the effect of the designation, or it is established that the consent cannot be obtained because the spouse cannot be located or is incompetent.

6.2 Changing Beneficiary . Any Beneficiary designation may be changed by an unmarried Participant without the consent of the previously named Beneficiary by the filing of a new Beneficiary designation with the Committee. A married Participant’s Beneficiary designation may be changed by a Participant with the consent of the Participant’s spouse as provided for in Section 6.1 above, by the filing of a new designation shall cancel all designations previously filed.

6.3 Change in Marital Status . If the Participant’s marital status changes after the Participant has designated a Beneficiary, the following shall apply:

(a) If the Participant is married at death but was unmarried when the designation was made, the designation shall be void in its entirety unless the spouse has consented to it in the manner prescribed in Section 6.1 above.

(b) If the Participant is unmarried at death but was married when the designation was made:

(i) The designation shall be void if and to the extent the spouse was named as Beneficiary.

(ii) The designation shall remain valid if and to the extent a non-spouse Beneficiary was named.

(c) If the Participant was married when the designation was made and is married to a different spouse at death, the designation shall be void in its entirety unless the new spouse has consented to it in the manner prescribed in Section 6.1 above.

6.4 No Beneficiary Designation . If any Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary designated by a deceased Participant dies before the Participant or before complete distribution of the Participant’s benefits, the Participant’s Beneficiary shall be the person in the first of the following classes in which there is a survivor:

(a) The Participant’s surviving spouse;

(b) The Participant’s children in equal shares, except that if any of the children predeceases the Participant but leaves surviving issue, then such issue shall take by right of representation the share the deceased child would have taken if living; or

ARTICLE 7

ADMINISTRATION

7.1 Committee; Duties . This Plan shall be administered by the Committee, which shall consist of not less than three (3) persons appointed by the Board, except after a Change in Control as provided in Section 7.8 below. No member of the Committee who is a full-time officer or employee of the Company shall receive compensation with respect to his or her service on the Committee. Any member of the Committee may resign by delivering his or her written resignation to the chair of the Committee or to the Board. The Board may remove any Committee member by providing him or her with written notice of the removal. A majority vote of the Committee members shall control any decision. Members of the Committee may be Participants under this Plan.

7.2 Administrative Authority . The Committee shall be the “administrator” as defined in Section 3(16)(A) of ERISA for purposes of the reporting and disclosure requirements of ERISA and the Code. The Committee has full discretionary authority to perform all functions necessary or appropriate to the operation of the Plan, including without limitation authority to (a) construe and interpret the provisions of the Plan document and any related instrument and determine any question arising under the Plan document or related instrument, or in connection with the administration or operation thereof; (b) determine in its sole discretion all facts and relevant considerations affecting the eligibility of any individual to be or become a Participant; (c) authorize and direct all disbursements under the Plan; and (d) employ and engage such persons, counsel and agents and to obtain such administrative, clerical, medical, legal, audit and actuarial services as it may deem necessary in carrying out the provisions of the Plan. Notwithstanding anything in the Plan to the contrary, the Committee shall administer and construe the Plan in accordance with Section 409A of the Code, the Treasury regulations thereunder, and any other published interpretive authority, as issued or amended from time to time. The Company’s General Counsel or other designated officer shall be the agent for service of process on the Plan.

7.3 Agents . The Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Company.

7.4 Expenses of Administration . All reasonable expenses, which are necessary to operate and administer the Plan, shall be paid directly by the Company and, as applicable, by the relevant Affiliate. All reasonable costs incurred by a member of the Committee in the discharge of his or her duties under the Plan shall be paid or reimbursed by the Company. Such costs shall include fees or expenses arising from the Committee’s retention, with the consent of the Board, of any attorneys, accountants, actuaries, consultants or recordkeepers required by the Committee to discharge its duties under the Plan. Nothing in the preceding two sentences or in any other provisions of the Plan shall require the Company to pay or reimburse any person for any cost, liability, loss, fee or expense incurred by such person in any dispute with the Company; nor may any such person reimburse himself or herself from any Plan contributions or from the principal or income of investment or funding vehicle for the Plan for any such cost, liability, loss, fee or expense.

7.5 Insurance . The Company may, but need not, obtain liability insurance to protect its directors, officers, employees, or representatives or the Committee against loss in the discharge of their responsibility in the operation of the Plan.

7.6 Notices . Any notice from the Company or the Committee to a Participant or Beneficiary regarding this Plan may be addressed to the last known residence of said person as indicated in the records of the Company. Any notice to, or any service of process upon, the Company or the Committee with respect to this Plan may addressed as follows:

Novellus Systems, Inc.

4000 North First Street

San Jose, CA 95134


Attention :		Administrative Committee for the Novellus Systems, Inc. Executive Voluntary Deferred Compensation Plan

7.7 Indemnity of Committee . The Company shall indemnify and hold harmless the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan on account of such member’s service on the Committee, except in the case of gross negligence or willful misconduct.

7.8 Election of Committee After Change in Control . After a Change in Control, vacancies on the Committee shall be filled by majority vote of the remaining Committee members and Committee members may be removed only by such a vote. If no Committee members remain, a new Committee shall be elected by majority vote of the Participants in the Plan who were Participants immediately preceding such Change in Control. After a Change in Control, no amendment shall be made to Article 7 or other Plan provisions regarding Committee authority with respect to the Plan without prior approval by the Committee.

ARTICLE 8

CLAIMS AND APPEALS PROCEDURES

8.1 Claims Procedures .

(a) A claim for benefits shall be considered filed only when actually received by the Committee on a form prescribed by the Committee.

(b) Any time a claim for benefits is wholly or partially denied, the Participant or Beneficiary (hereinafter “ Claimant ”) shall be given written notice of such denial within thirty (30) days after the claim is filed, unless special circumstances require an extension of time for processing the claim. If there is an extension, the Claimant shall be notified of the extension and the reason for the extension within the initial thirty (30) day period. The extension shall expire within sixty (60) days after the claim is filed. Such notice will indicate the reason for denial, the pertinent provisions of the Plan on which the denial is based, an explanation of the claims appeal procedure set forth herein, and a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary.

8.2 Appeal Procedures .

(a) Any person who has had a claim for benefits denied by the Committee, or is otherwise adversely affected by the action or inaction of the Committee, shall have the right to request further review by the Committee. Such request must be in writing, and must be received by the Committee within sixty (60) days after such person receives notice of the Committee’s action. If written request for

review is not made within such sixty-day period, the Claimant shall forfeit his or her right to review. The Claimant or a duly authorized representative of the Claimant may review all pertinent documents and submit issues and comments in writing.

(b) The Committee shall then review the claim. The Committee may issue a written decision reaffirming, modifying or setting aside its former action within thirty (30) days after receipt of the written request for review, or sixty (60) days if special circumstances require an extension. The Claimant shall be notified in writing of any such extension within thirty (30) days following the request for review. An original or copy of the decision shall be furnished to the Claimant. The decision shall set forth the reasons and pertinent plan provisions or relevant laws on which the decision rests. The decision shall be final and binding upon the Claimant and the Committee and all other persons having or claiming to have an interest in the Plan or in any Account established under the Plan.

8.3 Subsequent Proceedings .

(a) Exhaustion of Administrative Remedies Required . Notwithstanding any provision in the Plan to the contrary, a Claimant must exhaust all administrative remedies available to such Claimant under the Plan before such Claimant may seek judicial review pursuant to Section 502(a) of ERISA. A Claimant’s failure to submit a claim or a request for review in accordance with the procedures and deadlines set forth in Sections 8.1 and 8.2 shall result in an automatic, conclusive, and binding denial of the Claimant’s claim or appeal, as the case may be.

(b) Award of Fees, Costs, Etc. to Prevailing Party . In the event of any litigation arising out of, or relating to, this Plan, the prevailing party shall automatically be entitled to recover from the other party his/her/its legal fees, expert witness fees, court costs, and other expenses incurred in connection with any such litigation.

(c) Necessary Parties . The Plan and the Company will be the necessary parties to any action or proceeding involving the Plan. No person employed by the Company, no Participant or Beneficiary or any other person having or claiming to have an interest in the Plan will be entitled to any notice or process, unless such person is a named party to the action or proceeding. Any final judgment or decision that may be entered in any such action or proceeding will be binding and conclusive on all persons having or claiming to have any interest in the Plan.

ARTICLE 9

AMENDMENT AND TERMINATION OF PLAN

9.1 Amendment . The Board may at any time amend the Plan by written instrument, notice of which is given to all Participants and to any Beneficiary then receiving installment payments, subject to the following:

(a) Preservation of Account Balance . No amendment shall reduce the amount accrued in any Account as of the date such notice of the amendment is given.

(b) Changes in Accrual Rate . No amendment shall reduce, either prospectively or retroactively, the rate at which Accruals are credited to the amount already accrued in any of the Participant’s Account and any amounts credited to the Account under a Deferral Election already in effect on that date, except as may be provided in Section 2.27, above, as a result of a selection or deletion of available Valuation Funds.

(c) Section 409A Compliance; Specified Employee Delay . Notwithstanding the foregoing, the Board may adopt any amendments to the Plan as it deems necessary or appropriate, as determined in good faith, to comply with Section 409A of the Code and any related regulatory or administrative guidance issued by the Internal Revenue Service. The Board shall delay the payment of any benefits payable under this Plan to the extent it deems necessary or appropriate to comply with Section 409A(a)(2)(B)(i) of the Code (relating to payments made to certain “specified employees” of certain publicly-traded companies) and in such event, any such amount to which a Participant would otherwise be entitled during the six (6) month period immediately following his or her separation from service will be paid on the first business day following the expiration of such six (6) month period.

9.2 Company’s Right to Terminate . To the extent permitted by Section 409A of the Code, the Board may at any time partially or completely terminate the Plan if, in its judgment, the tax, accounting or other effects of the continuance of the Plan, or potential payments thereunder would not be in the best interests of Company.

9.3 Liquidation of Plan . In connection with the termination of the Plan under Section 9.2, the Board may liquidate the Plan and pay out all outstanding Account balances; provided, however, that—

(a) The termination and liquidation of the Plan does not occur proximate to a downturn in the financial health of the Company (within the meaning of Section 1.409A-3(j)(4)(ix)(C)(1) of the Treasury regulations);

(b) All agreements, methods, programs, and other arrangements sponsored by the Company that would be aggregated with the Plan under Section 1.409A-1(c) of the Treasury regulations are terminated and liquidated;

(c) No payments in liquidation of the Plan are made within twelve (12) months of the date the on which the Board takes all necessary action to irrevocably terminate and liquidate the Plan other than payments that would have been payable under the terms of the Plan if the action to terminate and liquidate it had not occurred;

(d) All payments are made within twenty-four (24) months of the date the Board takes all necessary action to irrevocably terminate and liquidate the Plan; and

(e) The Company does not adopt a new plan that would be aggregated with Plan under Section 1.409A-1(c) of the Treasury regulations within three (3) years following the date the Board takes all necessary action to irrevocably terminate and liquidate the Plan.

Notwithstanding the foregoing, in no event shall any outstanding Grandfathered Accounts be liquidated in a manner inconsistent with Section 9.2(b) of the Prior Plan document.

9.4 Termination in the Event of Insolvency . To the extent permitted under Section 409A of the Code, the Board shall have the authority, in its sole discretion, to terminate the Plan and distribute each Participant’s outstanding Account balance within twelve (12) months of a corporate dissolution taxed under Section 331 of the Code or with the approval of a bankruptcy court pursuant to 11 U.S.C. § 503(b)(1)(a). The total accelerated distribution under this Section 9.4 must be included in a Participant’s gross income in the latest of:

(a) The calendar year in which the Plan is terminated;

(b) The calendar year in which the amount of the Participant’s Account is no longer subject to a substantial risk of forfeiture; or

9.5 Other Termination Events . The Board shall have the authority to terminate the Plan and distribute a Participant’s outstanding Account balance to the Participant or, if applicable, his or her Beneficiary upon the occurrence of such other events and conditions as may be prescribed in generally applicable guidance published in the Internal Revenue Bulletin relating to Section 409A of the Code.

ARTICLE 10

MISCELLANEOUS

10.1 Unfunded Plan . This plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of “management or highly compensated employees” within the meaning of Sections 201, 301, and 401 of ERISA, and therefore is intended to be exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA. Notwithstanding any other provision of this Plan, Participants and Participants’ Beneficiary shall be unsecured general creditors, with no secured or preferential rights to any assets of the Company or any other party for payment of benefits under this Plan. All amounts deferred under this Plan remain or become general assets of the Company. Any property held by the Company for the purpose of generating the cash flow for benefit payments shall remain its general, unpledged and unrestricted assets of the Company. The Company’s obligations under the Plan shall be an unfunded and unsecured promise to pay money in the future. This Plan shall not be construed to require the Company to fund any of the benefits provided hereunder or to establish a trust or purchase an insurance policy or other product for such purpose. The Company may make such arrangements as it desires to provide for the payment of benefits.

10.2 Tax Withholding . From any payments made under this Plan, the Company shall withhold any taxes or other amounts which federal, state or local law requires the Company to deduct, withhold and deposit. A Beneficiary, however, may elect not to have withholding of federal income tax to the extent permitted under Section 3405(a)(2) of the Code, or any successor provision thereto. The Company’s determination of the type and amount of taxes to be withheld from any payment shall be final and binding on all persons having or claiming to have an interest in this Plan.

10.3 Unsecured General Creditor . Notwithstanding any other provision of this Plan, Participants and Participants’ Beneficiary shall be unsecured general creditors, with no secured or preferential rights to any assets of the Company or any other party for payment of benefits under this Plan. All amounts deferred under this Plan remain or become general assets of the Company. Any property held by the Company for the purpose of generating the cash flow for benefit payments shall remain its general, unpledged and unrestricted assets of the Company. The Company’s obligations under the Plan shall be an unfunded and unsecured promise to pay money in the future. This Plan shall not be construed to require the Company to fund any of the benefits provided hereunder or to establish a trust or purchase an insurance policy or other product for such purpose. The Company may make such arrangements as it desires to provide for the payment of benefits.

10.4 Trust Fund . The Company shall be responsible for the payment of all benefits provided under the Plan. At its discretion, Company may establish one (1) or more trusts, with such trustees as the Board may approve, for the purpose of assisting in the payment of such benefits. Although such a trust shall be irrevocable, its assets shall be held for payment of all the Company’s general creditors in the event of insolvency. To the extent any benefits provided under the Plan are paid from any such trust, the Company shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Company.

10.5 Nonassignability . Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.

10.6 Not a Contract of Employment . Nothing in this Plan document or in any related instrument shall cause this Plan to be treated as a contract of employment within the meaning of the Federal Arbitration Act, 9 U.S.C. § 1 et seq. , or shall be construed as evidence of any agreement or understanding, express or implied, that the Company (a) will employ any person in any particular position or level of compensation, (b) will offer any person initial or continued participation in the Plan or awards in any commission, bonus or other compensation program, or (c) will continue any person’s employment with the Company for any particular period of time.

10.7 Alternative Acts and Times . If it becomes impossible or burdensome for the Company, the Board, or the Committee to perform a specific act at a specific time required by this Plan, the Company, the Board, or the Committee, as applicable, may perform such alternative act which most nearly carries out the intent and purpose of this Plan and may perform such required or alternative act at a time as close as administratively feasible to the time specified in this Plan for such performance. Nothing in the preceding sentence shall allow the Company, the Board, or the Committee to accelerate or defer any payments to Participants under this Plan, except as otherwise expressly permitted herein and by the terms of Section 409A of the Code, the Treasury regulations thereunder, and any other published interpretive authority, as issued or amended from time to time.

10.8 Provision of Information . A Participant will cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Company may deem necessary and taking such other action as may be requested by the Company.

10.9 Facility of Payment . If the Committee, in its sole discretion, determines that any Participant or Beneficiary by reason of infirmity, minority or other disability, is physically, mentally or legally incapable of giving a valid receipt for any payment due him or her or is incapable of handling his or her own affairs and if the Committee is not aware of any legal representative appointed on his or her behalf, then the Committee, in its sole discretion, may direct (a) payment to or for the benefit of the Participant or Beneficiary; (b) payment to any person or institution maintaining custody of the Participant or Beneficiary; or (c) payment to any other person selected by the Committee to receive, manage and disburse such payment for the benefit of the Participant or Beneficiary. The receipt by any such person of any such payment shall be a complete satisfaction therefor; and any such payment, to the extent thereof, shall

discharge the liability of the Company, the Board, the Committee, and the Plan for any amounts owed to the Participant or Beneficiary hereunder. In the event of any controversy or uncertainty regarding who should receive or whom the Committee should select to receive any payment under this Plan, the Committee may seek instruction from a court of proper jurisdiction or may place the payment into such court with final distribution to be determined by such court.

10.10 Correction of Errors . If a Participant or Beneficiary in an application for a benefit or in response to any request by the Committee for information, makes any erroneous statement, omits any material fact, or fails to correct any information previously furnished incorrectly to the Committee, or if the Committee makes an error in determining the amount payable to a Participant or Beneficiary, the Committee may correct its error and adjust any payment on the basis of correct facts. The amount of any overpayment or underpayment may be deducted from or added to the next succeeding payments, as directed by the Committee. The Committee reserve the right to recover any amounts improperly or incorrectly paid to any person under the Plan or in settlement of a claim or satisfaction of a judgment involving the Plan. Notwithstanding the foregoing, any actions taken by the Committee under this Section 10.10 shall comply with Section 409A of the Code, the regulations thereunder, and any other published interpretive authority, as issued or amended from time to time.

10.11 Missing Persons . In the event a distribution of part or all of an Account is required to be made from the Plan to a Participant or Beneficiary, and such person cannot be located, the relevant portion of the Account shall escheat in accordance with the laws of the State of California. Prior to forfeiting any Account, the Committee shall attempt to contact the Participant or Beneficiary by return receipt mail (or other carrier) at his or her last known address according to the Company’s records, and, where practical, by letter-forwarding services offered through the Internal Revenue Service, or the Social Security Administration, or such other means as the Committee deems appropriate.

10.12 Governing Law; Severability . This Plan shall be construed in accordance with the laws of the State of California (exclusive of its rules regarding conflicts of law) to the extent that such laws are not preempted by ERISA or other federal laws. If any provision of this Plan shall be held illegal or invalid for any reason, such determination shall not affect the remaining provisions of this Plan which shall be construed as if said illegal or invalid provision had never been included.

10.13 Validity . If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein.

10.14 Notice . Any notice required or permitted under the Plan shall be sufficient if in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Mailed notice to the Committee shall be directed to the company’s address. Mailed notice to a Participant or Beneficiary shall be directed to the individual’s last known address in the Company’s records.

10.15 Successors . The provisions of this Plan shall bind and inure to the benefit of the Company and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Company, and successors of any such corporation or other business entity.

10.16 Headings . The headings in this Plan are solely for the convenience of reference and shall be given no effect in the construction or interpretation of the Plan.

10.17 Status of Participants . In accordance with Revenue Procedure 92-65 Section 3.01(d), this Plan hereby provides:

(a) Participants under this Plan shall have the status of general unsecured creditors of the Company;

(b) This Plan constitutes a mere promise by the Company to make benefit payments in the future;

(c) Any trust to which this Plan refers (i.e. any trust created by the Company and any assets held by the trust to assist the Company in meeting its obligations under the Plan) shall conform to the terms of the model trust described in Revenue Procedure 92-64; and

(d) It is the intention of the parties that the arrangements under this Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.

[END OF PLAN]

N OVELLUS S YSTEMS , I NC .

V OLUNTARY E XECUTIVE D EFERRED C OMPENSATION P LAN

EXHIBIT A — FORM OF DEFERRAL ELECTION

1. I acknowledge that I have read and understand the terms and conditions of the NOVELLUS SYSTEMS, INC. VOLUNTARY EXECUTIVE DEFERRED COMPENSATION PLAN (the “ Plan ”) and that I have had the opportunity to consult with my financial, tax and other advisors regarding the consequences of participating in the Plan. Unless otherwise defined, all capitalized terms used herein shall have the meanings assigned in the Plan document.

2. I agree to defer a portion of my current compensation, and to have that income paid to me at a later date pursuant to the terms and conditions of the Plan, which is incorporated by reference, in its entirety, in this Deferral Election Form.

3. I understand that this Deferral Election is not an employment agreement, does not guarantee that I will receive any predetermined amount of compensation, and does not guarantee that I will receive any salary, bonus or incentive compensation, or other remuneration of any type.

4. I understand that any compensation I defer will be held as an asset of Novellus Systems, Inc., and will remain subject to the claims of the general creditors of Novellus Systems, Inc.

5. If I am an Employee of the Company, I understand that amounts deferred under the Plan will be subject to applicable tax withholding under the Federal Insurance Contributions Act during the year in which they are deferred. If I am a Director of the Company, I understand that amounts deferred under the Plan will be earnings from self-employment for purposes of the Self-Employment Contributions Act.

Page 1 of 5

Instructions : Complete your election and allocation instructions below.

A.	ELECTION TO DEFER COMPENSATION

I hereby elect to defer the following percentage or amount from each of my regular paychecks (or in the case of bonuses from each bonus paycheck):


Regular Salary:	_______	%
Bonus Payments:	_______	%
Directors Fees	_______	%

With respect to subsequent Plan Years, I understand that, if I fail to make an annual election at a time during which I am eligible to make an election under the Plan, I will be deemed to have elected to continue deferring the same percentage/dollar amount of Compensation that I elected to defer above. The foregoing Deferral Election is voluntarily made by me after reviewing the terms of the Plan and with knowledge that this Deferral Election is irrevocable until changed in accordance with the terms of the Plan and applicable law.

Page 2 of 5

B.	ALLOCATION OF DEFERRALS

The following allocation applies to all amounts deferred during future Deferral Periods, adjusted for any Accruals and administrative expenses credited to or charged against your Account under the Plan and shall remain effective unless and until I submit a revised allocation to the Committee. I understand that any such revised allocation shall only be given effect to the extent permitted by the terms of the Plan and applicable law and, in the event any such revised allocation has not become effective at the time I become entitled to a receive payment under the Plan affected by such revised allocation, my prior allocation shall remain effective.

Please specify the percentages in which your deferrals are to be allocated as between your Retirement Account and your In-Service Account:


	Retirement Account		In-Service Account		Total *(must equal 100%)*
Regular Salary	_______	%	_______	%	_______	%
Bonus Payments	_______	%	_______	%	_______	%
Directors Fees	_______	%	_______	%	_______	%

Page 3 of 5

C.	DISTRIBUTION ELECTION

The following applies to all amounts deferred during future calendar years, adjusted for any Accruals and administrative expenses credited to or charged against your Account under the Plan.

Please select and complete the following:

1.	Distribution from Retirement Account

The form of distribution from my Retirement Account upon my Termination shall be ( select one ):

A single Lump-Sum Payment; or

Substantially equal annual installments. The number of installments may be no less than 2 and no more than 15 as specified below.

substantially equal annual installments ( choose between 2 and 15 )

2.	Distribution from In-Service Account

The form of distribution from my In-Service Account at the date specified below shall be ( select one ):

A single Lump-Sum Payment; or

Substantially equal annual installments. The number of installments may be no less than 2 and no more than 5 as specified below.

substantially equal annual installments ( choose between 2 and 5 )

My In-Service Account shall be distributed or commence to be distributed on:

( specify date )

Page 4 of 5

This Deferral Election Form is executed and agreed:




( Signature )				( Date )


( Printed Name )

FILING ACKNOWLEDGEMENT

Filed with the records of the Company this day of , 20 .



By:

Title:

Page 5 of 5

N OVELLUS S YSTEMS , I NC . V OLUNTARY E XECUTIVE D EFERRED C OMPENSATION P LAN

EXHIBIT B — VALUATION FUNDS


	Allocation Percentages
Valuation Fund	Retirement Account		In-Service Account
1. Janus Global Technology Portfolio: Service Shares	_____	%	_____	%
2. Morgan Stanley UIF U.S. Real Estate Portfolio	_____	%	_____	%
3. Janus International Growth Portfolio: Service Shares	_____	%	_____	%
4. Nationwide Small Company Fund (Multi-Manager)	_____	%	_____	%
5. Dreyfus NSAT Mid Cap Index Fund	_____	%	_____	%
6. Oppenheimer Funds Aggressive Growth Fund/VA	_____	%	_____	%
7. Dreyfus Stock Index Fund Inc.	_____	%	_____	%

Page 1 of 3


8. Dreyfus VIF Appreciation Portfolio	_____	%	_____	%
9. Janus Capital Appreciation Portfolio: Service Shares	_____	%	_____	%
10. Federated NSAT High Income Bond Fund	_____	%	_____	%
11. Federated Quality Bond Fund II	_____	%	_____	%
12. Nationwide NSAT Money Market Fund*	_____	%	_____	%
13. Janus Global Technology Portfolio: Service Shares	_____	%	_____	%

Totals (must equal 100%)	_____	%	_____	%

*	This fund is designated as the default investment, in the absence of an election.

Page 2 of 3

This Allocation Form is executed and agreed:




( Signature )				( Date )


( Printed Name )

FILING ACKNOWLEDGEMENT

Filed with the records of the Company this day of , 20 .



By:						Title:

Page 3 of 3

N OVELLUS S YSTEMS , I NC .

V OLUNTARY E XECUTIVE D EFERRED C OMPENSATION P LAN

EXHIBIT C—BENEFICIARY DESIGNATION FORM

In the event that I should die prior to the receipt of all amounts due to me under the Novellus Systems, Inc. Voluntary Deferred Compensation Plan (the “ Plan ”), and in lieu of disposing of my interest ¹ in my Account by my will or the laws of intestate succession, I hereby designate the following person(s) as primary Beneficiary(ies) and contingent Beneficiary(ies) of my interest in my Account (please attach additional sheets if necessary).

Primary Beneficiary(ies) ( Select only one of the three alternatives )


¨	(a) Individuals and/or Charities	% Share

Name

Address

Name

Address

Name

Address

A married Participant whose Award is community property may dispose only of his or her own interest in the Award. In such cases, the Participant’s spouse may designate the Participant or any other person(s) as the beneficiary(ies) of his or her interest in the Award on a separate Beneficiary Designation form.

Page 1 of 5

Primary Beneficiary(ies) ( Select only one of the three alternatives )

¨ (b)

Residuary Testamentary Trust

In trust, to the trustee of the trust named as the beneficiary of the residue of my probate estate.

¨ (c)

Living Trust

The ( specify name ) Trust, dated ( date of trust establishment ).

Contingent Beneficiary(ies) ( Select only one of the three alternatives )


¨	(a) Individuals and/or Charities	% Share

Name

Address

Name

Address

Name

Address

Page 2 of 5

¨ (b)

Residuary Testamentary Trust

In trust, to the trustee of the trust named as the beneficiary of the residue of my probate estate.

¨ (c)

Living Trust

The ( specify name ) Trust, dated ( date of trust establishment ).

Should all the individual primary Beneficiary(ies) fail to survive me or if the trust named as the primary Beneficiary does not exist at my death (or no will of mine containing a residuary trust is admitted to probate within six months of my death), the contingent Beneficiary(ies) shall be entitled to my interest in my Award in the shares indicated. Should any individual beneficiary fail to survive me or a charity named as a beneficiary no longer exists at my death, such beneficiary’s share shall be divided among the remaining named primary or contingent Beneficiaries, as appropriate, in proportion to the percentage shares I have allocated to them. In the event that no individual primary Beneficiary(ies) or contingent Beneficiary(ies) survives me, no trust (excluding a residuary testamentary trust) or charity named as a primary Beneficiary or contingent Beneficiary exists at my death, and no will of mine containing a residuary trust is admitted to probate within six months of my death, then my interest in my Award shall be disposed of by my will or the laws of intestate succession, as applicable.

Capitalized terms used but not otherwise defined herein shall have the same meanings as set forth in the Plan.

Page 3 of 5

This Beneficiary Designation is effective until I file another such Beneficiary Designation form with the Company. Any previous Beneficiary Designations are hereby revoked.

I understand and acknowledge that the distribution of any portion of my Account consisting of amounts deferred or credited under the Voluntary Executive Deferred Compensation Plan of Novellus Systems, Inc., as in effect on December 31, 2004 (the “ Prior Plan ”) shall be controlled by the terms of the Prior Plan and any beneficiary designation I may have previously made thereunder and shall not be modified or superseded by this Beneficiary Designation.

[Signature Page Follows]

Page 4 of 5


Submitted by: ¨ Participant				¨ Participant’s Spouse


( Signature )				( Date )


( Printed Name )

FILING ACKNOWLEDGEMENT

Filed with the records of Novellus Systems, Inc. this day of , 20 .



By:

Title:

Page 5 of 5

Exhibit 31.1

NOVELLUS SYSTEMS, INC.

CERTIFICATION

I, Richard S. Hill, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Novellus Systems, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Exhibit 31.2

NOVELLUS SYSTEMS, INC.

CERTIFICATION

I, Jeffrey C. Benzing, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Novellus Systems, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Exhibit 32.1

NOVELLUS SYSTEMS, INC.

CERTIFICATION

In connection with the periodic report of Novellus Systems, Inc. (the “Company”) on Form 10-Q for the period ended September 27, 2008 as filed with the Securities and Exchange Commission (the “Report”), I, Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Exhibit 32.2

NOVELLUS SYSTEMS, INC.

CERTIFICATION

In connection with the periodic report of Novellus Systems, Inc. (the “Company”) on Form 10-Q for the period ended September 27, 2008 as filed with the Securities and Exchange Commission (the “Report”), I, Jeffrey C. Benzing, Executive Vice President and Chief Administrative Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

(a) Individuals and/or Charities