Summary of NOVELLUS SYSTEMS INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K 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 contained in this Annual Report on Form 10-K, other than statements that are purely historical, are forward-looking statements and are based upon management's present expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future. As such, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated. We do not undertake, and expressly disclaim, any obligation to update this forward-looking information, except as required under applicable law.

The following information should be read in conjunction with "Part I, Item 1. Business," "Part II, Item 6. Selected Financial Data" and "Part II, Item 8. Consolidated Financial Statements" and the notes thereto. Forward-looking statements in this Annual Report on Form 10-K may be identified by words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes" or similar expressions, and include, without limitation:

• Statements about the growth of the semiconductor industry; market size, share and demand (particularly demand for corporate and consumer electronic devices); product performance; our expectations, objectives, anticipations, intentions and strategies regarding the future; expected operating results, revenues and earnings; and current and potential litigation, which statements are subject to various uncertainties, including, without limitation, those discussed in "Item 1A. Risk Factors";

• The statements in "Item 1. Business - Recent Developments - Proposed Merger with Lam Research" concerning the Merger and the Merger Agreement including satisfaction or waiver of the closing conditions, and our expectation regarding closing the transaction in the second calendar quarter of 2012;

• The statements in "Item 1. Business - Semiconductor Group" concerning (i) our expectation that the next planned wafer size will be up to 450 mm substrates and our anticipation that the migration will be at least five years in the future; (ii) our expectation that deposition and surface preparation technologies will play an important role in new patterning schemes due to a shift in focus on to the "front end" of wafer manufacturing process sequence; and (iii) our anticipation that the trend towards 3D WLP will mean that traditional back-end-of-line packaging schemes such as wire and die bonding will eventually be replaced by new packaging processes that must be completed in a clean room environment, which statements are subject to certain risks and uncertainties, including, without limitation, our inability to accurately predict the speed and magnitude of advances in technology affecting wafer sizes; our inability to predict the importance of deposition and surface preparation technologies as they relate to patterning schemes; and unexpected changes in the way that companies react to changing trends and advancements in technology;

• The statements in "Item 1. Business - Semiconductor Business Strategy" concerning (i) our focus on high-productivity systems, (ii) our ability to anticipate technologies that customers need and design products which will enhance their manufacturing capabilities, (iii) our focus on reducing customer costs; (iv) the continued development of new products to broaden our interconnect offerings; (v) our ability to provide 24 hour customer support;
(vi) our efforts to increase our worldwide sourcing of materials to Asia; and
(vii) our strategy to leverage our low-cost manufacturing, which statements are subject to various risks and uncertainties, including, without limitation, shifts in demand from expensive, high-performance products to lower priced, conventional products, resulting in reduced profit for semiconductor manufacturers; increases in the costs of material, labor or conducting a global business; our inability to enhance our systems' productivity, which may preclude us from containing costs to customers; periodic downturns in the semiconductor industry and the global or domestic economy; unrest or instability in Asia; our inability to allocate sufficient resources to R&D efforts; fluctuations in interest and foreign currency exchange rates and unexpected changes in the technological needs of our customers;

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• The statements in "Item 1. Business - Semiconductor Technologies and Products" concerning (i) our industry-leading manufacturing, productivity and through-puts, (ii) innovative technology, and (iii) our Energy Reduction Initiative targets which statements are subject to various uncertainties, including, without limitation, that we may not be able to sustain our position as an industry leader in manufacturing, productivity, through-puts and innovation, and that we may not be able to reach our Energy Reduction Initiative targets as anticipated;

• The statements in "Item 1. Business - Marketing, Sales and Service" concerning
(i) our belief that supporting our installed base through customer support has accelerated penetration of certain key accounts and (ii) our belief that marketing efforts are enhanced by the technical expertise of our R&D personnel, which statements are subject to certain risks and uncertainties, including, without limitation, that we may not be able to retain a sufficient number of qualified customer support and R&D personnel to support these strategies;

• The statement in "Item 1. Business - Customers" concerning 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 future, which statement is subject to certain risks and uncertainties, including the unexpected loss of a major customer, our inability to provide our customers with cost effective products and our inability to predict the changing needs of our customers;

• The statements in "Item 1. Business - Research and Development" regarding our belief that R&D expenditures will continue to represent a substantial percentage of our net sales in the future, which statements are subject to certain risks and uncertainties, including, among others, unanticipated costs or delays preventing us from achieving better results or lower costs and the risk that we may be unable to allocate substantial resources to R&D;

• The statements in "Item 1. Business - Manufacturing" regarding (i) our belief that our outsourcing strategy enables us to minimize our fixed costs and capital expenditures while also providing the flexibility to scale production capacity and allows us to focus on product differentiation through system design and quality control and (ii) our belief that our use of outsourced product specialists enables our subsystems to incorporate the latest and most advanced technologies in robotics, gas panel designs, and power supplies without the need for in-house expertise, which statements are subject to various risks and uncertainties, including, without limitation, a prolonged inability to obtain certain components imperative to our operations and our failure to work efficiently with suppliers and unexpected need to implement further cost cutting measures limiting the amount of resources we can allocate towards contracting with outsourced product specialists;

• The statement in "Item 1. Business - Competition" regarding our belief as to our ability to compete favorably in our Semiconductor Group, which statement is subject to various risks and uncertainties, including, among others, the greater financial, marketing, technical or other resources, broader product lines, greater customer service capabilities and larger and more established sales organizations and customer bases that some of our competitors possess; future competition from new market entrants from overseas and domestic sources; our competitors' improvement of the design and performance of their products that may offer superior price or performance features as compared to our products and our ability to successfully select, develop, manufacture and market our new products or enhance our existing products;

• The statements in "Item 1. Business - Patents and Proprietary Rights" regarding (i) our intention to continue to pursue patent and trade secret protection for our technology; (ii) our intention to vigorously protect our intellectual property rights, (iii) our intention to file additional patent applications as appropriate, and (iv) our belief that the outcomes of current litigation will not have a material effect on our business, financial condition or results of operations, which statements are subject to various risks and uncertainties, including, without limitation, the risk that patents will not be issued from any of our pending applications or that claims allowed from existing or pending patents will not be sufficiently broad to protect our technology; the risk that litigation could result in substantial cost and diversion of our effort and the risk that adverse litigation determinations could result in a loss of our intellectual property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products;

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• The statement in "Item 1. Business - Environmental Matters" that federal, state and local provisions regulating discharge of materials into the environment and remedial agreements or other environmental actions are not expected to have a material effect on our capital expenditures, financial condition, results of operations or competitive position, which statement is subject to certain risks and uncertainties, including, among others, the possibility that we have inaccurately assessed the environmental impact of our activities or the compliance requirements of environmental provisions and agreements and the introduction of new or more stringent environmental regulations;

• The statements in "Item 1A. Risk Factors" concerning (i) our expectation that we will complete the proposed Merger with Lam Research in the second quarter of 2012 (ii) our expectation that we will continue to experience significant fluctuations in our quarterly operating results; (iii) our expectation that sales to a small number of customers will continue to account for a high percentage of our net sales in the foreseeable future; (iv) our intention to continue to seek legal protection, primarily through patents and trade secrets, for our proprietary technology; and (v) our expectation that worldwide environmental regulatory activity will increase in the future, which statements are subject to various risks and uncertainties, including, without limitation, financial instability in our industry or the general economy; the loss of a significant customer or changes in demand for our products by our customers; the risk that patents will not be issued from any of our pending applications or that claims allowed from existing or pending patents will not be sufficiently broad to protect our technology and changing trends in environmental rule-making by government agencies;

• The statement in "Item 2. Properties" that our facilities are sufficient to meet our needs for the foreseeable future, which statement is subject to certain risks and uncertainties, including, among others, inaccurate estimates related to our facility needs and an unexpected need to expand operations;

• The statement in "Item 3. Legal Proceedings" that we believe that the ultimate disposition of litigation matters, including the litigation with Linear Technology Corporation, will not have a material adverse effect on the impact on our business, financial condition or our results of operations, which statement is subject to various risks and uncertainties, including, without limitation, inherent uncertainty surrounding the litigation process and our ability to accurately predict the determination of complex issues of fact and law;

• The statement in "Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities" that we anticipate that no cash dividends will be paid to holders of common stock in the foreseeable future, which statement is subject to various risks and uncertainties, including, without limitation, the possibility that we may deem it appropriate or advisable to declare a dividend;

• The statements in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Proposed Merger with Lam Research" concerning the Merger and the Merger Agreement including satisfaction or waiver of the closing conditions, and our expectation regarding closing the transaction in the second calendar quarter of 2012;

• The statements in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview of Our Business and Industry" regarding (i) the proliferation of smartphones and other mobile devices, including computer tablet products and notebooks with solid-state drives,
(ii) the investment required to upgrade the current communications infrastructure to support the growing use of mobile graphics and video, both domestically and internationally, (iii) growth in cloud computing and storage,
(iv) the emergence of a growing middle class in developing economies, (v) our continued belief that the necessary demand drivers to promote long-term growth remain intact, (vi) our belief that demand for our products will continue to increase as our customers' capital expenditures increase to meet growing demand for semiconductor devices, and (vii) our expectations that net orders will continue to fluctuate due to the cyclical nature of our business, which statements are subject to numerous risks and uncertainties, including, without limitation, our inability to maintain our customer accounts; unexpected trends in our customers' purchases or changes in their demand for our products; fluctuations in market demand for semiconductors; instability in the

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semiconductor industry or the economy; our inability to predict the origin of revenues, difficulties or delays in realizing marketable products from our investment in R&D, the failure of the market to accept our new product introductions and the cyclical nature of the semiconductor industry;

• The statements in "Item 7. Management's Discussion and Analysis of Financial Condition - Critical Accounting Policies" regarding the calculation of allowances, reserves, and other estimates that are based on historical experience, and various other 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, and the significant judgments of management that underlie the preparation of our consolidated financial statements including, without limitation, our belief that net deferred tax assets will be realized, which statements are subject to certain risks and uncertainties, including, among others, the inaccuracy of our calculations, estimates, assumptions and judgments regarding critical accounting policies; that actual and future product failure rates, material usage, installation costs, customer reserves or other estimates may differ from our historical experience, requiring revisions to our estimated doubtful account allowances, additional inventory write-downs, restructuring charges, litigation, warranty, and other reserves; the insufficiency of anticipated future income, whether due to a downturn in the semiconductor industry or increases in expenses; unexpected changes to federal, state or local tax laws, our inability to meet current forecasts; a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or both of our reporting units and our inability to estimate changes in our unrecognized tax benefits over the next twelve months;

• The statements in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Research and Development (R&D)" of our strategies, beliefs, plans, expectations and anticipations including (i) our continued belief that investment in R&D is required to remain competitive; and (ii) our plan to continue to invest in new products and enhancement of our current product lines, which statements are subject to numerous risks and uncertainties, including, without limitation, risks and uncertainties associated with technical and operational difficulties with our products that could result in increased warranty costs, our ability to attract and retain qualified personnel and our inability to allocate substantial resources to R&D programs;

• The statements in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Income Taxes" regarding (i) our expectation that in periods of profitability we expect to achieve tax rates lower than current federal rates as we benefit from a geographical mix of income at lower rates; and (ii) our expectation that the modification after the review of our intercompany agreements will reduce our tax liability in future years, which statement is subject to certain risks and uncertainties including changes to international tax rates; our eligibility for tax credits; shifts in our geographical mix of income and our inability to estimate the future tax liability associated with our intercompany agreements;

• The statement in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" that our financial resources will be sufficient to meet our needs for the next 12 months, which statement is subject to certain risks and uncertainties, including an unanticipated need for additional liquid assets in the next 12 months to fund operations, complete acquisitions or repurchase shares of our common stock;

• The statement in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements" that it is not probable that we will be required to pay any amounts under standby letters of credit arrangements or guarantee arrangements on behalf of our consolidated subsidiaries, which statement is subject to certain risks and uncertainties, including, without limitation, the inability of third parties on whose behalf we have made guarantees to pay their obligations when due;

• The statements in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 3. Significant Accounting Policies
- Recently Adopted-Accounting Pronouncements" that new guidance regarding multiple deliverable revenue arrangement will have not a significant impact on

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the timing of future revenue recognition, and the statements in "Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 3. Significant Accounting Policies-Recently Issued Accounting Pronouncements", that we do not expect guidance regarding how entities test for goodwill impairment to have a material effect on our Consolidated Financial Statements, which statements are subject to certain risks and uncertainties, including, without limitation, our changes in our estimates or assumptions; additional guidance issued by FASB; inaccurate assumptions regarding the creditworthiness of our counterparties or employees and unanticipated changes in the financial condition of our counterparties or employees;

• Our statements in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6. Fair Value of Financial Instruments" that (i) we believe the $6.0 million of impairment we recorded with respect to our auction-rate securities is temporary as we do not intend to sell the securities; and (ii) that we expect that we will recover the amortized cost of such securities; which statements are subject to certain risks and uncertainties, including, without limitation, our assumption that we will continue to have the ability to hold the auction-rate securities and that the value of such securities will be recovered without incurring significant losses and the instability of the credit quality of the auction-rate securities, which may impact our ability to recover the amortized cost basis of these securities;

• Our statement in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 8. Derivative Financial Instruments" that we anticipate reclassifying the accumulated gains recorded as of December 31, 2011 from OCI to net sales within 12 months, which statement is subject to certain risks and uncertainties, including, without limitation, fluctuations in foreign currency exchange contracts and the possible ineffectiveness of our hedges;

• Our statement in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 12. Goodwill and Other Intangible Assets" of our future estimated amortization expense for the identifiable intangible assets, which statement is subject to certain risks and uncertainties, including, without limitation, the accuracy of our accounting judgments and estimates underlying the amortization expense amount;

• Our statements in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 13. Commitments and Contingencies" regarding (i) our belief that it is not probable that any amounts will be required to be paid by us under our standby letters of credit; (ii) our belief that the ultimate disposition of litigation matters, including the litigation with Linear Technology Corporation, will not have a material adverse effect on the impact on our business, financial condition or the overall trend in our results from operations, which statements are subject to certain risks and uncertainties, including, without limitation, the creditworthiness and financial condition of our counterparties and inherent uncertainty surrounding the litigation process and our ability to accurately predict the determination of complex issues of fact and law;

• Our statement in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 14. Restructuring" that we estimate that future rent obligations will be paid in cash through 2017, which statement is subject to certain risks and uncertainties, including, without limitation unanticipated amendments to our leased facilities; unanticipated demands on our cash and our inability to accurately predict the effectiveness of our restructuring plans;

• Our statements in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 16. Income Taxes" regarding
(i) our intention to reinvest undistributed earnings from foreign subsidiaries for expansion of our business operations outside of the United States on an indefinite basis; (ii) the statements that our total unrecognized tax benefits could increase or decrease over the next twelve months, and (iii) our belief that adequate accruals have been provided for any potential adjustments that may result from current examination by several state tax authorities, which statements are subject to certain risks and uncertainties, including, without limitation,

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changes in state tax law; unanticipated interpretations of tax law; changes in strategy with respect to undistributed earnings from foreign subsidiaries and our inability to adequately estimate the amount of potential adjustments; and

• Our statement in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 18. Stock-Based Compensation and Employee Benefit Plans" that we do not anticipate paying any cash dividends in the foreseeable future, which statement is subject to certain risks and uncertainties, including, without limitation, the possibility that we may deem it appropriate or advisable to declare a dividend.

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 Novellus. Our MD&A addresses the following topics:

• Overview of Our Business and Industry;

• Financial Performance Overview;

• Critical Accounting Policies;

• Recent Accounting Pronouncements;

• Results of Operations;

• Liquidity and Capital Resources;

• Off-Balance Sheet Arrangements; and

• Contractual Obligations.

Proposed Merger with Lam Research

On December 14, 2011, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Lam Research Corporation, a Delaware corporation (Lam Research), and BLMS Inc., a California corporation and wholly owned subsidiary of Lam Research (Merger subsidiary), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger subsidiary will merge with and into Novellus (the Merger) with Novellus surviving the Merger as a wholly owned subsidiary of Lam Research. Upon completion of the Merger, each share of our common stock will be converted into 1.125 shares of Lam Research common stock.

Completion of the Merger is subject to certain customary conditions, including, among others: (i) approval of Novellus' shareholders and Lam Research's stockholders, (ii) the receipt of certain foreign antitrust approvals, (iii) the registration statement on Form S-4 used to register the Lam Research Common Stock to be issued as consideration for the Merger having been declared effective by the SEC, and the authorization for the listing of the Lam Research Common Stock to be issued as consideration in the Merger on NASDAQ,
(iv) delivery of customary opinions from counsel to Novellus and counsel to Lam Research that the Merger will qualify as a tax-free reorganization for federal income tax purposes and (v) dissenting shareholders not exceeding certain thresholds. The obligation of each party to consummate the Merger is also conditioned upon the other party's representations and warranties being true and correct and the other party having performed in all material respects its obligations under the Merger Agreement. The companies anticipate the Merger, which has been unanimously approved by the boards of directors of both Lam Research and Novellus, to close in the second calendar quarter of 2012.

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See Item 1A, "Risk Factors," and Note 13 for additional risks and information related to the Merger.

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. We refer to this segment of our business as our Semiconductor Group. Customers for this equipment manufacture chips for sale or for incorporation in their own . . .