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~~March 2431, ~~2011~~2012

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

For the transition period from to

Commission File Number 000-17157

NOVELLUS SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)


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

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

(408) 943-9700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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~~ April 27, ~~2011~~2012, there were 6672,~~589~~168,~~390~~068 shares of the Registrant’s common stock, no par value, issued and outstanding.

NOVELLUS SYSTEMS, INC.

FORM 10-Q

QUARTER ENDED ~~SEPTEMBER~~MARCH 2431, ~~2011~~2012

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 24, 2011 and September 25, 2010		3
	Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and March 26, 2011		3
	Condensed Consolidated Balance Sheets as of September 24, 2011 and December 31, 2010		4
	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and March 26, 2011		4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 24, 2011 and September 25, 2010		5
	Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011		5
	Notes to Condensed Consolidated Financial Statements		6
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and March 26, 2011		6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
	Notes to Condensed Consolidated Financial Statements		7
Item 3:	Quantitative and Qualitative Disclosures About Market Risk		29
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 4:	Controls and Procedures		30
Item 3:	Quantitative and Qualitative Disclosures About Market Risk		31
Item 4:	Controls and Procedures		31
Part II: Other Information
Item 1:	Legal Proceedings		3132
Item 1A:	Risk Factors		3233
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		4248
Item 6:	Exhibits		4348
Signatures			4449
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
EXHIBIT 101.INS
EXHIBIT 101.SCH
EXHIBIT 101.CAL
EXHIBIT 101.DEF
EXHIBIT 101.LAB
EXHIBIT 101.PRE

PART I: FINANCIAL INFORMATION

ITEM 1:

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(Unaudited)

Three Months Ended

~~Nine Months Ended~~

September 24, 2011

September 25, 2010

September 24, 2011

September 25, 2010

March 31, 2012

March 26, 2011

(In thousands, except per share amounts)

Net sales

~~306~~326,~~731~~722

~~367~~413,~~203~~185

~~1,070,139~~

~~964,801~~

Cost of sales

~~158~~172,~~824~~196

~~186~~204,~~774~~907

~~537,644~~

~~493,468~~

Gross profit

~~147~~154,~~907~~526

~~180~~208,~~429~~278

~~532,495~~

~~471,333~~

Selling, general and administrative

4449,~~364~~626

4649,~~426~~340

~~141,082~~

~~134,509~~

Research and development

4749,~~827~~149

4446,~~271~~721

~~141,818~~

~~124,747~~

Restructuring charges (benefits), net

(1,258

)

240

(936

)

657

Restructuring charges, net

166

181

Total operating expenses

9098,~~933~~941

9096,~~937~~242

~~281,964~~

~~259,913~~

Operating income

5655,~~974~~585

89112,~~492~~036

~~250,531~~

~~211,420~~

Interest income

1,~~340~~403

1,~~549~~497

~~4,321~~

~~5,625~~

Interest expense

(5,~~979~~648

)

(~~411~~426

)

~~(9,658~~

)

~~(1,037~~

)

Other income (expense), net

2,785

(1,270

)

1,195

(998

)

Other expense, net

(295

)

(354

)

Income before income taxes

55,120

89,360

246,389

215,010

Income before provision for income taxes

51,045

112,753

Provision for income taxes

46,~~038~~599

1316,~~095~~395

~~34,216~~

~~34,181~~

Net income

5144,~~082~~446

7696,~~265~~358

~~212,173~~

~~180,829~~

Net income per share:

Basic

0.7463

01.8307

~~2.67~~

~~1.93~~

Diluted

0.7359

01.8204

~~2.60~~

~~1.90~~

Shares used in basic per share calculations

6870,~~883~~452

9190,~~512~~321

~~79,401~~

~~93,833~~

Shares used in diluted per share calculations

7075,~~379~~682

92,~~859~~855

~~81,464~~

~~94,986~~

See accompanying Notes to the Condensed Consolidated Financial Statements.

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended
	March 31, 2012			March 26, 2011
	(In thousands)
Net income	$	44,446		$	96,358
Other comprehensive income
Net change in unrealized gain on investments		294			40
Foreign currency translation adjustments, net of tax⁽¹⁾		298			905
Net change in unrealized gain on derivative instruments		1,093			765
Net change in unrealized loss on pension obligations		(12	)		0

Total other comprehensive income		1,673			1,710

Comprehensive income	$	46,119		$	98,068

(1)	The tax benefit on foreign currency translation adjustments was $0.5 million and $1.3 million for the three months ended March 31, 2012 and March 26, 2011, respectively.

See accompanying Notes to the Condensed Consolidated Financial Statements.

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 24, 2011			December 31, 2010
	March 31, 2012			December 31, 2011
	(Unaudited)
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	~~353~~343,~~127~~974		$	~~247~~524,~~055~~901
Short-term investments		~~383~~669,~~482~~997			~~424~~393,~~196~~837
Accounts receivable, net		~~222~~226,~~764~~763			~~256~~188,~~731~~422
Inventories		~~216~~225,~~865~~838			~~208~~213,~~894~~869
Deferred tax assets, net		4036,~~613~~104			4944,~~995~~093
Other current assets		4451,~~165~~364			1544,~~530~~017
Total current assets		1,~~261~~554,~~016~~040			1,~~202~~409,~~401~~139
Property and equipment, net of accumulated depreciation of $576,991 in 2011 and $570,083 in 2010		205,783			218,569
Property and equipment, net of accumulated depreciation of $545,675 in 2012 and $564,399 in 2011		206,473			208,764
Non-current restricted cash and cash equivalents		~~132~~122,~~540~~309			~~121~~123,~~226~~150
Long-term investments		5346,~~456~~469			6842,~~645~~891
Goodwill		125,~~468~~135			~~125~~124,~~043~~685
Other non-current assets		9520,~~010~~492			9628,~~513~~006
Total assets	$	12,~~873~~074,~~273~~918		$	1,~~832~~936,~~397~~635
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	51,743		$	82,006
Senior convertible notes	$	273,070		$	0
Accrued payroll and related expenses		69,662			63,725
Accounts payable and accrued liabilities		87,383			51,195
Accrued warranty		30,035			29,512
Accrued payroll and related expenses		39,197			70,919
Other current liabilities		69,994			70,444
Accrued warranty		29,614			28,256
Income taxes payable		9,423			15,631
Other current liabilities		69,550			60,329
Deferred profit		20,775			29,693
Income taxes payable		6,356			5,536
Total current liabilities		251,632			291,011
Deferred profit		12,929			15,996
Senior convertible notes		271,291			0
Total current liabilities		518,099			232,231
Other long-term debt obligations		108,235			105,592
Senior convertible notes		0			272,172
Long-term income taxes payable		63,073			61,381
Other long-term debt obligations		106,048			103,189
Long-term deferred tax liabilities, net		169,810			3,815
Long-term income taxes payable		66,422			66,425
Other non-current liabilities		39,051			42,460
Long-term deferred tax liabilities, net		118,857			123,088
Total liabilities		903,092			504,259
Other non-current liabilities		37,340			39,000
Total liabilities		846,766			836,105
Commitments and contingencies (Note 10)
Senior convertible notes (Note 3)		426,930			0
Shareholders’ equity:
Common stock		1949,~~195,235~~242			1,~~206~~293,~~887~~811
Retained earnings (accumulated deficit)		(224,583	)		124,132
Accumulated deficit		(147,443	)		(191,031	)
Accumulated other comprehensive loss		(~~471~~577	)		(2,~~881~~250	)
Total shareholders’ equity		~~970~~801,~~181~~222			1,~~328~~100,~~138~~530
Total liabilities and shareholders’ equity	$	12,~~873~~074,~~273~~918		$	1,~~832~~936,~~397~~635

See accompanying Notes to Condensed Consolidated Financial Statements.

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	Three Months Ended
	September 24, 2011			September 25, 2010
	March 31, 2012			March 26, 2011
	(In thousands)
Cash flows from operating activities:
Net income	$	~~212~~44,~~173~~446		$	~~180~~96,~~829~~358
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		268,~~466~~482			308,~~775~~807
Deferred income taxes		224,~~859~~079			(210,~~876~~475	)
Stock-based compensation		3114,~~307~~519			259,~~706~~956
Excess tax benefit from stock-based compensation		0(429	)		(~~392~~1,517	)
Other non-cash charges, net		4,713			4,939
Other, net		821			1,204
Changes in operating assets and liabilities:
Accounts receivable, net		35(38,~~515~~356	)		(4721,~~956~~029	)
Inventories		(411,~~412~~052	)		(346,~~481~~245	)
Other assets		(163,~~734~~107	)		~~6,673~~472
Accounts payable and accrued liabilities		~~(30~~36,~~539~~139	)		319,~~466~~197
Accrued payroll and related expenses		8(28,~~786~~361	)		37(19,~~383~~905	)
Accrued warranty		~~1,763~~933			103,~~077~~620
Income taxes payable		~~(4,578~~673	)		20(6,~~728~~127	)
Deferred profit		(83,~~958~~174	)		6(16,~~265~~348	)
Other liabilities		~~285~~7,149			64,~~875~~847
Net cash provided by operating activities		~~278~~32,~~646~~762			~~248~~83,~~011~~765
Cash flows from investing activities:
Proceeds from sales of investments		~~365~~126,~~577~~299			~~119~~202,~~359~~714
Proceeds from maturities of investments		~~109~~14,~~400~~850			~~143~~29,~~384~~950
Purchases of investments		(~~441~~413,~~756~~723	)		(~~287~~177,~~894~~736	)
Capital expenditures		(155,~~509~~240	)		(125,~~916~~039	)
Decrease (increase) in restricted cash and cash equivalents		(9,590	)		8,652
Increase (decrease) in restricted cash and cash equivalents		1,915			(4,895	)
Net cash provided by (used in) investing activities		8(275,~~122~~899	)		~~(29~~44,~~415~~994	)
Cash flows from financing activities:
Proceeds from employee stock compensation plans		~~112~~61,~~711~~869			796,~~641~~285
Proceeds from senior convertible notes, net of issuance costs		684,250			0
Net repayments of other debt obligations		(26	)		(24	)
Net proceeds from (repayments of) other debt obligations		(72	)		510
Repurchases of common stock		(1,428	)		(200,392	)
Repurchases of common stock		(977,666	)		(161,037	)
Excess tax benefit from stock-based compensation		429			1,517
Excess tax benefit from stock-based compensation		0			392
Net cash provided by (used in) financing activities		60,844			(102,614	)
Net cash used in financing activities		(180,777	)		(152,494	)
Effects of exchange rate changes on cash and cash equivalents		1,366			2,139
Effects of exchange rate changes on cash and cash equivalents		81			(262	)
Net change in cash and cash equivalents		(180,927	)		28,284
Net increase in cash and cash equivalents		106,072			65,840
Cash and cash equivalents at the beginning of the period		524,901			247,055
Cash and cash equivalents at the beginning of the period		247,055			142,047
Cash and cash equivalents at the end of the period	$	343,974		$	275,339
Cash and cash equivalents at the end of the period	$	353,127		$	207,887

See accompanying Notes to Condensed Consolidated Financial Statements.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business and Basis of Presentation

~~The~~Description accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of ~~Regulation~~Business 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 24, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or any future period. The interim financial statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Novellus Systems, Inc., together with its subsidiaries, is primarily a supplier of semiconductor manufacturing equipment used in the fabrication of integrated circuits. We are focused on delivering innovative interconnect products and technologies that meet the increasingly complex and demanding needs of the world’s largest semiconductor manufacturers. The manufacturing equipment that we build, market and service provides today’s semiconductor device manufacturers with high productivity and low total cost of ownership. The segment of our business serving this area is the Semiconductor Group. Novellus also develops, manufactures, sells and supports grinding, lapping and polishing equipment for a broad spectrum of industrial applications. The segment of our business serving this market is the Industrial Applications Group (IAG).

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, the 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 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.

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 months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any future period. The interim financial statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

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 and liabilities, valuation of goodwill and other intangible assets, adequacy of warranty obligations, measurement of restructuring and impairment charges, valuation of long-term debt, compliance with accounting for derivatives, contingencies and litigation, and measurement of stock-based compensation. We base estimates on historical experience and on market-based assumptions that we believe to be reasonable under current circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our intent is to accurately state assets and liabilities given facts known at the time of measurement. Actual results may differ from these estimates.

The accompanying Condensed Consolidated Financial Statements include our accounts and the accounts of our subsidiaries after the elimination of all significant intercompany account balances and transactions.

Note 2. Significant Accounting Policies

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collection of the receivable is reasonably assured. It is common for us to ship equipment and transfer title at the point of delivery to the buyer under the terms of our contractual relationship. When uncertainty exists as to customer acceptance due to customer-specific equipment performance conditions, we defer revenue recognition until acceptance and record the deferred revenue and associated costs of sales in Deferred profit on our ~~Condensed~~ Consolidated Balance Sheet. Our sales arrangements do ~~not~~ not include a general right of return.

Our equipment sales generally have two elements: the equipment and its installation. While installation is not essential to the functionality of the delivered equipment, final payment is generally not billable for many of our sales contracts until we have fulfilled our system installation obligations and received customer acceptance. Provided that we have historically met defined levels of customer acceptance with both the specific customer and the specific type of equipment, we recognize revenue for the equipment element upon shipment and transfer of title. We recognize revenue for the installation element when installation is complete. Revenue recognized for delivered elements is limited to the amount not contingent on future performance obligations. Revenue related to sales of spare parts is recognized upon shipment. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.

InFor ~~the~~multiple ~~first~~element ~~quarter of 2011~~arrangements, the wetotal ~~adopted,~~consideration onfor ~~a prospective basis,~~ an ~~amended~~arrangement ~~accounting~~is ~~standard~~allocated ~~issued~~among by the ~~Financial~~separate ~~Accounting~~elements ~~Standards~~in ~~Board~~the ~~(FASB)~~arrangement ~~for~~based ~~multiple deliverable revenue arrangements applicable to transactions originating or materially modified~~ on ora ~~after January 1,~~selling ~~2011~~price hierarchy. The ~~new~~selling ~~standard~~price ~~changed~~hierarchy ~~the requirements~~ for ~~establishing separate units of accounting in~~ a ~~multiple element arrangement and requires the allocation of arrangement consideration to each~~ deliverable tois be based on ~~the~~(i) vendor ~~selling price~~specific ~~hierarchy~~objective ~~described~~evidence ~~below.~~(VSOE), ~~Implementation~~if available; of(ii) third ~~this~~party ~~new~~evidence ~~authoritative~~of ~~guidance~~selling ~~had~~price anif ~~insignificant~~VSOE ~~impact~~is onnot ~~reported~~available; ~~revenue~~or as(iii) an ~~compared~~estimated toselling ~~revenue~~price, ~~under~~if ~~previous~~neither ~~guidance,~~VSOE asnor ~~the~~third ~~new~~party ~~guidance~~evidence ~~did~~is ~~not~~available. ~~change~~We ~~the~~generally ~~units~~use ofVSOE ~~accounting~~for ~~within~~ our ~~sales~~ ~~arrangements~~products and ~~the~~services. ~~elimination~~Until ofwe establish ~~the~~VSOE, ~~residual~~we ~~method~~determine ~~for~~our ~~the~~estimate ~~allocation~~ of ~~arrangement~~the ~~consideration~~relative ~~had~~selling anprice ~~inconsequential~~by ~~impact~~considering onour ~~the~~production ~~amount~~costs and ~~timing~~margins of ~~our~~similar ~~reported~~products ~~revenue~~or services. We doregularly ~~not~~review ~~expect that~~ the ~~new~~method ~~guidance~~used ~~will~~to ~~have~~determine ~~a significant~~our ~~impact~~relative onselling ~~the~~price ~~timing~~and ofupdate ~~future~~any estimates ~~revenue recognition in comparison to our historical practice~~accordingly.

~~For~~Recent ~~multiple~~Accounting ~~element~~Pronouncements arrangements entered into before January 1, 2011, revenue was allocated among the separate elements based on their relative fair values, provided the elements had value on a stand-alone basis and there was objective and reliable evidence of fair value. In the limited cases where there was objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), the residual method was used to allocate the arrangement consideration. For multiple element arrangements entered into or materially modified on or after January 1, 2011, the total consideration for an arrangement is allocated among the separate elements in the arrangement based on a selling price hierarchy. The selling price hierarchy for a deliverable is based on (i) vendor specific objective evidence (VSOE), if available; (ii) third party evidence of selling price if VSOE is not available; or (iii) an estimated selling price, if neither VSOE nor third party evidence is available. We generally use VSOE for our products and services. Until we establish VSOE, we determine our estimate of the relative selling price by considering our production costs and margins of similar products or services. We regularly review the method used to determine our relative selling price and update any estimates accordingly.

~~Recently~~In ~~Issued~~May ~~Accounting~~2011, ~~Pronouncements~~the FASB issued new authoritative guidance that results in common principles and requirements for measuring and disclosing fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. We adopted this authoritative guidance prospectively in the first quarter of our fiscal year 2012 and the adoption of this guidance did not have a material effect on our Consolidated Financial Statements.

In ~~May~~ June 2011, the FASB issued new authoritative guidance that ~~results~~increases the prominence of items reported in ~~common~~Other ~~principles~~comprehensive ~~and~~income ~~requirements~~(OCI) ~~for~~by ~~measuring~~eliminating ~~and~~the ~~disclosing~~option ~~fair~~to ~~value~~present ~~and~~components ~~for~~of OCI as part of the Statement of Changes in Stockholders’ Equity. The amendments in this standard require that all non-owner changes in ~~disclosing~~stockholders’ ~~information~~equity ~~about~~be ~~fair~~presented ~~value~~either ~~measurements~~in a single continuous statement of comprehensive income or in ~~accordance~~two ~~with~~separate Ubut consecutive statements.S. ~~GAAP~~This ~~and~~guidance ~~International~~does ~~Financial~~not ~~Reporting~~affect ~~Standards.~~the Weunderlying accounting for components of OCI, but will ~~adopt~~change the presentation of our financial statements. We adopted this authoritative guidance ~~prospectively~~retrospectively in the first quarter of our fiscal year 2012. Weand ~~are currently evaluating~~ the ~~potential~~adoption ~~impact~~ of this ~~authoritative~~ guidance did not have a material effect on our Consolidated Financial Statements.

In ~~June~~ September 2011, the FASB issued new authoritative guidance that ~~increases~~simplified ~~the~~how ~~prominence~~entities oftest ~~items~~goodwill ~~reported~~for inimpairment. ~~other~~Entities ~~comprehensive~~are permitted ~~income~~to ~~(OCI)~~initially byassess ~~eliminating~~qualitative ~~the~~factors ~~option~~ to ~~present~~determine ~~components~~whether ofit ~~OCI~~is asmore ~~part~~likely ofthan ~~the~~not ~~statement of changes in stockholders’ equity. The amendments in this standard require~~ that ~~all~~the ~~non-owner~~fair ~~changes~~value inof ~~stockholders’ equity be presented either in~~ a ~~single~~reporting ~~continuous~~unit ~~statement~~is ofless ~~comprehensive~~than ~~income~~its orcarrying inamount ~~two~~as ~~separate~~a ~~but~~basis ~~consecutive statements. Under either method, adjustments must be displayed~~ for ~~items~~determining ~~that~~whether ~~are~~it ~~reclassified~~is ~~from~~necessary ~~OCI~~ to ~~net~~perform ~~income in~~ the ~~financial~~two-step goodwill ~~statements~~impairment ~~where~~test. ~~the~~We ~~components~~adopted ofthis ~~net~~authoritative ~~income and the components of OCI are presented. This~~ guidance ~~does~~in ~~not affect~~ the ~~underlying~~first ~~accounting~~quarter ~~for~~of ~~components~~our offiscal ~~OCI, but~~year ~~will~~2012 ~~change~~and the ~~presentation~~adoption of ~~our financial statements. We will adopt~~ this ~~authoritative~~ guidance ~~retrospectively~~did innot ~~the~~have ~~first~~a ~~quarter~~material ofeffect on our ~~fiscal~~Consolidated ~~year~~Financial ~~2012~~Statements.

In September 2011, the FASB issued new authoritative guidance that simplified how entities test goodwill for impairment. Entities are permitted to initially assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. We will adopt this authoritative guidance in the first quarter of our fiscal year 2012. We do not expect the adoption of this guidance to have a material effect on our Consolidated Financial Statements.

Note 3. Debt Obligations

Senior Convertible Notes

On May 10, 2011, we issued $700.0 million of 2.625% senior convertible notes due May 15, 2041, in a private offering (Senior Convertible Notes). The proceeds from the issuance of the Senior Convertible Notes ~~have~~were ~~been,~~primarily ~~and will continue to be,~~ used to repurchase shares of our common stock pursuant to our board-authorized stock repurchase program ~~and for general corporate purposes~~. The Senior Convertible Notes are senior unsecured borrowings initially convertible, subject to certain conditions, into shares of common stock at a conversion rate of 25.3139 shares of common stock per $1,000 principal amount of convertible notes, representing an initial effective conversion price of $39.50 per share of common stock. The conversion rate will be subject to adjustment for certain events as outlined in the indenture governing the Senior Convertible Notes but will not be adjusted for accrued interest. We will settle any conversion of the Senior Convertible Notes in cash up to the face value, and any amount in excess of face value will be settled in stock up to 19.99% of outstanding stock, unless shareholder approval is obtained. If shareholder approval is ~~not~~obtained, any excess amount will be settled in stock. If shareholder approval is not obtained, any excess amount will be settled in cash. As of ~~September~~March 2431, ~~2011~~2012, 17.7 million shares of common stock were reserved for issuance upon conversion of the Senior Convertible Notes. As of ~~September~~March 2431, ~~2011~~2012, the if-converted value of the Senior Convertible Notes ~~did~~exceeded ~~not exceed~~ the aggregate principal amount by $184.5 million.

Holders of the Senior Convertible Notes may convert at the applicable conversion rate, in multiples of $1,000 principal amount, under any of the following circumstances:

During any fiscal quarter beginning after September 24, 2011, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day.

ii. During the period of ~~five~~5 business days after any period of ~~five~~5 consecutive trading days in which the trading price per Senior Convertible Note for each day of that period of ~~five~~5 consecutive trading days was less than 98% of the product of the last reported sales price of our common stock and the conversion rate on such day.

iii.

If we call any or all of the Senior Convertible Notes for redemption at any time prior to the close of business on the trading day immediately preceding the redemption date.

iv.

Upon the occurrence of certain corporate transactions as specified in the indenture governing the Senior Convertible Notes (a Fundamental Change).

At any time on or after February 15, 2041 up to and including the close of business on the third scheduled trading day immediately preceding the maturity date.

In addition, holders who convert their Senior Convertible Notes in connection with a Fundamental Change may be entitled to a make-whole premium in the form of an increase in the conversion rate. In the event of a Fundamental Change, the holders may also require us to purchase all or a portion of their notes at a purchase price equal to 100% of the principal amount, plus accrued interest, if any. AsA merger whereby common shares of ~~September~~the company are exchanged for common shares of a publicly traded company is specifically excluded from the provisions for Fundamental Change and make-whole premium specified in the indenture governing the Senior Convertible Notes. The indenture for our Senior Convertible Notes provides that our Senior Convertible Notes may also be converted into our common stock at any time from and after the later of (i) ~~24,~~the ~~2011,~~date ~~none~~that is 30 scheduled trading days immediately prior to the anticipated closing date of the ~~conditions~~Merger ~~allowing~~and ~~holders~~(ii) the date on which we deliver to ~~convert~~the ~~had~~debt ~~been~~holders ~~met.~~notice of the Merger until 35 business days after the actual closing date of the Merger.

On or after May 21, 2021, we may redeem all or part of the Senior Convertible Notes for the principal plus any accrued and unpaid interest if the closing price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days during any period of 30 consecutive trading days prior to the date on which we provide notice of redemption.

Proceeds upon issuance of the Senior Convertible Notes were as follows (in thousands):

	May 10,2011
Principal value Senior Convertible Notes	$	700,000
Less issuance cost		(15,750	)
Net proceeds, Senior Convertible Notes	$	684,250
Amounts recognized at issuance:
Senior Convertible Notes	$	270,004
Common stock, net		262,367
Long-term deferred tax liability		161,043
Issuance costs allocated to Senior Convertible Notes		(6,087	)
Long-term deferred tax asset		(3,624	)
Contingent interest derivative liability		547
Net proceeds, Senior Convertible Notes	$	684,250

We calculated the carrying value of the Senior Convertible Notes at issuance as the present value of the future cash payments required by the Senior Convertible Notes using a discount rate of 8.1% (an estimated borrowing rate for similar non-convertible debt). The excess of the principal amount of the debt over the carrying value of the Senior Convertible Notes is considered a debt discount. The debt discount is being amortized using the effective interest rate of 8.1% over the 30-year term as a non-cash charge to Interest expense. As of September 24, 2011, the remaining term of the notes is 29.7 years. Interest is payable semi-annually in arrears on May 15 and November 15.

The Senior Convertible Notes also have a contingent interest payment provision that may require us to pay additional interest based on certain thresholds, beginning with the semi-annual interest payment commencing on May 15, 2021, and upon the occurrence of certain events, as outlined in the indenture governing the Senior Convertible Notes. The maximum amount of the contingent interest will accrue at a rate of 2.1% per annum, excluding any potential impact from dividends deemed payable to holders of the Senior Convertible Notes. The contingent interest payment provision has been identified as an embedded derivative, to be accounted for separately, and is recorded at fair value at the end of each reporting period in Other non-current liabilities, with any gains and losses recorded in Interest expense, within the Condensed Consolidated Statement of Operations.

As of September 24, 2011, the Senior Convertible Notes consisted of the following (in thousands, except conversion rate and conversion price):

	September 24,2011
Unamortized debt discount	$	428,709
Carrying amount of Senior Convertible Notes		271,291
Principal amount	$	700,000
Carrying amount of equity component, net	$	262,367
Conversion rate (shares of common stock per $1,000 principal amount of notes)		25.3139
Conversion price (per share of common stock)	$	39.50

~~The~~In ~~following~~accordance ~~table~~with ~~presents~~the indenture governing our Senior Convertible Notes, on March 30, 2012 we notified the ~~components~~registered holders of ~~Interest~~our ~~expense~~Senior ~~for~~Convertible Notes of the opening of the conversion window and their conversion rights in connection with the proposed Merger with Lam Research Corporation. Accordingly, the carrying amount of Senior Convertible Notes (has been reclassified from noncurrent to current liabilities in our balance sheet. The excess of the amount of cash payable, if converted, over the carrying amount of the notes has been reclassified from permanent to temporary equity. Should ~~thousands):~~the proposed Merger not be completed or when the conversion period closes, 35 days after the completion of the proposed Merger, all notes not converted will be reclassified back to noncurrent liabilities and the temporary equity will be reclassified back to permanent equity. As of the issuance date of this financial statement, no holder has exercised their option to convert.

	Three MonthsEnded			Nine MonthsEnded
	September 24,2011			September 24,2011
	(In thousands)
Contractual interest	$	4,594		$	6,891
Amortization of debt discount		863			1,288
Decrease in contingent interest derivative liability		(27	)		(12	)
Amortization of issuance costs		12			18
Total	$	5,442		$	8,185

We calculated the carrying value of the Senior Convertible Notes at issuance as the present value of the future cash payments required by the Senior Convertible Notes using a discount rate of 8.1% (an estimated borrowing rate for similar non-convertible debt). The excess of the principal amount of the debt over the carrying value of the Senior Convertible Notes is considered a debt discount. The debt discount is being amortized using the effective interest rate of 8.1% as a non-cash charge to Interest expense. As of March 31, 2012, the remaining term of the notes is 29.2 years. Interest is payable semi-annually in arrears on May 15 and November 15.

As of March 31, 2012 and December 31, 2011, the Senior Convertible Notes consisted of the following (in thousands, except conversion rate and conversion price):


	March 31, 2012		December 31, 2011
Carrying amount of senior convertible notes	$	273,070	$	272,172
Unamortized debt discount		426,930		427,828

Principal amount	$	700,000	$	700,000

Carrying amount of equity component, net of tax	$	262,367	$	262,367
Conversion rate (shares of common stock per $1,000 principal amount of notes)		25.3139		25.3139
Conversion price (per share of common stock)	$	39.50	$	39.50

The following table presents the components of Interest expense for the Senior Convertible Notes:


	Three Months Ended
	March 31, 2012
	(In thousands)
Contractual interest	$	4,594
Amortization of debt discount		898
Decrease in contingent interest derivative liability		(221	)
Amortization of issuance costs		13

Total	$	5,284

General Corporate Borrowings

We have an aggregate amount of $3732.09 million available under short-term credit facilities with various financial institutions. As of ~~September~~March 2431, ~~2011~~2012, $97.19 million of our credit facilities ~~were pledged~~was pledged against outstanding letters of credit and the remainder was unutilized.

On June 17, 2009, we entered into a Euro-denominated ~~credit~~ credit agreement (the “Agreement”). The ~~agreement~~Agreement, as amended most recently on May 12, 2011, ~~provides~~provided a secured credit line with an aggregate committed maximum amount of 80 million Euros. The ~~current~~ terms ~~provide~~provided for an interest rate of Euro ~~Interbank~~ Interbank Offered Rate (EURIBOR) plus 50 basis points, with amounts outstanding due and payable on or before May 3, 2014. As of ~~September~~March 2431, ~~2011~~2012 and December 31, ~~2010~~2011, we had 79.5 million Euros outstanding under the ~~agreement which~~Agreement, ~~equaled~~which was equivalent to $~~107~~105.98 million and $~~105~~102.29 million, respectively, as of such dates, ~~respectively,~~ at an effective interest rate of 10.7986% and 1.4752%, respectively. The ~~agreement~~Agreement iswas secured by deposits in money market funds and Euro-denominated, time-based deposits atof a minimum of 105% of the outstanding balance. Amounts used to secure the debt ~~are~~were included within Non-current restricted cash and cash equivalents on our Condensed Consolidated Balance Sheet. The ~~agreement~~Agreement ~~contains~~contained customary affirmative covenants, representations, warranties, events of default, limited negative covenants, and financial covenants which ~~are~~were subject to various exceptions and qualifications. We were in compliance with these covenants as of ~~September~~March 2431, ~~2011~~2012. The outstanding amount under the Agreement was paid in full on April 27, 2012.

Note 4. 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.

For the three ~~and nine~~ months ended ~~September~~March 2431, ~~2011~~2012 and ~~September~~March 2526, ~~2010~~2011, diluted net income per share was computed by dividing net income by the weighted average number of common and potential common shares outstanding during the respective periods. Potential common shares represent the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued. For purposes of computing diluted net income per share, weighted average potential common shares do not include potential common shares that are either anti-dilutive under the treasury stock method or restricted shares subject to performance conditions that have not been met. For this reason, potential common shares of 50.65 million and 4.24 million pertaining to outstanding stock options and restricted stock awards were excluded from the computation for the three ~~and nine~~ months ended ~~September~~March 2431, ~~2011,~~ ~~respectively,~~2012 and ~~13.3~~March ~~million and 14.0 million were excluded from the three and nine months ended September 25~~26, ~~2010~~2011, respectively. ~~None~~Of of the 17.7 million shares underlying our Senior Convertible Notes, 2.7 million were included in our dilution calculation as our average ~~quarterly~~ stock price for the quarter was ~~less~~higher than the conversion price of $39.50.

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 24,2011		September 25,2010		September 24,2011		September 25,2010
	March 31, 2012		March 26, 2011
	(In thousands, except per share amounts)
Numerator:
Net income	$	5144,~~082~~446	$	7696,~~265~~358	$	~~212,173~~	$	~~180,829~~
Denominator:
Basic weighted average shares outstanding		68,883		91,512		79,401		93,833
Basic weighted-average shares outstanding		70,452		90,321
Dilutive common equivalent shares		1,496		1,347		2,063		1,153
Dilutive common equivalent shares – senior convertible notes		2,691		0
Diluted weighted average shares outstanding		70,379		92,859		81,464		94,986
Dilutive common equivalent shares – share based awards		2,539		2,534
Net income per share – Basic	$	0.74	$	0.83	$	2.67	$	1.93
Diluted weighted-average shares outstanding		75,682		92,855
Net income per share – Diluted	$	0.73	$	0.82	$	2.60	$	1.90
Net income per share – Basic	$	0.63	$	1.07
Net income per share – Diluted	$	0.59	$	1.04

Note 5. Fair Value of Financial Instruments

Fair Value Hierarchy

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

~~Our~~10 financial instruments consist primarily of money market funds, municipal bonds, variable-rate demand notes, corporate bonds, auction-rate securities, and derivatives. Three levels of inputs are used to measure the fair value of our instruments:

Our financial instruments consist primarily of money market funds, municipal bonds, variable rate demand notes, corporate bonds, auction-rate securities, government sponsored agency bonds, asset-backed securities, US treasury bonds, and derivatives. Three levels of inputs are used to measure the fair value of our instruments:

Level 1 -

Quoted prices in active markets for identical assets or liabilities.

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

Level 2 -

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

We classify our municipal bonds, variable- rate demand notes, corporate bonds, government sponsored agency bonds, asset-backed securities, and ~~corporate~~US treasury bonds as Level 2 instruments due to our use of observable market prices in less active markets or, when observable market prices are not available, our use of non-binding market prices that are corroborated by observable market data or quoted market prices for similar instruments. We classify our derivative instruments, with the exception of our contingent interest derivative liability, as Level 2 instruments due to our use of observable inputs other than quoted prices, including interest rates and credit risk.

We classify our Senior Convertible Notes as a Level 2 instrument, as we use the bond’s trading price, which has a low trading volume, to measure the fair value of the liability.

We classify our other long-term debt, primarily denominated in Euros, as Level 2 instruments, due to our use of observable inputs other than quoted prices, including interest rates.

Level 3 -

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

We classify our auction-rate ~~securities~~notes as Level 3 instruments, as we ~~use~~observe athat ~~cash-flow-based valuation model to measure~~ the ~~fair value of these~~ securities. ~~This~~are ~~model~~thinly ~~requires the use of significant unobservable inputs~~traded. ~~Our~~We ~~valuation~~obtain offair ~~these~~values ~~securities incorporates our assumptions about~~ for the ~~anticipated~~auction-rate ~~term~~notes ~~and~~from ~~yield that~~ a ~~market~~third ~~participant~~party ~~would~~pricing ~~require to purchase such securities in the marketplace~~source.

We classify our ~~contingent~~auction-rate ~~interest~~preferred ~~derivative~~shares ~~liability~~ as a Level 3 instruments ~~instrument~~ as we use a ~~Monte~~cash-flow-based ~~Carlo~~ valuation model to measure the fair value of these securities. This model requires the use of significant unobservable inputs. Our valuation of these securities incorporates our assumptions about the anticipated ~~comparable~~term ~~yield~~ and ~~stock~~yield ~~borrow rate~~ that a market participant would ~~obtain~~require to purchase such securities in the marketplace.

~~During~~We classify ~~the~~our ~~three~~contingent ~~and~~interest ~~nine~~derivative ~~months~~liability ~~ended~~as ~~September 24,~~a ~~2011~~Level ~~and~~3 ~~September 25,~~instrument ~~2010,~~as ~~there~~we ~~were~~use noa ~~transfers~~Monte Carlo valuation model to measure the fair value. This model requires the use of ~~financial~~significant unobservable inputs. Our valuation incorporates our ~~instruments~~assumptions ~~between~~about ~~Level~~the 1comparable ~~and~~yield ~~Level~~that 2a ormarket ~~transfers~~participant would obtain in orthe ~~out~~marketplace ofand ~~Level~~stock 3volatility.

During the three months ending March 31, 2012 and March 26, 2011, there were no transfers of financial instruments between Level 1 and Level 2 or transfers in or out of Level 3.

Financial Instruments Measured at Fair Value on a Recurring Basis

Financial instruments measured at fair value on a recurring basis, excluding accrued interest components, consist of the following types of instruments as presented on our Condensed Consolidated Balance Sheets:

	Fair Value Measurements as of September 24, 2011
	Fair Value Measurements as of March 31, 2012
	Quoted Prices in Active Markets for IdenticalAssets(Level 1)		Significant OtherObservable Inputs(Level 2)		SignificantUnobservable Inputs(Level 3)		Total
	(In thousands)
Assets
Cash and cash equivalents
Money market funds	$	~~267~~271,~~096~~313	$	0	$	0	$	~~267~~271,~~096~~313
Municipal bonds		0		1,800		0		1,800
Corporate bonds		0		2,900		0		2,900
Short-term investments
Municipal bonds		0		~~254~~348,~~226~~665		0		~~254~~348,~~226~~665
Variable rate demand notes		0		59,700		0		59,700
Corporate bonds		0		131,463		0		131,463
Corporate bonds		0		53,328		0		53,328
Variable rate demand notes		0		72,192		0		72,192
Government sponsored agency bonds		0		57,096		0		57,096
Asset-backed securities		0		25,592		0		25,592
US treasury bonds		0		17,051		0		17,051
Other current assets
Derivative assets (1)		0		431,932		0		431,932
Non-current restricted cash and cash equivalents
Money market funds		9078,~~407~~993		0		0		9078,~~407~~993
Long-term investments
Auction rate securities		0		0		53,456		53,456
Auction-rate securities		0		0		41,469		41,469
Total assets	$	~~357~~350,~~503~~306	$	~~369~~656,~~097~~891	$	5341,~~456~~469	$	~~780~~1,~~056~~048,666
Liabilities
Other current liabilities
Derivative liabilities (1)	$	0	$	~~1,400~~57	$	0	$	~~1,400~~57
Other non-current liabilities
Embedded derivative liabilities (1)		0		0		535		535
Embedded derivative liabilities(1)		0		0		257		257
Total Liabilities	$	0	$	~~1,400~~57	$	~~535~~257	$	~~1,935~~314

(1) See additional disclosures relating to our derivatives and hedging activities in Note 7 ~~below~~.


	Fair Value Measurements as of December 31, 2011
	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
Cash and cash equivalents
Money market funds	$	454,208	$	0	$	0	$	454,208
Short-term investments
Municipal bonds		0		262,793		0		262,793
Variable rate demand notes		0		56,540		0		56,540
Corporate bonds		0		49,008		0		49,008
Auction-rate securities		0		0		9,700		9,700
Other current assets
Derivative assets⁽¹⁾		0		337		0		337
Non-current restricted cash and cash equivalents
Money market funds		82,118		0		0		82,118
Long-term investments
Auction-rate securities		0		0		42,891		42,891

Total assets	$	536,326	$	368,678	$	52,591	$	957,595

Liabilities
Other current liabilities
Derivative liabilities⁽¹⁾	$	0	$	213	$	0	$	213
Other non-current liabilities
Embedded derivative liabilities⁽¹⁾		0		0		478		478

Total Liabilities	$	0	$	213	$	478	$	691

(1)	See additional disclosures relating to our derivatives and hedging activities in Note 7.

	Fair Value Measurements as of December 31, 2010
	Quoted Prices in Active Markets for IdenticalAssets(Level 1)		Significant OtherObservable Inputs(Level 2)		SignificantUnobservable Inputs(Level 3)		Total
	(In thousands)
Assets
Cash and cash equivalents
Money market funds	$	172,181	$	0	$	0	$	172,181
Short-term investments
Municipal bonds		0		291,296		0		291,296
Variable rate demand notes		0		94,849		0		94,849
Corporate bonds		0		18,966		0		18,966
Other current assets
Derivative assets (1)		0		118		0		118
Non-current restricted cash and cash equivalents
Money market funds		64,352		0		0		64,352
Long-term investments
Auction rate securities		0		0		68,645		68,645
Total assets	$	236,533	$	405,229	$	68,645	$	710,407
Liabilities
Other current liabilities
Derivative liabilities (1)	$	0	$	1,562	$	0	$	1,562

Valuation Process for Level 3 Measurements

~~(1)~~We ~~See~~classify ~~additional~~financial ~~disclosures~~instruments ~~relating~~in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to ~~our~~the valuation ~~derivatives~~model. ~~and~~In ~~hedging~~addition ~~activities~~to inthese ~~Note~~unobservable 7inputs, ~~below~~the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. The Corporate Treasury department, which reports to the Chief Financial Officer, is charged with development of valuation policies and procedures.

~~The~~Valuation ~~tables~~models ~~below~~for ~~present~~our Level ~~reconciliations~~3 ofauction-rate ~~all~~securities ~~financial~~portfolio ~~instruments~~were ~~measured~~established atin ~~fair~~2008 ~~value~~following onthe asecurities ~~recurring~~reclassification ~~basis~~from ~~using significant unobservable inputs (~~Level ~~3).~~2, Wewhich ~~classify~~resulted ~~financial~~from ~~instruments~~significant changes in ~~Level~~ 3market ofconditions ~~the~~resulting ~~fair~~in ~~value~~auction ~~hierarchy~~failures ~~when~~and ~~there~~a isdecrease ~~reliance~~in onobservable ~~at least one significant unobservable input to the valuation model~~market data. InDue ~~addition~~ to ~~these~~auction ~~unobservable~~failures ~~inputs,~~in the ~~valuation~~marketplace, ~~models~~we ~~for~~will ~~Level~~not 3have ~~financial~~access ~~instruments~~to ~~typically~~these ~~also~~funds ~~rely~~unless ~~on a~~(i) future ~~number~~auctions ~~of inputs that~~ are ~~readily~~successful, ~~observable~~(ii) the ~~either~~securities ~~directly~~are orcalled ~~indirectly.~~by ~~Thus,~~ the ~~gains~~issuer, ~~and~~(iii) we ~~losses~~sell ~~presented~~the ~~below~~securities ~~include~~in ~~changes~~a insecondary market, or (iv) the ~~fair~~underlying ~~value~~notes ~~related~~mature. toCurrently, ~~both~~there ~~observable~~are ~~and~~no ~~unobservable~~active ~~inputs~~secondary markets.

	Asset Fair Value Measurements UsingSignificant Unobservable Inputs (Level 3)
	Three Months Ended						Nine Months Ended
	September 24,2011			September 25,2010			September 24,2011			September 25,2010
	(In thousands)
Balance, beginning of period	$	55,728		$	73,956		$	68,645		$	78,763
Unrealized gains (losses), net included in Other comprehensive income (loss)		103			(35	)		1,536			658
Sales		(2,375	)		(2,350	)		(16,725	)		(7,850	)
Balance, end of period	$	53,456		$	71,571		$	53,456		$	71,571

Our auction-rate security portfolio is made up of two tranches, auction-rate notes which consist of student loans that are substantially backed by the federal government and auction-rate preferred shares of tax-exempt closed-end municipal bond funds. For auction-rate notes we obtain fair market data from a third party pricing source. To test the propriety of the values provided by the pricing service, we obtain an independent fair market value from a secondary pricing service for a sample of securities within the tranche. We obtain an understanding of the methodologies, inputs, and assumptions used by the secondary pricing service. Additionally, we internally derive a fair market value for a sample of securities on a regular basis for comparison to the fair values provided by the primary and secondary pricing source.

11For our auction-rate preferred shares, an internal valuation is performed using a model which discounts the expected future cash flow from the securities. The valuation model for auction-rate preferred securities is reviewed at each reporting date and management’s assumptions regarding the significant unobservable inputs discount rates and duration are analyzed to ensure that they are consistent with current market conditions. The discount rate is derived by adding an illiquidity premium to a risk free rate. The duration is estimated for each security based on our expectation for improvement in interest rates. Significant increases (decreases) in either of the significant inputs, discount rate or duration, in isolation would result in a significantly lower (higher) fair value measurement. There is no interrelationship between changes in the two inputs.

Changes in fair value measures for our combined auction-rate securities portfolio are analyzed by our Corporate Treasury department and reviewed by our Chief Executive Officer and Chief Financial Officer on a quarterly basis. As of March 31, 2012 we have recorded a cumulative temporary impairment loss of $5.9 million within OCI based upon our assessment of the fair value of these securities. We believe that this impairment is temporary as we do not intend to sell these securities until recovery at par. We do not believe that we will be required to sell these securities before recovery of their amortized cost and, based on our credit quality assessment, we expect to recover the amortized cost of these securities.

The table below presents reconciliations of all financial instrument assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The gains and losses presented below include changes in the fair value related to both observable and unobservable inputs.


	Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended
	March 31, 2012			March 26, 2011
	(In thousands)
Balance, beginning of period	$	52,591		$	68,645
Decrease in unrealized losses included in Other comprehensive income		128			189
Sales		(11,250	)		(1,350	)

Balance, end of period	$	41,469		$	67,484

The table below presents reconciliations of our financial instrument liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3). Our Level 3 liability relates to the contingent interest payment provision on our Senior Convertible Notes that may require us to pay additional interest based on certain thresholds, beginning with the semi-annual interest payment on May 15, 2021, and upon the occurrence of certain events, as outlined in the indenture governing the Senior Convertible Notes.

All Level 3 assets are auction-rate securities. Auction-rate securities include auction-rate notes and auction-rate preferred shares of tax-exempt closed-end municipal bond funds. Auction-rate notes consist of student loans that are substantially backed by the federal government. Due to auction failures in the marketplace, we will not have access to these funds unless (i) future auctions are successful, (ii) the securities are called by the issuer, (iii) we sell the securities in a secondary market, or (iv) the underlying notes mature. Currently, there are no active secondary markets. As of September 24, 2011 we have recorded a cumulative temporary impairment loss of $7.0 million within OCI based upon our assessment of the fair value of these securities. We believe that this impairment is temporary as we do not intend to sell these securities until recovery at par. We do not believe that we will be required to sell these securities before recovery of their amortized cost and, based on our credit quality assessment, we expect to recover the amortized cost of these securities.


	Liability Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31, 2012
	(In thousands)
Balance, beginning of period	$	(478	)
Unrealized gains included in earnings		221

Balance, end of period	$	(257	)

	Liability Fair Value Measurements UsingSignificant Unobservable Inputs (Level 3)
	Three Months Ended			Nine Months Ended
	September 24,2011			September 24,2011
	(In thousands)
Balance, beginning of period	$	562		$	0
Issuances		0			547
Unrealized gains included in earnings		(27	)		(12	)
Balance, end of period	$	535		$	535

Quantitative Information about Level 3 Financial Instruments Measured at Fair Value on a Recurring Basis

Our Level 3 liability relates to the contingent interest payment provision on our Senior Convertible Notes that may require us to pay additional interest based on certain thresholds, beginning with the semi-annual interest payment on May 15, 2021, and upon the occurrence of certain events, as outlined in the indenture governing the Senior Convertible Notes.

Fair Value at
March 31, 2012

Valuation Technique

Unobservable Input

Range (Weighted Average)

($ in thousands)

Asset

Auction-rate preferred shares

22,628

Discounted cash flow

Duration

48-60 Months

(54)

Yield

2.2

Fair values for our auction-rate notes are obtained from a third party pricing service and are evaluated by management. We consider our Level 3 financial liability instrument, the contingent interest derivative liability, to be immaterial.

Fair Value of Other Financial Instruments

The carrying value of cash, accrued interest receivable, non-current restricted cash, and current debt obligations (except the Senior Convertible Notes) approximates fair value because of the short maturity of these instruments. Other investments primarily relate to corporate-owned life insurance contracts used to offset our deferred compensation obligations. These investments have a determinable cash surrender value, which is the best available evidence of fair value. Accrued interest receivable and other investments are classified within Short-term investments on our Condensed Consolidated Balance Sheets. Our Senior Convertible Notes and Other long-term debt obligations are not publicly traded. The ~~carrying~~outstanding ~~amount~~principal and fair value of our Senior Convertible Notes was $~~271~~700.30 million and $~~244~~978.2 million, respectively, as of ~~September~~ March 2431, ~~2011~~2012. Our Other long-term debt is primarily denominated in Euros and the estimated fair value is primarily based on a market approach, comparing our interest rates to those rates we believe we would reasonably receive upon re-entry into the market. The carrying amount and fair value of our Other long-term debt ~~were~~was $~~108~~106.20 million and $~~109~~106.85 million, respectively, as of ~~September~~ March 2431, ~~2011~~2012 and $~~105~~103.62 million and $~~106~~104.72 million, respectively, as of December 31, ~~2010~~2011. Judgment is required to estimate the fair value, using available market information and appropriate valuation methods.

See additional disclosures regarding our investments in Note 6 ~~below~~.

Note 6. Investments

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

	September 24, 2011
	March 31, 2012
	Amortized Cost		GrossUnrealized Gains		GrossUnrealized Losses			Estimated FairValue
	(In thousands)
Municipal bonds	$	~~253~~347,~~101~~832	$	1,~~177~~140	$	(52307	)	$	~~254~~348,~~226~~665
Variable-rate demand notes		59,700		0		0			59,700
Corporate bonds		131,379		289		(205	)		131,463
Corporate bonds		53,451		101		(224	)		53,328
Variable rate demand notes		72,192		0		0			72,192
Auction-rate securities		60,425		0		(6,969	)		53,456
Government sponsored agency bonds		57,120		5		(29	)		57,096
Total	$	426,677	$	1,278	$	(7,245	)	$	420,710
Asset-backed securities		25,590		13		(11	)		25,592
US treasury bonds		17,059		0		(8	)		17,051
Equity investments in privately-held company		5,000		0		0			5,000
Auction-rate securities		47,325		0		(5,856	)		41,469
Total	$	703,497	$	1,447	$	(6,416	)	$	698,528

1214

	December 31, 2010
	December 31, 2011
	Amortized Cost		GrossUnrealized Gains		GrossUnrealized Losses			Estimated FairValue
	(In thousands)
Municipal bonds	$	~~290~~261,~~284~~937	$	1,~~538~~000	$	(~~526~~144	)	$	~~291~~262,~~296~~793
Variable-rate demand notes		94,849		0		0			94,849
Variable rate demand notes		56,540		0		0			56,540
Corporate bonds		1849,~~863~~143		~~114~~115		(11250	)		1849,~~966~~008
Auction-rate securities		7758,~~150~~575		0		(85,~~505~~984	)		6852,~~645~~591
Total	$	~~481~~426,~~146~~195	$	1,~~652~~115	$	(96,~~042~~378	)	$	~~473~~420,~~756~~932

Included in our Short-term investments balance as of ~~September~~March 2431, ~~2011~~2012 and December 31, ~~2010~~2011 were interest receivable of $34.25 million and $32.79 million, respectively, and other investments of $13.15 million and $1512.49 million, respectively, which are excluded from the tables above.

The maturities of our investments as of ~~September~~March 2431, ~~2011~~2012 are as follows:

	Amortized Cost		Fair Value
	(In thousands)
Due in less than one year	$	~~113~~161,~~729~~481	$	~~114~~161,~~056~~866
Due in 1 to 5 years		185,788		186,463
Due after 1 through 5 years		400,503		401,004
Due in 5 to 10 years		4,500		4,500
Due after 5 through 10 years		6,565		6,565
Due in greater than 10 years		122,660		115,691
Due after 10 years		86,982		82,651
Total	$	426,677	$	420,710
No single maturity date		47,966		46,442
Total	$	703,497	$	698,528

Securities with no single maturity date include privately held equity securities, asset-backed securities, and auction-rate securities with no stated maturity. Securities with contractual maturities greater than five years consist of auction-rate securities and variable- rate demand notes. We classify privately held equity securities as Long-term investments in our Condensed Consolidated Balance Sheet. We primarily classify auction-rate securities as Long-term investments in our Condensed Consolidated Balance Sheets as they are not readily available to us due to failed auctions in the marketplace. Auction-rate securities that have been called as of the balance sheet date are classified as short-term based on their expected redemption dates. We classify variable- rate demand notes as Short-term investments in our Condensed Consolidated Balance Sheets as they are payable on demand.

The breakdown of investments with unrealized losses as of ~~September~~March 2431, ~~2011~~2012 is as follows:

	In Loss Position for LessThan 12 Months					In Loss Position for12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		UnrealizedLosses
	(In thousands)
Municipal bonds	$	4172,~~433~~845	$	(52307	)	$	0	$	0		$	4172,~~433~~845	$	(52307	)
Corporate bonds		2963,~~764~~734		(~~224~~205	)		0		0			2963,~~764~~734		(~~224~~205	)
Auction-rate securities		0		0			53,456		(6,969	)		53,456		(6,969	)
Government sponsored agency bonds		53,019		(29	)		0		0			53,019		(29	)
Total	$	71,197	$	(276	)	$	53,456	$	(6,969	)	$	124,653	$	(7,245	)
Asset-backed securities		17,038		(11	)		0		0			17,038		(11	)
US Treasury Bonds		17,051		(8	)		0		0			17,051		(8	)
Auction-rate securities		0		0			41,469		(5,856	)		41,469		(5,856	)
Total	$	223,687	$	(560	)	$	41,469	$	(5,856	)	$	265,156	$	(6,416	)

~~The~~15 unrealized losses related to municipal and corporate bonds are primarily due to fluctuations in interest rates and quoted market prices. The unrealized losses related to auction-rate securities are primarily due to our estimates about the anticipated term and yield of these investments given the lack of an active market. We review our investment portfolio for possible impairment on a quarterly basis. Impairment is based on an analysis of factors that may have adverse effects on the fair value of the investment. Factors considered in determining whether a loss is temporary include our intent to sell the security, our ability to hold the security to recovery of its amortized cost, and our assessment of the credit quality of the security, including whether we expect to recover the amortized cost of the security.

See additional disclosures regarding the fair value of our investments in Note 5 above.

Note 7. Derivative Financial Instruments

We manage our foreign currency exchange risk through foreign currency forward exchange contracts and foreign denominated floating-rate debt to hedge against the short-term impact of currency fluctuations. We enter into foreign currency forward exchange contracts with maturities generally less than 12 months to mitigate the effect of currency fluctuations on (i) probable system sales denominated in Japanese yen, (ii) our net investment in certain foreign subsidiaries, and (iii) other monetary asset and liability balances denominated in foreign currencies. We utilize a portion of our foreign denominated floating-rate debt to mitigate the economic effect of our net investment in certain foreign subsidiaries. As of September 24, 2011 and December 31, 2010, 34.1 million and 34.9 million Euros of floating-rate debt were designated as a net investment hedge, respectively. All foreign currency derivatives are recorded at fair value in either Other current assets or Other current liabilities. We report cash flows from these derivative instruments in Cash flows from operating activities. We use the income approach to value our derivative instruments using observable inputs other than quoted prices, including interest rates and credit risk.

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

See additional disclosures regarding the fair value of our investments in Note 5.

Note 7. Derivative Financial Instruments

We manage our foreign currency exchange risk through foreign currency forward exchange contracts and foreign denominated floating-rate debt to hedge against the short-term impact of currency fluctuations. We enter into foreign currency forward exchange contracts with maturities generally less than 12 months to mitigate the effect of currency fluctuations on (i) probable system sales denominated in Japanese yen, (ii) our net investment in certain foreign subsidiaries, and (iii) other monetary asset and liability balances denominated in foreign currencies. We utilized a portion of our foreign denominated floating-rate debt to mitigate the economic effect of our net investment in certain foreign subsidiaries. As of March 31, 2012 and December 31, 2011, 33.3 million and 34.1 million Euros of floating-rate debt were designated as a net investment hedge, respectively. All foreign currency derivatives are recorded at fair value in either Other current assets or Other current liabilities. We report cash flows from these derivative instruments in Cash flows from operating activities. We use the income approach to value our derivative instruments using observable inputs other than quoted prices, including interest rates and credit risk.

The notional amounts of outstanding hedge contracts are as follows:

	September 24, 2011				December 31, 2010
	March 31, 2012				December 31, 2011
	Buy Contracts		Sell Contracts		Buy Contracts		Sell Contracts
	(In thousands)
Japanese Yen	$	34,~~677~~159	$	5138,~~698~~634	$	122,~~288~~827	$	3440,~~652~~190
British Pound		4,~~489~~545		4,~~488~~546		4,~~441~~426		4,~~442~~427
Chinese Renminbi		0		0		0		~~6,776~~0
Indian Rupee		1,~~329~~884		1,~~325~~881		1,~~063~~798		1,~~061~~795
Taiwan Dollar		0		0		0		~~1,663~~0
Swiss Franc		0		4,~~506~~427		0		4,~~236~~252
Korean Won		2,438		2,435		0		0
Total	$	10,588	$	49,488	$	9,051	$	50,664
Total	$	11,933	$	64,452	$	17,792	$	52,830

Cash Flow Hedges. We designate and document our foreign currency forward exchange contracts as cash flow hedges on sales transactions in which costs are denominated in U.S. dollars and the related revenues are generated in Japanese yen. We evaluate and calculate the effectiveness of each hedge at least quarterly; using the dollar offset method, comparing the change in the forward contract’s fair value on a spot-to-spot basis to the spot-to-spot change in the anticipated transaction. The effective change is recorded in ~~accumulated~~Accumulated OCI until the sale is recognized. Ineffectiveness, along with the excluded time value of the forward contracts, is recorded in Net sales as designated at the inception of the forward contract. In the event it becomes probable that an anticipated hedged transaction will not occur, the gains or losses on the related cash flow hedges are immediately reclassified from ~~accumulated~~Accumulated OCI to Net sales in the Condensed Consolidated ~~Statement~~Statements of ~~Operations~~Income. No such events occurred for the three ~~and nine~~ months ended ~~September~~March 2431, ~~2011~~2012 and ~~September~~ March 2526, ~~2010~~2011.

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

~~Non-Designated~~16 Hedges. We enter into other non-designated foreign currency forward exchange contracts to hedge (i) intercompany balances that are denominated in non-functional currencies, (ii) certain third-party receivables denominated in Japanese yen, and (iii) anticipated sales denominated in foreign currency that we do not designate and document as cash flow hedges. The maturities of these contracts are generally less than 12 months. Gains or losses arising from the remeasurement of these contracts to fair value each period are recorded in Other income (expense), net.

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

Other Derivative Instruments. In addition to the required semi-annual interest payments, our Senior Convertible Notes have a contingent interest payment provision that may require us to pay interest based on certain thresholds, beginning with the semi-annual interest payment on May 15, 2021, and upon the occurrence of certain events, as outlined in the indenture governing the Senior Convertible Notes. The contingent interest payment provision has been identified as an embedded derivative and is accounted for separately at fair value in Other non-current liabilities.

The fair value and balance sheet classification of our derivatives are as follows:

	September 24,2011		December 31,2010
	March 31, 2012		December 31, 2011
	(In thousands)
Other current assets:
Derivative assets designated as hedging instruments:
Cash flow hedges	$	101,164	$	0287
Derivative assets not designated as hedging instruments:
Other foreign currency hedges		33768		~~118~~50
Total derivative assets (1)	$	431,932	$	~~118~~337
Other current liabilities:
Derivative liabilities designated as hedging instruments:
Cash flow hedges	$	~~157~~1	$	7618
Net investment hedges		406		19
Derivative liabilities not designated as hedging instruments:
Other foreign currency hedges		~~1,203~~50		~~1,485~~186
Other non-current liabilities:
Derivative liabilities not designated as hedging instruments:
Contingent interest derivative		~~535~~257		0478
Total derivative liabilities (1)	$	~~1,935~~314	$	~~1,562~~691

(1) See additional fair value measurement disclosures in Note 5 ~~above~~.

14The following table summarizes the pre-tax effects of our derivatives on OCI and the Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and March 26, 2011.


	Financial Statement Location	Three Months Ended
	Financial Statement Location	March 31, 2012			March 26, 2011
		(In thousands)
Cash flow hedges:
Gains (losses) recorded in OCI (effective portion), net	OCI	$	944		$	(45	)
Gains reclassified from OCI to earnings (effective portion), net	Net sales	$	149		$	811
Gains (losses) recorded in earnings (ineffective and excluded time value portion), net	Net sales	$	69		$	(12	)
Net investment hedges:
Foreign exchange contracts:
Losses recorded in OCI (effective portion), net	OCI	$	(142	)	$	(352	)
Losses recorded in earnings (ineffective and excluded time value portion), net	Other income (expense), net	$	(39	)	$	(14	)
Foreign denominated floating-rate debt:
Losses recorded in OCI (effective portion), net	OCI	$	(1,222	)	$	(3,163	)
Other foreign currency hedges:
Gains (losses) recorded in earnings, net	Other income (expense), net	$	1,044		$	(356	)
Contingent interest derivative
Gains recorded in earnings, net	Interest expense	$	221		$	0

~~The~~We ~~following~~anticipate ~~table~~reclassifying ~~summarizes~~ the ~~pre-tax~~accumulated ~~effects~~gains ofrecorded ~~our~~as ~~derivatives~~of onMarch 31, ~~OCI~~2012 ~~and~~associated ~~the~~with ~~Condensed Consolidated~~our ~~Statements~~cash offlow ~~Operations~~hedges ~~for~~from ~~the~~OCI ~~three~~to ~~and~~Net ~~nine~~sales ~~months~~within ~~ended~~12 ~~September 24, 2011 and September 25, 2010~~months.

	Financial Statement Location	Three Months Ended						Nine Months Ended
		September 24,2011			September 25,2010			September 24,2011			September 25,2010
		(In thousands)
Cash flow hedges:
Losses recorded in OCI (effective portion), net	OCI	$	(267	)	$	(719	)	$	(247	)	$	(813	)
Gains (losses) reclassified from OCI to earnings (effective portion), net	Net sales	$	92		$	(86	)	$	974		$	40
Gains recorded in earnings (ineffective and excluded time value portion), net	Net sales	$	10		$	42		$	18		$	22
Net investment hedges:
Foreign exchange contracts:
Gains (losses) recorded in OCI (effective portion), net	OCI	$	4		$	(2,778	)	$	(450	)	$	(3,098	)
Losses recorded in earnings (ineffective and excluded time value portion), net	Other Income (expense), net	$	(21	)	$	(79	)	$	(57	)	$	(134	)
Foreign denominated floating-rate debt:
Gains (losses) recorded in OCI (effective portion), net	OCI	$	2,814		$	(2,811	)	$	(1,183	)	$	2,826
Other foreign currency hedges:
Gains (losses) recorded in earnings, net	Other income (expense), net	$	(1,054	)	$	1,707		$	(2,226	)	$	1,842
Contingent interest derivative:
Gains recorded in earnings, net	Interest expense	$	27		$	0		$	12		$	0

We anticipate reclassifying the accumulated gains (losses) recorded as of September 24, 2011 associated with our cash flow hedges from OCI to Net sales within 12 months.

Note 8. Inventories

	September 24,2011		December 31,2010
	March 31, 2012		December 31, 2011
	(In thousands)
Purchased and spare parts	$	~~140~~133,~~461~~103	$	~~126~~128,~~655~~970
Work-in-process		3442,~~886~~701		4236,~~173~~887
Finished goods		4150,~~518~~034		4048,~~066~~012
Total inventories	$	216,865	$	208,894
Inventories	$	225,838	$	213,869

15Finished goods include $36.3 million and $32.9 million as of March 31, 2012 and December 31, 2011, respectively, of systems at customer locations.

Finished goods include $20.8 million and $17.5 million as of September 24, 2011 and December 31, 2010, respectively, of systems at customer locations.

Note 9. Goodwill and Intangible Assets

Goodwill

The following table summarizes the changes in ~~Goodwill~~goodwill for the ~~nine~~three months ended ~~September~~March 2431, ~~2011~~2012:

	SemiconductorGroup		IndustrialApplications Group		Total
	(In thousands)
Net balance, beginning of period	$	108,431	$	16,~~612~~254	$	~~125~~124,~~043~~685
Foreign currency translation		0		~~425~~450		~~425~~450
Net balance, end of period	$	108,431	$	1716,~~037~~704	$	125,~~468~~135

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 ~~2010~~2011.

Intangible Assets

Our acquired intangible assets are as follows:

September 24, 2011

December 31, 2010

March 31, 2012

December 31, 2011

WeightedAverageAmortizationPeriod

Gross

AccumulatedAmortization

Net

WeightedAverageAmortizationPeriod

Gross

AccumulatedAmortization

Net

(Years)

(In thousands)

(Years)

(In thousands)

Patents and other intangible assets

18,~~651~~510

(78,~~779~~482

)

10,~~872~~028

18,~~647~~507

(68,~~509~~057

)

1210,~~138~~450

Developed technology

30,~~456~~219

(29,~~870~~737

)

~~586~~482

3029,~~102~~900

(29,~~424~~380

)

~~678~~520

Trademark

7,~~290~~147

(5,~~095~~346

)

21,~~195~~801

76,~~088~~951

(45,~~441~~028

)

21,~~647~~923

Total intangible assets

5655,~~397~~876

(4243,~~744~~565

)

1312,~~653~~311

55,~~837~~358

(4042,~~374~~465

)

1512,~~463~~893

Our estimated amortization expense for identifiable intangible assets is $01.69 million for the remaining three ~~months~~quarters of ~~2011~~2012, and $2.6 million, $2.62 million, $21.35 million, and $1.54 million for the years ending December 31, ~~2012,~~ 2013, 2014, 2015, and ~~2015~~2016, respectively. As of ~~September~~March 2431, ~~2011~~2012, we had no ~~recorded~~ identifiable intangible assets with indefinite lives.

Note 10. Commitments and Contingencies

Product Warranty

Changes in our Accrued warranty liability are as follows:

Three Months Ended

~~Nine Months Ended~~

September 24,2011

September 25,2010

September 24,2011

September 25,2010

March 31, 2012

March 26, 2011

(In thousands)

Balance, beginning of period

3934,~~820~~115

2534,~~254~~947

~~34,947~~

~~19,611~~

Warranties issued

11,~~167~~782

14,~~823~~899

~~38,911~~

~~36,385~~

Settlements

(1311,~~345~~658

)

(910,~~897~~238

)

~~(33,060~~

)

~~(24,155~~

)

Net changes in liability for pre-existing warranties, including expirations

~~(897~~916

)

(~~567~~844

)

~~(4,053~~

)

~~(2,228~~

)

Balance, end of period

3635,~~745~~155

2938,~~613~~764

~~36,745~~

~~29,613~~

Less: Long-term portion

6(5,~~710~~541

)

4(6,~~292~~804

)

~~6,710~~

~~4,292~~

Accrued warranty, current

3029,~~035~~614

2531,~~321~~960

~~30,035~~

~~25,321~~

~~Linear~~Merger ~~Technology~~Termination ~~Corporation~~Fees

InIf ~~March~~the ~~2002,~~Merger ~~Linear~~is ~~Technology~~not ~~Corporation (Linear) filed a complaint against Novellus~~completed, ~~among~~depending ~~other~~upon ~~parties, in~~ the ~~Superior~~reasons ~~Court~~for ofnot ~~the~~completing ~~State of California for~~ the ~~County~~Merger, ofincluding ~~Santa~~whether ~~Clara~~we ~~(the~~have ~~Superior Court)~~received ~~seeking~~or ~~damages~~entered ofinto upa tocompeting ~~$200~~takeover ~~million (including punitive damages)~~proposal, ~~declaratory~~we ~~relief~~may ~~and~~be ~~injunctions~~required ~~for~~to ~~causes~~pay ofLam Research ~~action~~a ~~involving~~termination ~~alleged~~fee ~~breach~~ of ~~contract,~~$80.0 ~~fraud,~~million ~~unfair~~or ~~competition,~~$120.0 million ~~and~~depending ~~breach~~on ofthe ~~warranty~~termination event.

16Litigation Related to Proposed Merger with Lam Research

On December 15, 2011, a purported class action lawsuit was filed in California Superior Court for the County of Santa Clara (State Court), by Marla Skroch, an alleged Novellus shareholder who seeks to represent a class comprised of Novellus shareholders. The complaint in this action (the Skroch complaint), names as defendants Novellus, the members of Novellus’ Board of Directors, and Lam Research. The Skroch complaint alleges that the director defendants breached fiduciary duties allegedly owed to Novellus’ shareholders by entering into the Merger Agreement; that Lam Research and Novellus aided and abetted the alleged breaches of fiduciary duty; and that if the transaction is allowed to proceed, the shareholders will suffer damages because their shares will be acquired for less than their actual value. The plaintiff seeks an order in the State Court certifying the action as a class action; rescinding the transaction and/or preliminarily enjoining the defendants from consummating the transaction, and/or awarding attorneys’ fees and costs.

On December 19, 2011 a second purported class action was filed in the State Court by Michael Resing, an alleged Novellus shareholder, who seeks to represent the same purported class. The complaint in this action (the Resing complaint) names as defendants the members of Novellus’ Board of Directors, Novellus, Lam Research and the Merger subsidiary. The allegations contained in the Resing complaint are largely similar to the allegations contained in the Skroch complaint, except that the Resing complaint also alleges that BLMS aided and abetted alleged breaches of fiduciary duty by the director defendants. The plaintiff seeks similar relief to that sought by the Skroch complaint.

On December 20, 2011 and December 28, 2011, two additional purported class action lawsuits were filed by the State Court by Louisiana Municipal Police Employees’ Retirement System (“LMPERS”) and Nanette Ramsay, alleged Novellus shareholders that seek to represent the same purported class. The complaints in these actions names as defendants the same parties named in the Resing complaint. The allegations and relief sought in these complaints are largely similar to the allegations and relief sought in each of the preceding complaints, except that the LMPERS complaint alleges that Novellus breached fiduciary duties allegedly owed to Novellus’ shareholders, rather than aiding and abetting the alleged breaches of fiduciary duty. Both the LMPERS complaint and the Ramsay complaint also seek damages.

Attorneys for the parties in the four actions filed in the State Court have agreed, and the State Court has ordered, that these actions be consolidated into one action titled In re Novellus Systems, Inc. litigation (the “State Action”). On February 10, 2012, the Superior Court appointed LMPERS as lead plaintiff.

On January 5, 2012, a purported class action lawsuit was filed in the United States District Court (“Federal Court”) by Sunil Nagpal, an alleged Novellus shareholder, who seeks to represent the same purported class (the “Nagpal action”). The complaint in the Nagpal action names as defendants the same parties as the complaints in the Resing, LMPERS, and Ramsay actions, as well as one former Novellus director, and the allegations and relief sought in this complaint are largely similar to the allegations and relief sought in each of the preceding complaints. On February 17, 2012, counsel for Mr. Nagpal filed a separate purported class action in Federal Court (the “Tessitore action”), asserting the same claims as the Nagpal Action and adding a claim that the individual defendants and Novellus violated Section 14(a) of the Exchange Act and SEC Rule 14a-9 (the Nagpal action and the Tessitore action are collectively referred to as the “Federal Actions”).

~~The~~On ~~Superior Court dismissed Linear’s claims for fraud and unfair competition on October~~May 54, ~~2004. The~~2012, ~~Court~~Novellus, ofLam ~~Appeal~~Research, ~~for~~and the ~~Sixth~~Merger ~~Appellate~~subsidiary ~~District~~entered ~~affirmed~~into ~~this~~a ~~dismissal~~memorandum onof understanding ~~June 18,~~(“MOU”) ~~2007.~~to ~~Trial~~settle onboth the ~~remaining~~State ~~claims~~Action ~~began~~and ~~before a jury on January 19, 2010, in~~ the ~~Superior~~Federal ~~Court~~Actions. ~~Novellus~~Pursuant ~~prevailed~~to onthe ~~these claims at trial~~MOU, ~~which ended on February 26~~Novellus, ~~2010.~~Lam ~~On August 2~~Research, ~~2010,~~and ~~in connection with~~ the ~~judgment~~Merger ~~against~~subsidiary ~~Linear,~~agreed ~~the~~to ~~Superior~~resolve ~~Court~~disputed ~~awarded~~legal usclaims ~~$5.2 million in attorney’s fees~~ and ~~$0.1~~to ~~million~~make incertain ~~other~~additional ~~costs. Linear filed two motions, one seeking entry~~disclosures ofregarding ~~a judgment in its favor notwithstanding~~ the ~~jury’s~~proposed ~~verdict,~~Merger ~~and the other seeking a new trial, both~~ of ~~which~~ the ~~Superior~~Merger ~~Court~~subsidiary ~~has~~and ~~denied. Linear subsequently filed an appeal. Linear has since paid us the entire award. However~~Novellus, ~~Linear’s~~ ~~payment~~as isset ~~subject~~forth toin ~~its appeal. Although we cannot, at this time, predict~~ the ~~ultimate~~Current ~~outcome~~Report inon ~~this~~Form ~~case~~8-K orfiled ~~estimate~~with ~~a range of any such potential loss, we believe that~~ the ~~ultimate~~SEC ~~disposition of this matter will not have a material adverse effect~~ on ~~our business~~May 4, ~~financial condition, or operating results~~2012.

The MOU is expected to be memorialized in a stipulation of settlement, which will be subject to customary terms and conditions, including court approval, and will include an agreement by the plaintiffs in each of the State and Federal Actions, on behalf of a class of Novellus shareholders, to provide a release of claims of Novellus shareholders against Novellus, Lam Research, the Merger subsidiary, and their respective officers and directors. In addition, the parties have agreed that, prior to the completion of the Merger, Novellus will not be responsible for the payment of any amounts in connection with the settlement.

Other Litigation

We are either a defendant or plaintiff in various actions that have arisen from time to time in the normal course of business, including intellectual property claims. We accrue for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. These accruals are reviewed at least quarterly and adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, we believe that the amount of any such additional loss would be immaterial to our business, financial condition, and results of operations.

Note 11. Restructuring ~~Charges~~

In an effort to consolidate our operations, streamline product offerings, and align our manufacturing operations with current business conditions, we have implemented various restructuring plans from 2001 through 2006. All restructuring activity presented below is related to the Semiconductor Group.

Adjustments of prior restructuring costs relate to changes in estimated sublease income over the remaining lease term, for facility exit activities recorded in prior years and include normal accretion. ~~During the third quarter 2011, the adjustment of $1.3 million primarily relates to reoccupying certain facilities previously included in our restructuring reserve.~~

As of ~~September~~March 2431, ~~2011~~2012, our restructuring plans had been completed except for payments of future rent obligations which we estimate will be paid in cash through 2017.

The following table summarizes our restructuring activity:

Three Months Ended

~~Nine Months Ended~~

September 24,2011

September 25,2010

September 24,2011

September 25,2010

March 31, 2012

March 26, 2011

(In thousands)

Balance, beginning of period

129,~~988~~978

1614,~~163~~865

~~14,865~~

~~18,046~~

Cash payments for rent obligations

(~~985~~686

)

(1,~~152~~094

)

~~(3,184~~

)

~~(3,452~~

)

Adjustment of prior restructuring costs

~~(1,258~~166

)

~~240~~181

~~(936~~

)

~~657~~

Balance, end of period

109,~~745~~458

1513,~~251~~952

~~10,745~~

~~15,251~~

Note 12. Other ~~Income (~~Expense), net

The components of ~~other~~Other ~~income (~~expense), net are as follows:

	Three Months Ended						~~Nine Months Ended~~
	September 24, 2011			September 25, 2010			September 24, 2011			September 25, 2010
	March 31, 2012			March 26, 2011
	(In thousands)
Foreign currency gain (loss), net	$	1,080		$	(1,167	)	$	(1,290	)	$	(936	)
Foreign currency loss, net	$	(995	)	$	(760	)
Gain on other investments, net		~~1,492~~616			23339			~~2,185~~			~~104~~
Other gain (loss), net		213			(126	)		300			(166	)
Other income, net		84			67
Other income (expense), net	$	2,785		$	(1,270	)	$	1,195		$	(998	)
Other expense, net	$	(295	)	$	(354	)

Note 13. Income Taxes

The income tax provision for the three ~~and nine~~ months ended ~~September~~March 2431, ~~2011~~2012 was computed based on our annual forecast of profit by jurisdiction for fiscal year ~~2011~~2012. Our provision for income taxes for the three ~~and nine~~ months ended ~~September~~March 2431, ~~2011~~2012 was $46.06 million ~~and $34.2 million~~, ~~respectively,~~ compared to a provision for income taxes of $1316.14 million ~~and $34.2 million,~~ for the three ~~and nine~~ months ended ~~September~~March 2526, ~~2010, respectively~~2011. For the three ~~and nine~~ months ended ~~September~~March 2431, ~~2011~~2012, our provision for income taxes was less than the federal statutory tax rate primarily due to foreign income taxed at lower rates.

17As of March 31, 2012 our net long-term deferred tax liabilities of $118.9 million primarily related to the difference between the book and tax basis of our Senior Convertible Notes.

With certain exceptions, we are no longer subject to state income tax examinations by tax authorities for years prior to 2008. We believe that adequate accruals have been provided for any potential adjustments that may result from current examinations by state tax authorities. As of ~~September~~December 2431, 2011, our ~~net~~income ~~long-term~~tax ~~deferred~~refunds claimed in amended federal returns filed for the tax ~~liabilities~~years ended December 31, 2006 and 2007 were under review by the Internal Revenue Service (IRS). In the first quarter of ~~$169~~2012, the IRS added our 2008 amended income tax return to its review.8 ~~million~~We ~~primarily~~believe that the ~~related~~IRS review of 2006 to ~~the~~2008 ~~difference~~amended ~~between~~income ~~the~~tax ~~book~~returns will be finalized concurrently. As it concerns federal and other tax ~~basis~~jurisdictions ofand tax periods, it is reasonably possible that our ~~Senior~~total ~~Convertible~~unrecognized ~~Notes~~tax benefits could increase or decrease over the next twelve months as we may be subject to either examination by tax authorities or a lapse in statute of limitations. Currently, it is not possible to estimate the amount of any increase or decrease in unrecognized tax benefits.

Note 14. Shareholders’ Equity

Accumulated Other Comprehensive ~~Income~~Loss

The components of total comprehensive income, net of tax, are as follows:

	Three Months Ended						Nine Months Ended
	September 24,2011			September 25,2010			September 24,2011		September 25,2010
	(In thousands)
Net income	$	51,082		$	76,265		$	212,173	$	180,829
Other comprehensive income:
Foreign currency translation adjustments		(1,982	)		3,130			261		1,220
Unrealized gain (loss) on investments		(299	)		(348	)		1,423		(753	)
Unrealized gain (loss) on cash flow hedges		(175	)		(804	)		726		(771	)
Unrealized loss on pension liability		0			(124	)		0		(124	)
Comprehensive income	$	48,626		$	78,119		$	214,583	$	180,401

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

	September 24,2011			December 31,2010
	March 31, 2012			December 31, 2011
	(In thousands)
Foreign currency translation adjustments	$	6,~~815~~141		$	65,~~554~~843
Unrealized loss on investments		(54,~~967~~969	)		(75,~~390~~263	)
Unrealized loss on cash flow hedges		(350	)		(1,076	)
Unrealized gain on cash flow hedges		1,165			72
Unrealized loss on pension liability		(~~969~~2,914	)		(~~969~~2,902	)
Accumulated other comprehensive loss	$	(~~471~~577	)	$	(2,~~881~~250	)

Common Stock Repurchases

~~Our~~In October 2011, our Board of Directors ~~has~~ authorized $500.0 million for repurchases of our outstanding common stock under a stock repurchase plan through December 2014. As of ~~September~~March 2431, ~~2011~~2012, we had $~~264~~500.20 million available for stock repurchases under the plan. InWe ~~October~~did ~~2011,~~not ~~the~~repurchase ~~remaining~~any ~~authorization~~ of ~~$264.2~~our ~~million~~outstanding ~~expired~~common ~~and~~stock ~~our~~during ~~Board~~the offirst ~~Directors~~quarter ~~authorized~~of ~~$500~~2012.0 ~~million~~The ~~for~~Merger ~~repurchases~~Agreement ~~through~~prohibits ~~December~~us ~~2014.~~from ~~During~~redeeming, ~~the~~purchasing, ~~three~~or ~~and~~otherwise ~~nine~~acquiring ~~months~~our ~~ended September 24, 2011,~~own 5stock.~~2 million~~ ~~shares~~As ~~and~~a ~~28.5 million~~result, ~~shares~~we ~~were~~will ~~repurchased~~not ~~under~~repurchase ~~this~~additional ~~plan~~shares ~~for~~of ~~$150.6~~our ~~million~~common ~~and~~stock ~~$975.9~~pursuant ~~million,~~to ~~respectively,~~our atboard-authorized arepurchase ~~weighted~~program ~~average~~while ~~price~~the ~~per~~Merger ~~share~~remains ~~of $29~~pending.19 ~~and $34.21, respectively.~~ During the three ~~and nine~~ months ended ~~September~~March 2526, ~~2010~~2011, 15.61 million shares ~~and 6.7 million shares~~ were repurchased ~~under this plan~~ for $37200.91 million ~~and $160.4 million, respectively,~~ at a weighted average purchase price of $39.37 per share ofunder ~~$24.00~~the ~~and~~plan ~~$24.11~~with previous Board authorizations that expired in October, ~~respectively~~2011.

~~During~~For the ~~three~~majority ~~months~~of ~~ended~~restricted ~~September 24,~~stock ~~2011~~awards that vest pursuant to our stock incentive plan, wethe ~~executed~~number anof ~~agreement~~shares ~~which~~issued ~~could~~is ~~have~~net ~~required~~of usshares withheld to ~~purchase~~pay upthe tominimum ~~2,000,000~~statutory ofwithholding for income taxes ~~our~~on ~~common~~behalf of the grantee. Although shares withheld are not issued, ~~via~~they ~~physical~~are ~~settlement~~treated as common stock repurchases, ateffectively anreducing ~~agreed~~the number of shares that would otherwise have been issued upon ~~price~~vesting. ~~This~~ ~~agreement~~While ~~expired,~~they ~~unexercised,~~are onreported ~~September 21~~as stock repurchases in our financial statements, ~~2011.~~shares Inwithheld ~~conjunction~~upon ~~with~~vesting ~~this~~for ~~agreement,~~income wetax ~~received~~withholding aare ~~premium~~not included as common stock repurchases under our authorized plan. The value of shares withheld to satisfy the minimum statutory withholding requirement related to the grantees’ tax obligations was $21.4 million and $0.3 million, ~~which~~during isthe ~~included~~three inmonths ~~Other~~ended ~~income (expense)~~March 31, ~~net~~2012 onand ~~our~~March 26, ~~Condensed~~2011, ~~Consolidated Statement of Operations~~respectively.

For the majority of restricted stock awards that vest pursuant to our stock incentive plan, the number of shares issued is net of shares withheld to pay the minimum statutory withholding for income taxes on behalf of the grantee. Although shares withheld are not issued, they are treated as common stock repurchases, effectively reducing the number of shares that would otherwise have been issued upon vesting. Shares withheld upon vesting for income tax withholding are not included as common stock repurchases under our authorized plan. The value of shares withheld to satisfy the minimum statutory withholding requirement related to the grantees’ tax obligations was $0.4 million and $1.7 million for the three and nine months ended September 24, 2011, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 25, 2010, respectively.

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

Note 15. Stock-Based Compensation

On May 10, 2011, the shareholders approved the Novellus Systems, Inc. 2011 Stock Incentive Plan (the Plan) to replace the 2001 Stock Incentive Plan, as amended and restated, which expired on March 16, 2011. The Plan authorizes the future grant of up to 9.8 million shares. Awards under the Plan may include incentive stock options, non-statutory stock options, and restricted stock awards.

The following table summarizes the stock-based compensation expense for stock options and restricted stock awards in operating income.

Three Months Ended

~~Nine Months Ended~~

September 24,2011(1)

September 25,2010(2)

September 24,2011(1)

September 25,2010(2)

March 31,2012 (1)

March 26,2011 (2)

(In thousands)

Cost of sales

~~799~~1,069

~~929~~1,046

~~2,564~~

~~2,325~~

Selling, general and administrative

69,~~837~~372

5,~~546~~147

~~18,537~~

~~15,283~~

Research and development

34,~~094~~078

23,~~977~~763

~~10,206~~

~~8,098~~

Total stock-based compensation expense

1014,~~730~~519

9,~~452~~956

~~31,307~~

~~25,706~~

(1) Amounts include amortization expense related to stock options of $2.50 million and ~~$7.9~~to ~~million and~~ restricted stock awards of $812.25 million ~~and $23~~.~~4 million for the three and nine months ended September 24, 2011, respectively.~~

(2) Amounts include amortization expense related to stock options of $32.67 million and ~~$9.9~~to ~~million and~~ restricted stock awards of $57.93 million ~~and $15~~.~~8 million for the three and nine months ended September 25, 2010, respectively.~~

Stock Options

The exercise price of each stock option is 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. 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. For option grants to employees that are retirement eligible during the contractual term of the option, the expected term is based on a combination of historical experience plus an estimated incremental term related to an extended post-termination exercise period. We base the risk-free interest rate on the implied yield in effect at the time of option grant on ~~U.S. Treasury~~US treasury zero-coupon issues with remaining terms equivalent to the expected term of the option.

A summary of stock option activity for the ~~nine~~ three months ended ~~September~~March 2431, ~~2011~~2012 is as follows:

Number ofShares

Weighted-AverageExercise Price

Weighted-~~AverageRemaining ContractualTerm~~AverageRemainingContractualTerm

AggregateIntrinsic Value

(In thousands)

(In years)

(In thousands)

Outstanding, beginning of period

125,~~751~~931

30.9018

Grants

~~128~~0

~~35.25~~0

Exercises

(32,~~882~~019

)

2931.0396

Forfeitures or expirations

(~~519~~20

)

3727.1702

Outstanding, end of period

83,~~478~~892

3129.4328

45.1831

2180,~~133~~431

Exercisable, end of period

52,~~833~~315

3432.9616

23.4053

441,~~188~~217

As of ~~September~~March 2431, ~~2011~~2012, there was $1712.58 million of unrecognized compensation cost related to unvested stock options, with a weighted average remaining amortization period of 2.42 years.

Restricted Stock Awards

Restricted stock awards include restricted stock and restricted stock units that are settled in common stock. Restricted stock awards generally vest ratably over a four-year period on the anniversary date of the grant, excluding certain awards that vest upon the achievement of specific performance targets.

19A summary of restricted stock award activity for the three months ended March 31, 2012 is as follows:


	Number of Shares			Weighted- Average Grant Date Fair Value
	(In thousands)
Unvested restricted stock awards, beginning of period		3,073		$	28.71
Granted		346			46.86
Vested		(81	)		28.39
Forfeited		(57	)		30.53

Unvested restricted stock awards, end of period		3,281		$	27.79

As of March 31, 2012, there were a total of 0.2 million restricted stock awards subject to performance conditions that will result in forfeiture if the conditions are not realized. The restricted stock awards have performance conditions that could result in the vesting of additional restricted stock up to a maximum of 0.6 million shares. The majority of performance conditions are based on our revenue, revenue growth, and revenue growth relative to our peers.

AAs ~~summary~~of March 31, 2012, there was $68.4 million of ~~restricted~~unrecognized compensation cost related to restricted stock ~~award~~awards, ~~activity~~including ~~for~~performance ~~the~~awards ~~nine~~that ~~months~~are ~~ended~~expected ~~September 24~~to vest, ~~2011~~with isa ~~as follows:~~weighted average remaining amortization period of 2.7 years.

	Number ofShares			Weighted-AverageGrant DateFair Value
	(In thousands)
Unvested restricted stock awards, beginning of period		3,201		$	23.79
Granted		393			35.70
Vested		(187	)		23.27
Forfeited		(371	)		25.34
Unvested restricted stock awards, end of period		3,036		$	25.23

As of September 24, 2011, there were a total of 0.4 million restricted stock awards subject to performance conditions that will result in forfeiture if the conditions are not realized. The restricted stock awards have performance conditions that could result in the vesting of additional restricted stock up to a maximum of 1.1 million shares. The majority of performance conditions are based on our revenue, revenue growth, and revenue growth relative to our peers.

As of September 24, 2011, there was $58.2 million of unrecognized compensation cost related to restricted stock awards, including performance awards that are expected to vest, with a weighted average remaining amortization period of 2.5 years.

Note 16. Operating Segments

Our operations are organized into two segments, the Semiconductor Group and the Industrial Applications Group. Our Semiconductor Group develops, manufactures, sells, and supports equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. ~~Our~~The Industrial Applications Group is a supplier of lapping, grinding, polishing, and deburring equipment for fine-surface optimization. The accounting policies of these segments are the same as those described in Note 2 of our Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2010~~2011.

Segment information is as follows:

	Three Months Ended September 24, 2011							Nine Months Ended September 24, 2011
	Three Months Ended March 31, 2012							Three Months Ended March 26, 2011
	SemiconductorGroup		IndustrialApplicationsGroup			Consolidated		SemiconductorGroup		IndustrialApplicationsGroup			Consolidated
	(In thousands)
Sales to unaffiliated customers	$	~~274~~300,~~138~~273	$	3226,~~593~~449		$	~~306~~326,~~731~~722	$	~~994~~392,~~793~~791	$	7520,~~346~~394		$	1413,~~070,139~~185
Operating income	$	5552,~~603~~786	$	12,~~371~~799		$	5655,~~974~~585	$	~~248~~111,~~622~~378	$	~~1,909~~658		$	~~250~~112,~~531~~036
	Three Months Ended September 25, 2010							Nine Months Ended September 25, 2010
	March 31, 2012							December 31, 2011
	SemiconductorGroup		IndustrialApplicationsGroup			Consolidated		SemiconductorGroup		IndustrialApplicationsGroup			Consolidated
	(In thousands)
Sales to unaffiliated customers	$	347,948	$	19,255		$	367,203	$	918,385	$	46,416		$	964,801
Total assets	$	1,980,602	$	94,316		$	2,074,918	$	1,846,899	$	89,736		$	1,936,635
Operating income (loss)	$	95,140	$	(5,648	)	$	89,492	$	222,494	$	(11,074	)	$	211,420
	September 24, 2011							December 31, 2010
	SemiconductorGroup		IndustrialApplicationsGroup			Consolidated		SemiconductorGroup		IndustrialApplicationsGroup			Consolidated
	(In thousands)
Total assets	$	1,781,394	$	91,879		$	1,873,273	$	1,756,094	$	76,303		$	1,832,397

Note 17. Related Party Transactions

We lease an aircraft from NVLS I, LLC, a third-party entity wholly owned by Richard S. Hill, our Chairman and Chief Executive Officer. Under the aircraft lease agreement, we incurred expenses of $0.2 million and $0.83 million for the three ~~and nine~~ months ended ~~September~~March 2431, ~~2011~~2012 and ~~September~~March 2526, ~~2010~~2011, respectively.

AnWe employ, in non-executive positions, certain immediate family ~~member~~members of ~~one of~~ our executive officers. isThe aaggregate ~~partner~~compensation atamount arecognized ~~law firm that provides various services~~ for ~~the~~these ~~company.~~immediate Wefamily ~~incurred~~members ~~total expenses~~was of $0.52 million and $10.2 1 million for ~~services performed by~~ the ~~law~~three ~~firm~~months ~~for~~ended ~~the~~March 31, ~~three~~2012 and ~~nine months ended September~~March 2426, 2011, respectively~~, and $0~~.4 ~~million and $1.6 million for the three and nine months ended September 25, 2010.~~

We employ, in non-executive positions, certain immediate family members of our executive officers. The aggregate compensation amount recognized for these immediate family members was $0.1 million and $0.4 million for the three and nine months ended September 24, 2011, respectively, and $0.2 million and $0.3 million for the three and nine months ended September 25, 2010, respectively.

We have outstanding loans to non-executive vice presidents and other key personnel. As of September 24, 2011 and December 31, 2010, the total outstanding balance of such loans was $0.2 million, nearly all of which was secured by collateral. Loans typically bear interest, except for those made for employee relocation purposes. Bad debt expense related to personnel loans has not historically been significant. We do not have loans to any “executive officers” as defined by the SEC.

Note 18. Subsequent Event

InSubsequent to the ~~fourth~~balance ~~quarter~~sheet ofdate, ~~2011~~ we ~~recognized~~made athe ~~gain~~decision into terminate our ~~Industrial~~Euro-denominated ~~Applications~~credit ~~Group~~agreement on(the “Agreement”) through repayment. On April 27, 2012, the ~~sale~~outstanding ofamount ~~property~~under ~~and~~the ~~buildings~~Agreement included as Other long-term debt obligations on our Condensed Consolidated Balance Sheets was paid in full. As a result of the loan ~~Hauterive~~repayment, ~~Switzerland~~the ofassociated ~~$6.7~~Non-current ~~million~~restricted cash and cash equivalents were released.

On May 4, 2012, Novellus, Lam Research, and the Merger subsidiary entered into a MOU, an agreement to settle both of the class action lawsuits, the State Action and the Federal Actions, with the lead plaintiffs. See Note 10 for more information.

ITEM 2:

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

Cautionary Note Regarding Forward-Looking Statements

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

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

• our ~~anticipation~~belief tothat ~~reclassify~~our ~~the~~use ~~accumulated~~of ~~loss~~multiple ~~recorded~~element asrevenue ofarrangements ~~September~~will ~~24,~~not ~~2011~~have ~~for~~a ~~cash~~significant ~~flow~~impact ~~hedges~~on ~~from~~the ~~OCI~~timing toof ~~net~~revenue ~~sales~~recognition ~~within~~in ~~twelve~~comparison ~~months~~to our historical practice;

•23 ~~our expectation that the adoption of certain accounting pronouncements will not have a significant impact on our Condensed Consolidated Financial Statements;~~

• our anticipation that we will achieve tax rates lower than current federal rates during periods of profitability due to benefits from a geographical mix of income at lower tax rates;

• our estimation of amortization expense for currently recognized identifiable intangible assets for the remaining three months of 2011 and for the years ending December 31, 2012, 2013, 2014, and 2015, respectively;

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

• our expectation that the ultimate disposition of the Linear litigation and other litigation matters will not have a material adverse effect on our business, financial condition or results of operation;

• our estimation of unrecognized compensation cost related to unvested stock options and restricted stock awards;

• our belief that the long-term drivers that increase demand for semiconductors remain intact and that in the coming two to three years increased demand will come from (i) the proliferation of smartphones and other mobile devices, including computer tablet products and notebooks with solid-state drives, (ii) investment required to upgrade the current communications infrastructure to support the growing use of mobile graphics and video, both domestically and in markets overseas, (iii) growth in cloud computing and storage, and (iv) the emergence of a growing middle class in developing economies;

• our expectation that semiconductor devices for these new applications will grow in complexity, incorporating three-dimensional gate structures and advanced packaging technologies, all of which are expected to drive higher capital investment as a percentage of revenues for our semiconductor customers;

• our belief that long-term demand for our products will remain strong and our expectation that our customers will continue to invest in capital equipment;

• our belief that macroeconomic factors may affect customers’ levels of investment in capital equipment in the short term;

• our expectation that investments will be undertaken by our customers to both increase capacity and keep pace with their evolving technology needs;

• our expectation that orders will fluctuate due to the cyclical nature of our business;

• our belief that significant investment in research and development is required to remain competitive and our plan to continue to invest in new products and enhance our current product lines;

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

• our ~~belief~~estimation ~~that~~of weamortization ~~will~~expense ~~have~~for ~~sufficient~~identifiable ~~cash~~intangible ~~flow~~assets ~~from~~for ~~our~~the ~~business~~years toending ~~service~~December ~~our~~31, ~~debt~~2013, 2014, 2015 and 2016;

• our ~~belief~~expectation that wefuture ~~will~~rent ~~have~~obligations ~~the~~in ~~ability~~connection towith ~~raise~~vacated ~~the~~facilities ~~funds~~will ~~necessary~~be topaid ~~repurchase~~in ~~our Senior Convertible Notes upon the occurrence of a Fundamental Change or to pay the~~ cash ~~portion~~through ~~of the settlements amounts due when the notes are due to be converted~~2017;

•

our expectation that the ultimate disposition of the litigation relating to the Merger with LAM Research and other litigation matters that have arisen, or may arise in the future, in the normal course of business will not have a material adverse effect on our business, financial condition or operating results;

•

our belief that long-term demand for our products will remain strong; and our customers will continue to invest in capital expenditures to increase capacity and keep pace with their evolving technology needs;

•

our expectation that increased demand for semiconductor devices will come from (i) the proliferation of smartphones and other mobile devices, including computer tablet products and notebooks with solid-state drives, (ii) 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, and (iv) the emergence of a growing middle class in developing economies;

•

our belief that semiconductor devices will grow in complexity, incorporating three-dimensional gate structures and advanced packaging technologies, which is expected to drive higher capital investment as a percentage of revenues for our semiconductor customers;

•

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

•

our expectation that we will achieve tax rates that are lower than current federal rates;

•

our belief that we have adequate accruals for any potential tax adjustments resulting from examinations by state authorities, and our belief that that the IRS review of our 2006 to 2008 amended income tax returns will be finalized concurrently;

•

our belief that our financial resources will be sufficient to meet our working capital needs through the next twelve months;

• our belief that ~~our~~the ~~customer~~quality ~~base~~of isour ~~becoming~~credit ~~increasingly~~portfolio ~~more~~is ~~concentrated~~strong, and that ~~sales~~our ofstrong ~~our~~cash, ~~products~~cash toequivalent ~~relatively~~and ~~few~~short-term ~~customers~~investment position will ~~continue~~allow us to ~~account~~use ~~for~~our acash ~~high~~resources ~~percentage~~for ofacquisitions, ~~our~~working ~~net~~capital ~~sales~~needs, inand ~~the~~repurchases ~~foreseeable~~of ~~future~~common stock;

• our ~~expectation~~belief that weour ~~will~~Level ~~continue~~3 tofinancial ~~experience~~liability ~~significant~~instrument, ~~fluctuations~~the incontingent ~~our~~interest ~~quarterly~~derivative ~~operating~~liability, ~~results;~~is ~~and~~immaterial;

• our ~~belief~~expectation that ~~future~~we ~~impairment~~will ~~charges~~continue ~~related~~ to ~~goodwill~~experience orsignificant ~~long-lived~~fluctuations ~~assets~~in ~~may be required if~~ our ~~future~~quarterly operating results ~~do not meet current forecasts or if we have a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units.~~;

~~Our~~• ~~expectations,~~our ~~beliefs,~~belief ~~objectives,~~that ~~intentions~~continued ~~and~~uncertainty ~~strategies~~in ~~regarding~~both ~~the~~supply ~~future, including, without limitation, those concerning expected operating results, revenues~~ and ~~earnings~~demand ~~and~~associated ~~current~~with ~~and~~macroeconomic ~~potential~~factors ~~litigation,~~may ~~are not guarantees of future performance and are subject to risks and uncertainties that could~~ cause ~~actual results to differ materially from results contemplated by~~ our ~~forward-looking~~ ~~statements.~~customers ~~These risks and uncertainties include, but are not limited~~ to: react cautiously;

•

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;

•

our belief that Asia will continue to present large potential markets for our products and an opportunity for growth over the long term;

•

our expectation that it will be more difficult to sell to a given customer if that customer is currently using a competitor’s equipment;

•

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

•

our belief that significant investment in research and development (R&D) is required to remain competitive, and our plan to continue to invest in new products and enhance our current product lines; and

•

our expectation that the Merger with Lam Research will close in the second calendar quarter of 2012.

Our expectations, beliefs, objectives, intentions and strategies regarding the future, including, without limitation, those concerning expected operating results, revenues and earnings and current and potential litigation are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from results contemplated by our forward-looking statements. These risks and uncertainties include, but are not limited to:

•

risks related to the Merger with Lam Research;

•

unanticipated trends with respect to the cyclicality of the semiconductor industry;

• our inability to reclassify the accumulated gains (losses) for our cash flow hedges from OCI to net sales within twelve months;

• a sustained decrease in, or leveling off, of customer demand;

• our inability to make adequate inventory valuation adjustments in a timely manner;

• our inability to manage inventory levels;

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

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

• our inability to accurately predict the impact on our Consolidated Financial Statements of new accounting pronouncements;

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

• inaccuracies related to the timing and satisfaction of remaining obligations related to vacated leases;

• unexpected shipment delays which adversely impact shipment volumes;

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

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

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

• the failure of increased demand for semiconductor products to materialize as we anticipated;

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

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

• an unanticipated need for additional liquid assets in the next twelve months;

• our ability to repatriate profits from our Chinese subsidiaries;

• our inability to enforce our patents and protect our trade secrets;

•

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

• the effect of uncertainty in the global economy and credit markets on our ~~inability~~results toof ~~accurately~~operations ~~predict~~and ~~customers~~liquidity ~~capital~~and ~~spending~~broad ~~over~~market fluctuations on the ~~long~~market ~~term~~price of our common stock;

•24 ~~uncertainties in the global economy and credit markets;~~

• ~~unexpected~~our ~~consequences~~inability ofto ~~the~~make ~~downgrade~~adequate ofinventory ~~the~~valuation ~~United~~adjustments ~~States~~in ~~credit~~a ~~rating~~timely manner and ~~the~~our ~~ongoing~~inability ~~European~~to ~~debt~~manage ~~crisis~~inventory levels;

•

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

•

the possibility that our total unrecognized tax benefits could increase or decrease over the next twelve months;

•

various risks related to the regulatory environment;

•

risks related to our global operations;

•

our inability to predict the ultimate outcome of the litigation related to the Merger with Lam Research and other current litigation on our business, financial conditions or operating results;

•

our ability to manage the transition from 300 mm to 450 mm wafers and the resulting effect on demand for our products;

•

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

•

our inability to realize efficiencies from outsourcing; inefficiencies in the allocation of funds towards our R&D efforts to our existing and new product lines;

•

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

•

servicing our debt and an unanticipated need for additional liquid assets in the next twelve months;

•

risks related to the repurchase or conversion of our Senior Convertible Notes;

•

our inability to enforce our patents and protect our trade secrets;

•

our inability to accurately predict customers’ capital spending over the long term;

•

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

• ~~our~~the ~~inability~~introduction toof ~~accurately~~new ~~predict~~products ~~mega-fabrication~~by ~~trends~~competitors ~~in memory manufacturing~~ and ~~uncertainties~~unexpected ~~related~~shifts toin ~~the~~market ~~acceptance~~demand offor ~~new~~our ~~technology into the memory market~~products;

• uncertainties related to growth in the ~~introduction~~electronics ofindustry and our inability to successfully select, develop, and market new products, byor ~~competitors~~enhance existing products; and

• ~~our~~the ~~inability~~success toof ~~gain~~acquisitions, divestitures and ~~leverage~~other ~~market position during the economic downturn;~~transactions.

•The ~~unexpected~~forward-looking ~~shifts~~statements in ~~market~~this ~~demands~~Quarterly Report on Form 10-Q are subject to additional risks and uncertainties set forth under the heading “Risk Factors” in Item 1A of Part II, and are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Quarterly Report on Form 10-Q. Readers should also review carefully the cautionary statements listed in our Annual Report on Form 10-K for ~~both~~the ~~memory~~year ended December 31, 2011 and ~~logic~~in ~~products;~~our other filings with the SEC, including our Forms 10-Q and 8-K and our Annual Report to Shareholders.

• uncertainties related to growth in the electronic industry and our 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 listed in our Annual Report on Form 10-K for the year ended December 31, 2010 and in our other filings with the SEC, including our Forms 10-Q and 8-K and our Annual Report to Shareholders.

Introduction

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

•

Overview of our Business and Industry;

•

Critical Accounting Policies;

•

Results of Operations; and

•

Liquidity and Capital Resources.

~~Overview~~Proposed ofMerger ~~Our~~with ~~Business~~Lam ~~and~~Research ~~Industry~~

~~Novellus~~On ~~Systems~~December 14, ~~Inc.~~2011, iswe aentered ~~California~~into ~~corporation~~an Agreement ~~organized~~and inPlan ~~1984.~~of AtMerger ~~Novellus~~(the weMerger ~~primarily~~Agreement) ~~develop,~~with ~~manufacture,~~Lam ~~sell~~Research Corporation, ~~and~~a ~~support~~Delaware ~~equipment~~corporation ~~used~~(Lam inResearch), ~~the~~and ~~fabrication~~BLMS ~~of integrated circuits~~Inc., ~~commonly~~a ~~called~~California ~~chips~~corporation orand ~~semiconductors.~~wholly Weowned ~~refer~~subsidiary ~~to this segment~~ of ~~our~~Lam ~~business~~Research as(Merger ~~our~~subsidiary), ~~Semiconductor Group.~~pursuant ~~Customers~~to ~~for~~which, ~~this~~subject ~~equipment~~to the ~~manufacture~~satisfaction ~~chips for sale~~ or ~~for~~waiver ~~incorporation~~of incertain ~~their own products~~conditions, orMerger ~~provide~~subsidiary ~~chip~~will ~~manufacturing~~merge ~~services~~with toand ~~third~~into ~~parties.~~Novellus ~~For several decades,~~ (the ~~semiconductor~~Merger) ~~industry~~with ~~has~~Novellus ~~grown~~surviving ~~rapidly~~the Merger as a ~~result~~wholly ~~of increasing~~owned ~~demand~~subsidiary ~~for~~of ~~personal~~Lam ~~computers,~~Research. ~~the~~Upon ~~expansion~~completion of the ~~internet and the telecommunications industry~~Merger, ~~and~~each ~~the~~share ~~emergence~~ of ~~new applications in consumer electronics. We also develop, manufacture, sell, and support grinding, lapping, and~~our ~~polishing~~common ~~equipment~~stock ~~for~~will ~~fine-surface~~be ~~optimization~~converted ~~and~~into ~~serve a broad spectrum of industrial applications~~1.125 Weshares ~~refer to this segment~~ of ~~our~~Lam ~~business~~Research ascommon ~~our Industrial Applications Group, or IAG~~stock.

~~From~~25 2009 through the first quarter of 2011, our business benefitted from the general economic recovery resulting in increased demand for semiconductor products, driven in part by (i) a corporate refresh cycle for the personal computer, (ii) increased demand for NAND flash driven by the enterprise storage market, which utilizes hybrid architectures including combinations of solid-state drives and conventional hard-disk drives, and (iii) a robust smartphone market. During the second and third quarters of 2011 our net sales declined sequentially. We believe our customers have been reacting cautiously to uncertainty in both supply and demand associated with macroeconomic factors. Accordingly, any forecasts in demand for wafer fabrication equipment in the near-term are subject to the same uncertainty, which could introduce volatility into our quarterly results of operations.

Despite these circumstances, we believe the long-term drivers that increase demand for semiconductors remain intact. In the coming two to three years, we expect that increased demand will come from (i) the proliferation of smartphones and other mobile devices, including computer tablet products and notebooks with solid-state drives, (ii) investment required to upgrade the current communications infrastructure to support the growing use of mobile graphics and video, both domestically and overseas, (iii) growth in cloud computing and storage, and (iv) the emergence of a growing middle class in developing economies. We believe that semiconductor devices for these new applications will grow in complexity, incorporating three-dimensional gate structures and advanced packaging technologies, all of which are expected to drive higher capital investment as a percentage of revenues for our semiconductor customers. For this reason, we believe that long-term demand for our products will remain strong, as we expect that our customers will continue to invest in capital equipment to both increase capacity and keep pace with their evolving technology needs.

See Item 1A, “Risk Factors,” and Note 10 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 products, or provide chip manufacturing services to third parties. For several decades, the semiconductor industry has grown rapidly as a result of increasing demand for personal computers, the expansion of the internet and the telecommunications industry, and the emergence of new applications in consumer electronics. We also develop, manufacture, sell, and support grinding, lapping, and polishing equipment for fine-surface optimization and serve a broad spectrum of industrial applications. We refer to this segment of our business as our Industrial Applications Group (IAG).

From 2009 through the first quarter of 2011, our business benefitted from the general economic recovery resulting in increased demand for semiconductor products, driven in part by (i) a corporate refresh cycle for the personal computer, (ii) increased demand for NAND flash driven by the enterprise storage market, which utilizes hybrid architectures including combinations of solid-state drives and conventional hard-disk drives, and (iii) a robust smartphone market. However, during the second, third, and fourth quarters of 2011 our net sales declined sequentially. We believe continued uncertainty in both supply and demand associated with macroeconomic factors may cause our customers to react cautiously. Accordingly, any forecasts in demand for wafer fabrication equipment in the near-term are subject to the same uncertainty, which could introduce volatility into our quarterly results of operations.

Despite these uncertainties, we believe the long-term drivers that increase demand for semiconductors remain intact. In the coming two to three years, we expect that increased demand will come from (i) the proliferation of smartphones and other mobile devices, including computer tablet products and notebooks with solid-state drives, (ii) 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, and (iv) the emergence of a growing middle class in developing economies. We believe that semiconductor devices for these applications will grow in complexity, incorporating three-dimensional gate structures and advanced packaging technologies, all of which are expected to drive higher capital investment as a percentage of revenues for our semiconductor customers. For this reason, we believe that long-term demand for our products will remain strong, as we expect that our customers will continue to invest in capital equipment to both increase capacity and keep pace with their evolving technology needs.

Historically, however, any improvement in demand for semiconductor manufacturing equipment has occurred at an uneven pace. The current unstable macroeconomics for the general economy and weakening of memory prices could potentially affect some of our customers’ profitability, liquidity, and forecasted levels of investment in capital equipment in the short-term. Accordingly, any forecasts about demand for wafer fabrication equipment in the near term are subject to uncertainty, and we could experience significant volatility in our quarterly results of operations over the next several quarters.

We focus on certain key 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 financial measures that are not in accordance with U.S. generally accepted accounting principles (GAAP), such as shipments and net orders to assess business trends and performance. We discuss these non-GAAP measures because we believe they assist investors in assessing certain business trends in the same way that these trends are analyzed by management. Shipments consist of products shipped to customers, without regard to net sales adjustments such as deferrals associated with customer acceptance. Net orders, which in our industry are also referred to as bookings, consist of current period orders less current period cancellations and other adjustments. Shipments and net orders are used to forecast and plan future operations. We do not report orders for systems with delivery dates more than 12 months from the latest balance sheet date.

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

	Quarterly Financial Data
	2011									2010
	2012			2011
	ThirdQuarter			SecondQuarter			FirstQuarter			FourthQuarter			ThirdQuarter			SecondQuarter			FirstQuarter
	FirstQuarter			FourthQuarter			ThirdQuarter			SecondQuarter			FirstQuarter
Net sales	$	~~306~~326,~~731~~722		$	~~350~~282,~~223~~711		$	~~413~~306,~~185~~731		$	~~384~~350,~~357~~223		$	~~367~~413,~~203~~185		$	~~321,369~~		$	~~276,229~~
Gross profit	$	~~147~~154,~~907~~526		$	~~176~~132,~~310~~230		$	~~208~~147,~~278~~907		$	~~194~~176,~~000~~310		$	~~180~~208,~~429~~278		$	~~156,938~~		$	~~133,967~~
Net income	$	5144,~~082~~446		$	6438,~~733~~506		$	9651,~~358~~082		$	8164,~~503~~733		$	7696,~~265~~358		$	~~63,308~~		$	~~41,256~~
Net income per share – Diluted	$	0.73		$	0.79		$	1.04		$	0.89		$	0.82		$	0.66		$	0.43
Diluted net income per share	$	0.59		$	0.56		$	0.73		$	0.79		$	1.04
Shipments	$	~~301~~319,~~635~~223		$	~~359~~276,~~323~~499		$	~~376~~301,~~946~~635		$	~~417~~359,~~947~~323		$	~~363~~376,~~290~~946		$	~~332,083~~		$	~~282,816~~
Change in shipments from prior quarter		~~(16~~15	)%		(58	)%		(1016	)%		15(5	)%		9(10	)%		17	%		16	%
Net orders	$	~~226~~361,~~862~~731		$	~~311~~287,~~645~~118		$	~~415~~226,~~127~~862		$	~~410~~311,~~640~~645		$	~~406~~415,~~888~~127		$	~~384,856~~		$	~~321,363~~
Change in net orders from prior quarter		~~(27~~26	)%		~~(25~~27	)%		1(27	)%		1(25	)%		61	%		20	%		25	%

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

Critical Accounting Policies

The preparation of financial statements in conformity with ~~U.S.~~ GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our assumptions ~~and~~ and estimates, including those related to recognition of revenue, valuation of inventory, valuation of goodwill and other intangible assets, valuation of deferred tax assets and liabilities, adequacy of warranty obligations, measurement of ~~restructuring~~ restructuring and impairment charges, valuation of long-term debt, compliance with accounting for derivatives, measurement of stock-based compensation expense, valuation of investments, adequacy of the allowance for doubtful accounts and adequacy of ~~loss~~ loss contingencies, including those related to legal matters. We base our estimates on historical experience and on various assumptions that ~~are~~we ~~believed~~believe to be reasonable under the circumstances, the results of which form the basis for making ~~judgments~~ 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, ~~2010~~2011. ~~Except~~There ~~for the critical accounting policy set forth below entitled “Revenue Recognition” there~~ have been no significant changes in our critical accounting policies or estimates since those reported in our Annual Report.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collection of the receivable is reasonably assured. It is common for us to ship equipment and transfer title at the point of delivery to the buyer under the terms of our contractual relationship. When uncertainty exists as to customer acceptance due to customer-specific equipment performance conditions, we defer revenue recognition until acceptance and record the deferred revenue and associated costs of sales in Deferred profit on our Condensed Consolidated Balance Sheet. Our sales arrangements do not include a general right of return.

Our equipment sales generally have two elements: the equipment and its installation. While installation is not essential to the functionality of the delivered equipment, final payment is generally not billable for many of our sales contracts until we have fulfilled our system installation obligations and received customer acceptance. Provided that we have historically met defined levels of customer acceptance with both the specific customer and the specific type of equipment, we recognize revenue for the equipment element upon shipment and transfer of title. We recognize revenue for the installation element when installation is complete. Revenue recognized for delivered elements is limited to the amount not contingent on future performance obligations. This practice creates variability in our gross margin, as certain revenue related to customer acceptance is recognized with little or no associated costs, which may not be indicative of our future operating performance. Revenue related to sales of spare parts is recognized upon shipment. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.

In the first quarter of 2011, we adopted, on a prospective basis, an amended accounting standard issued by the Financial Accounting Standards Board (FASB) for multiple deliverable revenue arrangements applicable to transactions originating or materially modified on or after January 1, 2011. The new standard changed the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the selling price hierarchy described below. Implementation of this new authoritative guidance had an insignificant impact on reported revenue as compared to revenue under previous guidance, as the new guidance did not change the units of accounting within our sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had an inconsequential impact on the amount and timing of our reported revenue. We do not expect that the new guidance will have a significant impact on the timing of future revenue recognition in comparison to our historical practice.

For multiple element arrangements entered into before January 1, 2011, revenue was allocated among the separate elements based on their relative fair values, provided the elements had value on a stand-alone basis and there was objective and reliable evidence of fair value. In the limited cases where there was objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), the residual method was used to allocate the arrangement consideration. For multiple element arrangements entered into or materially modified on or after January 1, 2011, the total consideration for an arrangement is allocated among the separate elements in the arrangement based on a selling price hierarchy. The selling price hierarchy for a deliverable is based on (i) vendor specific objective evidence (VSOE), if available; (ii) third party evidence of selling price if VSOE is not available; or (iii) an estimated selling price, if neither VSOE nor third party evidence is available. We generally use VSOE for our products and services. Until we establish VSOE, we determine our estimate of the relative selling price by considering our production costs and margins of similar products or services. We regularly review the method used to determine our relative selling price and update any estimates accordingly.

Results of Operations

Net Sales

Three Months Ended

~~Nine~~Q1 ~~Months~~2012% ~~Ended~~ChangeFrom

September 24, 2011

June 25, 2011

September 25, 2010

September 24, 2011

September 25, 2010

March 31, 2012

December 31, 2011

March 26, 2011

Q4 2011

Q1 2011

(In thousands)

Semiconductor Group

~~274~~300,~~138~~273

~~327~~248,~~864~~937

~~347~~392,~~948~~791

~~994,793~~21

~~918,385~~(24

Industrial Applications Group

3226,~~593~~449

2233,~~359~~774

1920,~~255~~394

~~75,346~~(22

~~46,416~~30

Net sales

~~306~~326,~~731~~722

~~350~~282,~~223~~711

~~367~~413,~~203~~185

~~1,070,139~~16

~~964,801~~(21

Changes in net sales are generally influenced by our shipment volume and the timing of installation and ~~acceptances~~acceptance. Semiconductor Group net sales for the third quarter of 2011 decreased by 16% and 21% compared to the second quarter of 2011 and the third quarter of 2010, respectively, primarily due to decreased demand. We believe the recent reduction in our customers’ spending was due to macroeconomic uncertainties that have negatively affected end-market demand in the near-term. In addition, current customer utilization levels remain below seasonal levels. However, Semiconductor Group net sales increased by 8% in the first nine months of 2011 as compared with the same prior-year period. This year-over-year increase was due to increased demand for capital equipment in the first half of the year as our customers responded to growth in end-market demand for electronics which, as mentioned above, has recently diminished.

~~IAG~~Semiconductor Group net sales for the ~~third~~first quarter of ~~2011~~2012 increased by 4621% ~~and 69%~~ compared to the ~~second~~fourth quarter of 2011 and decreased by 24% compared to the ~~third~~first quarter of ~~2010, respectively~~2011. ~~IAG~~These ~~net~~changes ~~sales~~resulted ~~increased~~primarily ~~62%~~from fluctuations in demand. Sales levels in the first ~~nine~~quarter ~~months~~ of 2011 reflected a peak in demand for capital equipment as ~~compared~~a ~~with~~result of the ~~same~~economic ~~prior-year~~recovery ~~period~~occurring throughout 2010; shipments increased sequentially, peaking in the fourth quarter of 2010. ~~These~~Demand ~~increases~~subsequently ~~are~~declined ~~primarily~~throughout ~~due~~2011 ~~to continued~~as ~~improvement~~reflected in ~~demand~~fourth ~~for~~quarter ~~our~~2011 ~~industrial~~net ~~products~~sales. ~~Also~~Net ~~contributing~~sales toin the ~~year-over-year~~first ~~increase~~quarter ~~were~~of ~~favorable~~2012 ~~foreign~~resulted ~~currency~~primarily ~~exchange~~from ~~rates~~another ~~which~~upturn in ~~increased~~demand, ~~net~~as ~~sales~~shown by 8a 21% increase in shipments in the first quarter of 2012 over the fourth quarter of 2011.

2527

IAG net sales for the first quarter of 2012 decreased by 22% compared to the fourth quarter of 2011 and increased by 30% compared to the first quarter of 2011. These changes also resulted primarily from fluctuations in demand. Sales levels for IAG in the first quarter of 2011 reflect lower relative demand, which then rose to a peak in the fourth quarter of 2011; IAG shipments increased sequentially from the first quarter of 2010 to the fourth quarter of 2011. However, net sales in the first quarter of 2012 reflected a downturn in demand for industrial products; IAG shipments decreased 23% in the first quarter 2012 over the fourth quarter 2011.

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

	Three Months Ended					~~Nine Months Ended~~
	September 24, 2011		June 25, 2011	September 25, 2010		September 24, 2011	September 25, 2010
	March 31, 2012			December 31, 2011			March 26, 2011
Greater China	22%		42%	36%		36%	39%
United States		33	%		35	%		34	%
United States	36%		26%	22%		32%	24%
Korea		26	%		20	%		9	%
Korea	21%		17%	31%		15%	26%
Greater China		26	%		27	%		40	%
Europe	~~11%~~	9	11%	7%	6	10%	7%	9	%
Japan	~~10%~~	6	4%	4%	12	7%	4%	8	%

Gross Profit

	Three Months Ended									~~Nine~~Q1 ~~Months~~2012% ~~Ended~~ChangeFrom
	September 24, 2011			June 25, 2011			September 25, 2010			September 24, 2011			September 25, 2010
	March 31, 2012			December 31, 2011			March 26, 2011			Q4 2011			Q1 2011
	(In thousands, except percentages)
	(Dollars in thousands)
Gross profit	$	~~147~~154,~~907~~526		$	~~176~~132,~~310~~230		$	~~180~~208,~~429~~278		$	~~532,495~~17	%	$	~~471,333~~(26	)%
Gross margin		4847	%		5047	%		4950	%		50	%		49	%

Gross margin of 4847% for the ~~third~~first quarter of ~~2011~~2012 ~~decreased~~is 2consistent ~~percentage~~with ~~points from~~ the ~~second~~fourth quarter of 2011. ~~and~~Gross ~~1 percentage~~margin ~~point~~for ~~from~~ the first ~~third~~ quarter of ~~2010,~~2012 ~~primarily~~decreased ~~due~~three ~~to reduced absorption of fixed overhead costs on lower production volumes combined with an increased mix of industrial products revenue. The increase in gross margin by 1~~ percentage ~~point~~ ~~for~~points from the first ~~nine~~quarter ~~months~~ of 2011, ~~from the same prior-year period was~~ primarily driven by ~~favorable~~unfavorable product mix.

Selling, General and Administrative (SG&A)

	Three Months Ended									~~Nine~~Q1 ~~Months~~2012% ~~Ended~~ChangeFrom
	September 24, 2011			June 25, 2011			September 25, 2010			September 24, 2011			September 25, 2010
	March 31, 2012			December 31, 2011			March 26, 2011			Q4 2011			Q1 2011
	(In thousands, except percentages)
	(Dollars in thousands)
SG&A expense	$	4449,~~364~~626		$	4736,~~378~~556		$	4649,~~426~~340		$	~~141,082~~36	%	$	~~134,509~~1	%
% of net sales		1415	%		1413	%		1312	%		13	%		14	%

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

~~Third~~First quarter ~~2011~~2012 SG&A expense ~~decreased~~increased 636%, or $313.01 million, from the ~~second~~fourth quarter of 2011 ~~and~~primarily ~~decreased~~as ~~4%,~~a orresult ~~$2.1~~of ~~million,~~two ~~from the same prior~~non-~~year~~recurring ~~period~~fourth ~~due~~quarter ~~primarily~~2011 tobenefits ~~a gain~~ of $26.4 7 million ~~from a supplier settlement. SG&A expense~~ for the ~~first~~sale ~~nine~~of the ~~months~~Voumard ofmanufacturing ~~2011~~facility ~~increased~~in ~~5%,~~Switzerland orand $65.6 million, ~~from~~for the ~~same~~attorney’s ~~prior-year~~fees ~~period~~and ~~due~~other ~~primarily~~costs awarded to ~~increased~~Novellus ~~variable~~by ~~compensation~~the ~~expense~~California ~~partially~~Superior ~~offset~~Court byafter alitigation ~~supplier~~with ~~settlement of~~Linear ~~$2.4~~Technology ~~million~~Corporation. First quarter SG&A expense was ~~for~~flat ~~the~~compared ~~third~~with ~~quarter~~the ~~and~~same ~~first~~period ~~nine months of 2011 also includes $1.7 million~~ in ~~reduction in workforce expense compared to $0.3 million in~~ the ~~first~~prior ~~nine months of 2010~~year.

Research and Development (R&D)

	Three Months Ended									~~Nine~~Q1 ~~Months~~2012% ~~Ended~~ChangeFrom
	September 24, 2011			June 25, 2011			September 25, 2010			September 24, 2011			September 25, 2010
	March 31, 2012			December 31, 2011			March 26, 2011			Q4 2011			Q1 2011
	(In thousands, except percentages)
	(Dollars in thousands)
R&D expense	$	4749,~~827~~149		$	4744,~~270~~162		$	4446,~~271~~721		$	~~141,818~~11	%	$	~~124,747~~5	%
% of net sales		1615	%		1316	%		1211	%		13	%		13	%

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

~~Third~~28 quarter 2011 R&D expense remained relatively consistent with the second quarter of 2011. R&D expense for the third quarter and first nine months of 2011 increased 8% and 14%, respectively, compared with the same prior-year periods, primarily due to an overall increase in targeted R&D spending including an increase in headcount and higher variable compensation expense in the first nine months of 2011 compared to the same prior-year period.

Income Taxes

	Three Months Ended									Nine Months Ended
	September 24, 2011			June 25, 2011			September 25, 2010			September 24, 2011			September 25, 2010
	(In thousands, except percentages)
Provision for income taxes	$	4,038		$	13,783		$	13,095		$	34,216		$	34,181
% of income before income taxes		7	%		18	%		15	%		14	%		16	%

AsFirst aquarter ~~result~~2012 ofR&D ~~our~~expense ~~global~~increased ~~business structure~~11%, inor ~~periods~~$5.0 ~~of profitability~~million, wecompared ~~expect~~with tothe ~~achieve~~fourth ~~tax~~quarter ~~rates lower than current federal rates as we benefit from a geographical mix~~ of ~~income at lower tax rates. Likewise~~2011, and ~~in periods of operating losses~~5%, ~~these~~or ~~losses~~$2.4 ~~may accumulate in lower tax rate jurisdictions~~million, ~~which~~compared ~~could~~with ~~have an adverse impact on our tax rate. The income tax provision for~~ the ~~third~~fourth quarter of 2011, ~~was~~primarily ~~computed~~due ~~based~~to onoverall ~~our~~increases ~~annual~~in ~~forecast~~targeted ofR&D ~~profit~~spending, ~~and~~including ~~losses~~increases byin ~~jurisdiction for fiscal year 2011~~headcount.

~~The~~Income ~~decrease~~Taxes in our third quarter effective tax rate compared to our effective tax rate for the second quarter of 2011 and the third quarter of 2010 was primarily driven by revisions to our annual forecasted income before taxes and the mix of earnings by jurisdiction which resulted in a lower annual forecasted rate. The effective tax rate for the first nine months of 2011 was relatively constant compared to the same prior-year period.


	Three Months Ended
	March 31, 2012			December 31, 2011			March 26, 2011
	(Dollars in thousands)
Provision for income taxes	$	6,599		$	8,254		$	16,395
% of income before income taxes		13	%		18	%		15	%

As a result of our global business structure, we expect to achieve tax rates lower than current federal rates in periods of profitability as we benefit from a geographical mix of income at lower tax rates. Likewise, in periods of operating losses, these losses may accumulate in lower-tax-rate jurisdictions, which could have an adverse impact on our tax rate. The income tax provision for the first quarter of 2012 was computed based on our annual forecast of profit and losses by jurisdiction for fiscal year 2012.

The decrease in our first-quarter effective tax rate compared to our effective tax rate for the fourth quarter of 2011 and the first quarter of 2011 was primarily driven by the mix of earnings by jurisdiction, which resulted in a lower forecasted annual rate. The effective tax rate for the first three months of 2012 was relatively constant compared to the same prior-year period.

With certain exceptions, we are no longer subject to state income tax examinations by tax authorities for years prior to 2008. We believe that adequate accruals have been provided for any potential adjustments that may result from current examinations by state tax authorities. As of December 31, 2011, our income tax refunds claimed in amended federal returns filed for the tax years ended December 31, 2006 and 2007 were under review by the Internal Revenue Service (IRS). In the first quarter of 2012, the IRS added our 2008 amended income tax return to its review. We believe that the IRS review of 2006 to 2008 amended income tax returns will be finalized concurrently. As it concerns federal and other tax jurisdictions and tax periods, it is reasonably possible that our total unrecognized tax benefits could increase or decrease over the next twelve months as we may be subject to either examination by tax authorities or a lapse in statute of limitations. Currently, it is not possible to estimate the amount of any increase or decrease in unrecognized tax benefits.

Liquidity and Capital Resources

The following sections discuss the effect of changes in our balance sheet, our credit arrangements, and stock repurchases on our liquidity and capital resources.

We ~~believe~~classify ~~that~~ our ~~financial~~investments ~~resources~~as short-term ~~will~~based beon ~~sufficient~~their tonature ~~meet~~and ~~our~~availability ~~working~~for ~~capital~~use ~~needs~~in ~~through~~current ~~the~~operations. ~~next~~The 12overall ~~months.~~credit Asquality of ~~September 24,~~our ~~2011,~~portfolio ~~we do~~is ~~not have significant commitments for capital expenditures. In the future~~strong, wewith ~~may consider acquisition opportunities to extend~~ our ~~product~~cash orequivalents ~~technology portfolios~~ and toshort-term ~~expand~~investments ~~our~~consisting ~~product~~primarily ~~offerings.~~of Inhigh ~~connection~~quality, ~~with funding capital~~investment-grade ~~expenditures,~~securities. ~~increasing~~Our ~~our~~strong ~~working capital~~cash, orcash ~~completing~~equivalent ~~any~~and ~~acquisitions,~~short-term weinvestment ~~may~~position ~~seek~~allows tous ~~obtain debt or equity financing. We may also need~~ to ~~obtain~~use ~~debt~~our orcash ~~equity~~resources ~~financing~~for ifacquisitions, weworking ~~experience~~capital ~~downturns~~needs, orand ~~cyclical~~repurchases ~~fluctuations~~of incommon ~~our business that are more severe or longer than anticipated~~stock.

We have historically financed our operating and capital resource requirements through cash flows from operations and borrowings. Cash provided by operating activities will fluctuate from period to period due to fluctuations in operating results, ~~Cash~~the ~~Equivalents~~rate at which our customers can accept orders, the timing and ~~Short-Term~~collection ~~Investments~~of accounts receivable, and required inventory levels, among other things.

	September 24, 2011		December 31, 2010		Change
	(In thousands)
Cash and cash equivalents	$	353,127	$	247,055	$	106,072
Short-term investments		383,482		424,196		(40,714	)
Total cash, cash equivalents, and short-term investments	$	736,609	$	671,251	$	65,358

We believe that our financial resources will be sufficient to meet our working capital needs through the next 12 months. As of March 31, 2012, we do not have significant commitments for capital expenditures.

~~The increase of $65.4 million in total cash~~Cash, ~~cash~~Cash ~~equivalents,~~Equivalents and ~~short~~Short-~~term~~Term ~~investments~~Investments during the first nine months of 2011 was primarily the result of $278.6 million of cash generated from operations, net proceeds of $684.3 million from the issuance of our Senior Convertible Notes, and proceeds of $112.7 million from the issuance of common stock pursuant to employee stock compensation plans. These cash inflows were generally offset by the repurchase of $975.9 million of our common stock through our stock repurchase plan.

Restricted Cash, Cash Equivalents, and Long-Term Investments


	March 31, 2012		December 31, 2011		Change
	(In thousands)
Cash and cash equivalents	$	343,974	$	524,901	$	(180,927	)
Short-term investments		669,997		393,837		276,160

Total cash, cash equivalents, and short-term investments	$	1,013,971	$	918,738	$	95,233

	September 24, 2011		December 31, 2010		Change
	(In thousands)
Restricted cash and cash equivalents	$	132,540	$	121,226	$	11,314
Long-term investments		53,456		68,645		(15,189	)
Total restricted cash, cash equivalents, and long-term investments	$	185,996	$	189,871	$	(3,875	)

Restricted cash and cash equivalents are primarily money market funds and Euro-denominated time-based deposits held to secure our Euro-denominated debt obligation. The increase of $11.3 million in restricted cash and cash equivalents from December 31, 2010 was driven by fluctuations in the exchange rate of our Euro-denominated debt.

The decrease in long-term investments of $15.2 million is due to sales of auction-rate securities during the first nine months of 2011.

The increase of $95.2 million in total cash, cash equivalents, and short-term investments during the first three months of 2012 was primarily the result of $32.8 million of cash generated from operations and net proceeds of $61.9 million from the issuance of common stock pursuant to employee stock compensation plans.

Restricted Cash, Cash Equivalents and Long-Term Investments


	March 31, 2012		December 31, 2011		Change
	(In thousands)
Restricted cash and cash equivalents	$	122,309	$	123,150	$	(841	)
Long-term investments		46,469		42,891		3,578

Total restricted cash, cash equivalents, and long-term investments	$	168,778	$	166,041	$	2,737

Restricted cash and cash equivalents are primarily money market funds and Euro-denominated time-based deposits held to secure our Euro-denominated debt obligation. The decrease of $0.8 million in Restricted cash and cash equivalents from December 31, 2011 was driven by fluctuations in the exchange rate of our Euro-denominated debt. The increase in Long-term investments of $3.6 million is due primarily to the purchase of $5.0 million in equity investments offset by the sale of $1.5 million in auction-rate securities during the quarter. The outstanding amount under the Euro-denominated debt obligation was paid in full on April 27, 2012.

Accounts Receivable, Net

September 24, 2011

December 31, 2010

Change

March 31, 2012

December 31, 2011

Change

(Dollars in thousands)

Accounts receivable, net

~~222~~226,~~764~~763

~~256~~188,~~731~~422

~~(33~~38,~~967~~341

)

Quarterly days sales outstanding (DSO)

6562

Accounts receivable, net ~~decreased~~increased $3438.03 million, or 1320%, compared with December 31, ~~2010~~2011 and is consistent with the ~~decrease~~increase in shipments in the ~~third~~first quarter of ~~2011~~2012 compared to the fourth quarter of ~~2010~~2011 of 15%. Quarterly DSO increased by 52 days due to the timing of shipments ~~which~~accompanied ~~occurred~~by ~~later~~certain incustomers ~~the~~with ~~quarter accompanied by~~ longer payment terms.

Inventories

September 24, 2011

December 31, 2010

Change

March 31, 2012

December 31, 2011

Change

(Dollars in thousands)

Inventories

~~216~~225,~~865~~838

~~208~~213,~~894~~869

711,~~971~~969

Annualized inventory turns

3.31

32.5

(0.26

)

Inventories increased $812.0 million, or 46%, compared with December 31, ~~2010~~2011, ~~primarily~~including ~~due~~an toincrease of $4.4 million at IAG as well as an increase of $67.6 million atin ~~IAG~~our ~~related~~Semiconductor Group. These increases are primarily due to ~~increasing~~inventory management in response to increased demand. ~~for~~Within ~~industrial~~inventories, ~~products~~there was an increase of $3.4 million in ~~2011~~finished goods inventory in the first quarter of 2012 for systems held at customer locations for customer evaluation of recently developed products.

Credit Arrangements

On May 10, 2011, we issued $700.0 million of 2.625% Senior Convertible Notes due May 15, 2041, in a private offering. The proceeds from the issuance of the Senior Convertible Notes ~~have~~were ~~been,~~primarily ~~and will continue to be,~~ used to repurchase shares of our common stock pursuant to our board-authorized share repurchase program and for general corporate purposes. The Senior Convertible Notes are unsecured borrowings and are initially convertible, subject to certain conditions, into shares of common stock at a conversion rate of 25.3139 shares of common stock per $1,000 principal amount, representing an initial effective conversion price of $39.50 per share of common stock. The conversion rate will be subject to adjustment for certain events as outlined in the indenture governing the Senior Convertible Notes. We will settle any conversion of the Senior Convertible Notes in cash up to the face value, and any amount in excess of face value will be settled in stock up to 19.99% of outstanding stock, unless a higher percentage is approved by shareholders. If shareholder approval is not obtained, any excess amount will be settled in cash. ~~See~~The ~~additional disclosures~~indenture ~~relating~~for toour Senior Convertible Notes provides that our Senior Convertible Notes inmay ~~Note~~be 3converted into our common stock at any time from the later of (i) the date that is 30 scheduled trading days immediately prior to the ~~Condensed~~anticipated ~~Consolidated~~closing ~~Financial~~date ~~Statements~~of ~~above~~the Merger and (ii) the date on which we deliver to the debt holders notice of the Merger until 35 business days after the actual closing date of the Merger.

On30 June 17, 2009, we entered into a Euro-denominated credit agreement. The agreement, as amended most recently on May 12, 2011, provides a secured credit line with an aggregate committed maximum amount of 80 million Euros. The current terms provide for an interest rate of Euro Interbank Offered Rate (EURIBOR) plus 50 basis points with amounts outstanding due and payable on or before May 3, 2014. As of September 24, 2011 and December 31, 2010, we had 79.5 million Euros outstanding under the agreement which equaled $107.9 million and $105.2 million as of such dates, respectively, at an effective interest rate of 1.79% and 1.47%, respectively. The agreement is secured by deposits in money market funds and Euro-denominated time-based deposits at a minimum of 105% of the outstanding balance. Amounts used to secure the debt are included within Non-current restricted cash and cash equivalents on our Condensed Consolidated Balance Sheet. The agreement contains customary affirmative covenants, representations, warranties, events of default, limited negative covenants, and financial covenants which are subject to various exceptions and qualifications. We were in compliance with these covenants as of September 24, 2011.

We have an aggregate amount of $37.0 million available under short-term credit facilities with various financial institutions. As of September 24, 2011, $9.1 million of our credit facilities were pledged against outstanding letters of credit and the remainder was unutilized.

Stock Repurchases

Our Board of Directors has authorized repurchases of our outstanding common stock under a stock repurchase plan. As of September 24, 2011, we had $264.2 million available for stock repurchases under the plan. In October 2011, the remaining authorization of $264.2 million expired and our Board of Directors authorized $500.0 million for repurchases through December 2014. During the three and nine months ended September 24, 2011, 5.2 million shares and 28.5 million shares were repurchased under this plan for $150.6 million and $975.9 million, respectively, at a weighted average price per share of $29.19 and $34.21, respectively. During the three and nine months ended September 25, 2010, 1.6 million shares and 6.7 million shares were repurchased under this plan for $37.9 million and $160.4 million, respectively, at a weighted average price of $24.00 and $24.11, respectively.

WeIn ~~are~~accordance ~~not~~with ~~obligated~~the toindenture ~~make~~governing ~~any~~our ~~purchases~~Senior ~~under~~Convertible Notes, on March 30, 2012 we notified the registered holders of our ~~stock~~Senior ~~repurchase~~Convertible ~~program~~Notes of the opening of the conversion window and their conversion rights in connection with the proposed merger with Lam Research Corporation. ~~Subject~~Accordingly, the carrying amount of Senior Convertible Notes has been reclassified from noncurrent to ~~applicable~~current ~~state~~liabilities in our balance sheet. The excess of the amount of cash payable, if converted, over the carrying amount of the notes has been reclassified from permanent to temporary equity. Should ~~and~~the ~~federal~~proposed ~~corporate~~merger ~~and~~not ~~securities~~be ~~laws~~completed or when the conversion period closes, ~~repurchases~~35 ~~under~~days ~~our~~after ~~stock~~the ~~repurchase~~completion ~~program~~of ~~may~~the proposed merger, all notes not converted will be ~~made~~reclassified atback ~~such~~to ~~times~~noncurrent liabilities and inthe ~~such~~temporary ~~amounts~~equity aswill webe ~~deem~~reclassified back ~~appropriate~~to permanent equity. ~~Purchases~~As ~~made~~of ~~under~~the ~~our~~issuance ~~stock~~date ~~repurchase~~of ~~program~~this ~~can~~financial bestatement, ~~discontinued~~no atholder ~~any~~has ~~time~~exercised wetheir ~~feel~~ option to convert. See additional ~~purchases~~disclosures ~~are~~relating ~~not~~to ~~warranted~~our Senior Convertible Notes in Note 3 to the Condensed Consolidated Financial Statements.

InOn ~~addition~~June 17, 2009, we ~~repurchased~~entered ~~shares~~into ~~under~~a ~~our~~Euro-denominated ~~stock~~credit ~~incentive~~agreement ~~plan~~(the to“Agreement”). ~~pay~~The ~~the~~Agreement, ~~minimum~~as ~~statutory~~amended ~~withholding~~most ~~for~~recently ~~income~~on ~~taxes~~May 12, on2011, ~~behalf~~provided ofa ~~grantees~~secured ~~under~~credit ~~this~~line ~~plan.~~with ~~The~~an ~~amount~~aggregate ~~repurchased~~committed ~~was~~maximum ~~$0.4~~amount of 80 million ~~and $1~~Euros.7 ~~million~~The terms provided for ~~the~~an ~~three~~interest rate of Euro Interbank Offered Rate (EURIBOR) plus 50 basis points with amounts outstanding due and ~~nine~~payable ~~months~~on ~~ended~~or ~~September~~before May 243, 2014. As of March 31, 2012 and December 31, 2011, ~~respectively~~we had 79.5 million Euros outstanding under the Agreement, ~~and~~equivalent to $0105.28 million and $0102.79 million ~~for~~as of such dates, respectively, at an effective interest rate of 0.86% and 1.52%, respectively. The Agreement was secured by deposits in money-market funds and Euro-denominated, time-based deposits of a minimum of 105% of the ~~three~~outstanding balance. Amounts used to secure the debt were included within Non-current restricted cash and ~~nine~~cash ~~months~~equivalents ~~ended~~on ~~September~~our Condensed Consolidated Balance Sheet. The 25Agreement contained customary affirmative covenants, ~~2010~~representations, ~~respectively~~warranties, events of default, limited negative covenants, and financial covenants which were subject to various exceptions and qualifications. ~~These~~We ~~withheld~~were ~~shares~~in ~~are~~compliance ~~not~~with ~~included~~these covenants as ~~common~~of ~~stock~~March 31, ~~repurchases~~2012. The outstanding amount under ~~our~~the ~~authorized~~Agreement ~~stock~~was ~~repurchase~~paid ~~program~~in full on April 27, 2012.

We have an aggregate amount of $32.9 million available under short-term credit facilities with various financial institutions. As of March 31, 2012, $7.9 million of our credit facilities were pledged against outstanding letters of credit and the remainder was unutilized.

Stock Repurchases

In October 2011, our Board of Directors authorized $500.0 million for repurchases of our outstanding common stock under a stock repurchase plan through December 2014. As of March 31, 2012, we had $500.0 million available for stock repurchases under the plan. We did not repurchase any of our common stock outstanding during the first quarter of 2012. The Merger Agreement prohibits us from redeeming, purchasing, or otherwise acquiring our own stock. As a result, we will not repurchase additional shares of our common stock pursuant to our board-authorized repurchase program while the Merger remains pending. During the three months ended March 26, 2011, 5.1 million shares were repurchased for $200.1 million at a weighted average purchase price of $39.37 per share under the plan with previous Board authorizations that expired in October, 2011.

We withhold shares released under our stock incentive plan to pay the minimum statutory required amount for income taxes on behalf of grantees under this plan. The amount withheld was $1.4 million and $0.3 million for the three months ended March 31, 2012 and March 26, 2011, respectively. These withheld shares are not included as common stock repurchases under our authorized stock repurchase program.

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, ~~2010~~2011. ~~Other~~Our ~~than noted below, our~~ exposure related to market risk has not changed materially since December 31, ~~2010~~2011.

Market risk

The fair market value of the contingent interest derivative on the Senior Convertible Notes is subject to interest rate risk and market risk and will change in response to fluctuations in interest rates and the fair market value of the Senior Convertible Notes.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our debt obligations. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit-quality issuers and, by policy, limit the amount of credit exposure with any one issuer.

We mitigate default risk by investing in high credit quality securities and by monitoring the credit rating of the underlying issuers. Excluding our investments in auction rate securities, our portfolio includes only short-term investments with active secondary or resale markets.

Our operating results are affected by interest rate changes due to our variable-rate long-term borrowings. The tables below present the amounts we recorded and related weighted average interest rates by year of contractual maturity for our investment portfolio and debt obligations as of September 24, 2011 and December 31, 2010. The amounts presented in the tables below approximate fair value.

	Periods of Maturity															Total
September 24, 2011	Less than1 Year			1 to 3Years			3 to 5Years			5 to 10Years			Over 10Years
	(In thousands)
Assets:
Cash and cash equivalents	$	353,127		$	0		$	0		$	0		$	0		$	353,127
Average interest rate		0.05	%		0	%		0	%		0	%		0	%		0.05	%
Short-term investments	$	127,131		$	185,923		$	540		$	4,500		$	62,235		$	380,329
Average interest rate		1.93	%		2.12	%		0.35	%		0.50	%		0.49	%		1.77	%
Long-term investments	$	0		$	0		$	0		$	0		$	53,456		$	53,456
Average interest rate		0	%		0	%		0	%		0	%		0.36	%		0.36	%
Restricted cash and cash equivalents	$	132,540		$	0		$	0		$	0		$	0		$	132,540
Average interest rate		0.24	%		0	%		0	%		0	%		0	%		0.24	%
Liabilities:
Short-term borrowings – fixed rate	$	105		$	0		$	0		$	0		$	0		$	105
Average interest rate		8.12	%		0	%		0	%		0	%		0	%		8.12	%
Long-term borrowings – variable rate	$	0		$	109,531		$	0		$	0		$	0		$	109,531
Average interest rate		0	%		1.79	%		0	%		0	%		0	%		1.79	%
Long-term borrowings – fixed rate	$	0		$	314		$	0		$	0		$	244,175		$	244,489
Average interest rate		0	%		8.12	%		0	%		0	%		2.63	%		2.63	%

	Periods of Maturity															Total
December 31, 2010	Less than1 Year			1 to 3Years			3 to 5Years			5 to 10Years			Over 10Years
	(In thousands)
Assets:
Cash and cash equivalents	$	247,055		$	0		$	0		$	0		$	0		$	247,055
Average interest rate		0.17	%		0	%		0	%		0	%		0	%		0.17	%
Short-term investments	$	180,631		$	148,485		$	0		$	9,000		$	82,349		$	420,465
Average interest rate		3.01	%		2.31	%		0	%		0.34	%		0.79	%		2.27	%
Long-term investments	$	0		$	0		$	0		$	0		$	68,645		$	68,645
Average interest rate		0	%		0	%		0	%		0	%		0.71	%		0.71	%
Restricted cash and cash equivalents	$	121,226		$	0		$	0		$	0		$	0		$	121,226
Average interest rate		0.15	%		0	%		0	%		0	%		0	%		0.15	%
Liabilities:
Short-term borrowings – fixed rate	$	98		$	0		$	0		$	0		$	0		$	98
Average interest rate		8.12	%		0	%		0	%		0	%		0	%		8.12	%
Long-term borrowings – variable rate	$	0		$	106,304		$	0		$	0		$	0		$	106,304
Average interest rate		0	%		1.47	%		0	%		0	%		0	%		1.47	%
Long-term borrowings – fixed rate	$	0		$	393		$	0		$	0		$	0		$	393
Average interest rate		0	%		8.12	%		0	%		0	%		0	%		8.12	%

The “less than 1 year” category of Short-term investments contains $13.1 million and $15.4 million of other investments that do not have contractual maturities as of September 24, 2011 and December 31, 2010, respectively. The tables exclude interest receivable of $3.2 million and $3.7 million as of September 24, 2011 and December 31, 2010, respectively, which is included in Short-term investments on the Condensed Consolidated Balance Sheet.

As of September 24, 2011, we held tax-exempt auction-rate securities with an estimated fair value of $53.5 million, whose underlying assets are either student loans substantially backed by the federal government or closed-end municipal funds. Since 2008, our auction-rate securities have been illiquid as a result of failed auctions. 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. These investments are classified as long-term in our Condensed Consolidated Balance Sheets. As of September 24, 2011, we currently have a cumulative temporary unrealized loss of $7.0 million within OCI.

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 Chief 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 Chief 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 CFO Certifications

The certifications of the Chief Executive Officer and the Chief 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~~31 ~~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 Chief 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.

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 Chief 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 Chief 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 is 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~~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 Chief 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 Chief 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 Chief 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 Chief Financial Officer, particularly during the period when our periodic reports are being prepared, and that our internal controls for financial reporting are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with U.S. GAAP.

PART II: OTHER INFORMATION

ITEM 1:

LEGAL PROCEEDINGS

~~Linear~~Proposed ~~Technology~~Merger ~~Corporation~~with Lam Research

InOn ~~March~~December 15, ~~2002~~2011, ~~Linear~~a ~~Technology~~purported ~~Corporation~~class action lawsuit was filed in California Superior Court for the County of Santa Clara (~~Linear~~State Court), ~~filed~~by Marla Skroch, an alleged Novellus shareholder who seeks to represent a ~~complaint~~class ~~against~~comprised of Novellus, ~~among~~shareholders. ~~other~~The ~~parties,~~complaint in this action (the ~~Superior~~Skroch ~~Court~~complaint), ofnames as defendants Novellus, the ~~State~~members of ~~California~~Novellus’ ~~for~~Board of Directors, and Lam Research. The Skroch complaint alleges that the director ~~County~~defendants ofbreached ~~Santa~~fiduciary ~~Clara~~duties (allegedly owed to Novellus’ shareholders by entering into the ~~Superior Court)~~Merger ~~seeking~~Agreement; ~~damages~~that Lam Research and Novellus aided and abetted the alleged breaches of upfiduciary duty; and that if the transaction is allowed to ~~$200~~proceed, ~~million~~the ~~(including~~shareholders ~~punitive~~will suffer damages), ~~declaratory~~because ~~relief~~their ~~and~~shares ~~injunctions~~will be acquired for ~~causes~~less ofthan their actual value. The plaintiff seeks an order in the State Court certifying the action ~~involving~~as ~~alleged~~a ~~breach~~class ofaction; ~~contract,~~rescinding ~~fraud,~~the ~~unfair~~transaction and/or ~~competition~~preliminarily enjoining the defendants from consummating the transaction, and/or ~~breach~~awarding ofattorneys’ ~~warranty~~fees and costs.

~~The Superior Court dismissed Linear’s claims for fraud and unfair competition on October 5, 2004. The Court of Appeal for the Sixth Appellate~~On ~~District affirmed this dismissal on June~~December 1819, ~~2007.~~2011 ~~Trial~~a onsecond ~~the~~purported ~~remaining~~class ~~claims~~action ~~began~~was ~~before~~filed ~~a jury on January 19, 2010,~~ in the ~~Superior~~State Court. ~~Novellus~~by ~~prevailed~~Michael ~~on these claims at trial~~Resing, ~~which~~an ~~ended~~alleged onNovellus ~~February 26~~shareholder, ~~2010.~~who ~~On August 2,~~seeks ~~2010,~~to inrepresent ~~connection with~~ the ~~judgment~~same ~~against~~purported ~~Linear, the Superior Court awarded us $5~~class.2 ~~million~~The incomplaint ~~attorney’s fees and $0.1 million~~ in ~~other~~this ~~costs.~~action ~~Linear~~(the ~~filed~~Resing ~~two~~complaint) ~~motions,~~names ~~one~~as defendants ~~seeking~~the ~~entry~~members of aNovellus’ ~~judgment~~Board inof ~~its~~Directors, ~~favor notwithstanding~~Novellus, ~~the~~Lam ~~jury’s~~Research ~~verdict,~~ and the ~~other~~Merger ~~seeking~~subsidiary. aThe ~~new~~allegations ~~trial,~~contained ~~both~~in ~~of which~~ the ~~Superior~~Resing ~~Court~~complaint ~~has~~are ~~denied.~~largely ~~Linear~~similar ~~subsequently~~to ~~filed~~the anallegations ~~appeal.~~contained ~~Linear~~in ~~has since paid us~~ the ~~entire~~Skroch ~~award. However~~complaint, ~~Linear’s~~except ~~payment is subject to its~~that ~~appeal. Although~~the weResing ~~cannot~~complaint atalso ~~this~~alleges ~~time~~that ~~predict~~BLMS ~~the~~aided ~~ultimate~~and ~~outcome~~abetted inalleged ~~this~~breaches ~~case or estimate a range~~ of ~~any~~fiduciary ~~such~~duty ~~potential~~by ~~loss, we believe that~~ the ~~ultimate~~director ~~disposition~~defendants. ofThe ~~this~~plaintiff ~~matter~~seeks ~~will~~similar ~~not~~relief ~~have~~to athat ~~material~~sought ~~adverse~~by ~~effect~~the onSkroch ~~our business, financial condition, or operating results~~complaint.

On May 4, 2012, Novellus, Lam Research, and the Merger subsidiary entered into a memorandum of understanding (“MOU”) to settle both the State Action and the Federal Actions. Pursuant to the MOU, Novellus, Lam Research, and the Merger subsidiary agreed to resolve disputed legal claims and to make certain additional disclosures regarding the proposed Merger of the Merger subsidiary and Novellus, as set forth in the Current Report on Form 8-K filed with the SEC on May 4, 2012.

Other Litigation

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~~ statements contained in this Quarterly Report. We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede the risks previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, ~~2010~~2011.

Risks Related to the Merger with Lam Research

The Merger is subject to the receipt of consents and clearances from domestic and foreign regulatory authorities who may impose conditions that could have an adverse effect on Lam Research, Novellus or the combined company or that, if not obtained, could prevent completion of the Merger.

On December 14, 2011, we announced the execution of the Merger Agreement with Lam Research. Before the Merger may be completed, applicable waiting periods must expire or terminate under antitrust and competition laws and various approvals or consents must be obtained from regulatory entities. In deciding whether to grant antitrust or regulatory clearances, the relevant governmental entities will consider the effect of the Merger on competition within their relevant jurisdiction. The terms and conditions of any approvals that are granted may impose requirements, limitations, or costs or place restrictions on the conduct of the combined company’s business. The Merger Agreement may require us and/or Lam Research to comply with conditions imposed by regulatory entities and, in certain circumstances, either company may refuse to carry out the Merger on the basis of those regulatory conditions. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions, or that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the Merger or imposing additional material costs on or materially limiting the revenues of the combined company following the Merger. In addition, neither we nor Lam Research can provide assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the Merger. On January 13, 2012, Novellus filed its notification under the HSR Act. On January 26, 2012, Lam Research filed its notification under the HSR Act. In addition, Lam Research and Novellus have submitted notifications with competition authorities in Germany, Korea, Taiwan, and China. On February 3, 2012, Lam Research and Novellus were granted early termination of the waiting period under the HSR Act. On February 6, 2012, the Korean antitrust authority informed Lam Research and Novellus that it had approved the Merger. On February 14, 2012, the German antitrust authority granted clearance for the Merger. On March 5, 2012, the Taiwanese antitrust authority granted clearance for the Merger.

Any delay in completing the Merger may reduce or eliminate the benefits expected to be achieved by it.

In addition to the required regulatory clearances, the Merger is subject to a number of other conditions beyond our and Lam Research’s control that may prevent, delay or otherwise materially adversely affect its completion. We cannot predict whether and when these other conditions will be satisfied. Furthermore, the requirements for obtaining the required clearances and approvals could delay the completion of the Merger for a significant period of time or prevent it from occurring. Any delay in completing the Merger could cause the combined company not to realize some or all of the synergies that we expect to achieve if the Merger is successfully completed within its expected time frame.

The Merger Agreement restricts us, without Lam Research’s consent, from taking certain actions.

The Merger Agreement restricts us, without Lam Research’s consent, from making certain acquisitions and taking other specified actions until the Merger occurs or the Merger Agreement terminates. These restrictions may prevent us from pursuing otherwise attractive business opportunities and making other changes to our business prior to consummation of the Merger or termination of the Merger Agreement. Unless the Merger Agreement is terminated earlier, we and Lam Research will each have the right to terminate the Merger Agreement if the Merger has not been completed by June 30, 2012 (which date is subject to extension under certain circumstances).

If completed, our Merger with Lam Research may not achieve the anticipated results and benefits.

We and Lam Research entered into the Merger Agreement with the expectation that the Merger would result in various benefits, including, among other things, cost savings and operating efficiencies. Achieving the anticipated benefits of the Merger is subject to a number of uncertainties, including whether our businesses and the businesses of Lam Research can be integrated in an efficient, effective and timely manner. The combined company is also subject to the risk that the expected cost savings and operational synergies may not be fully realized. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected liquidity provided by the combined company and diversion of management’s time and energy, and could have an adverse effect on the combined company’s business, financial results and prospects.

We will be subject to business uncertainties and contractual restrictions while the Merger with Lam Research is pending that could adversely affect our financial results.

Uncertainty about the effect of the Merger on our business may have an adverse effect on us. Although we intend to take steps designed to reduce any adverse effects, these uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed and for a period of time thereafter, and could cause customers, suppliers, distributors and others that deal with us to seek to change existing business relationships.

Novellus shareholders will have a reduced ownership and voting interest after the Merger.

It is currently estimated that upon the completion of the Merger, current Lam Research stockholders and our former shareholders would own approximately 59% and 41% of the common stock of Lam Research, respectively.

When the Merger closes, each of our shareholders who receives shares of Lam Research common stock will become a holder of Lam Research common stock with a percentage ownership of the combined company that will be smaller than the shareholder’s percentage ownership of us. As a result of these reduced ownership percentages our shareholders will have less voting power in the combined company than they now have with respect to us.

Uncertainties associated with the Merger may cause a loss of management personnel and other key employees, which could adversely affect the future business and operations of the combined company.

We are dependent on the experience and industry knowledge of our officers and other key employees to execute their business plans. The combined company’s success after the Merger will depend in part upon its ability to retain key management personnel and other key employees. Our current and prospective employees may experience uncertainty about their roles within the combined company following the Merger or other concerns regarding the timing and completion of the Merger or the operations of the combined company, any of which may have an adverse effect on our ability to attract or retain key management and other key personnel. Accordingly, no assurance can be given that the combined company will be able to attract or retain key management personnel and other key employees to the same extent that we have previously been able to attract or retain employees.

In the event that the Merger Agreement is terminated prior to the completion of the Merger, we could incur significant transaction costs that could materially impact our financial performance and results. Failure to complete the Merger could also negatively impact our stock price and our future business and financial results.

We will incur significant Merger transaction costs, including legal, accounting, financial advisory, filing, printing and other costs relating to the Merger. If the Merger is not completed, depending upon the reasons for not completing the Merger, including whether we have received or entered into a competing takeover proposal, we may be required to pay Lam Research a termination fee of $80.0 million or $120.0 million depending on the termination event. The payment of a termination fee could materially impair our financial performance and results.

We cannot be sure of the market value of the Merger consideration that our shareholders will receive as a result of the announced Merger with 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. The market value of the Merger consideration will vary from the closing price of Lam Research common stock on the date we announced the Merger, on the date that the joint proxy statement/prospectus was mailed to our shareholders, on the date of the special meeting of the our shareholders and on the date we complete the Merger and thereafter. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in our respective businesses, operations and prospects, and regulatory considerations. Many of these factors are beyond our control.

Any change in the market price of Lam Research common stock prior to completion of the Merger will affect the market value of the Merger consideration that our shareholders will receive upon completion of the Merger, and there will be no adjustment to the Merger consideration for changes in the market price of either shares of Lam Research common stock or shares of our common stock.

We may fail to realize all of the anticipated benefits of the Merger.

The Merger involves the combination of two companies that currently operate as independent public companies. The combined company will be required to devote significant management attention and resources to integrating our business practices and operations with Lam Research. Potential difficulties the combined company may encounter as part of the integration process include the following:

•

the inability to successfully combine our business with Lam Research in a manner that permits the combined company to achieve the full revenue and cost synergies and other benefits anticipated to result from the Merger;

•

complexities associated with managing the combined businesses, including difficulty addressing possible differences in corporate cultures and management philosophies and the challenge of integrating complex systems, technology, networks and other assets of each of the companies in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies; and

•

potential unknown liabilities and unforeseen increased expenses or delays associated with the Merger.

In addition, we have operated and, until the completion of the Merger, will continue to operate, independently. It is possible that the integration process could result in:

•

diversion of the attention of management; and

•

the disruption of, or the loss of momentum in, our ongoing business or inconsistencies in standards, controls, procedures and policies;

any of which could adversely affect our ability to maintain relationships with customers, suppliers, employees and others or our ability to achieve the anticipated benefits of the Merger, or could reduce our earnings or otherwise adversely affect the business and financial results of the combined company.

Several lawsuits have been filed against Lam Research and us challenging the Merger and an adverse ruling may prevent the Merger from being completed.

Lam Research, Novellus, and BLMS Inc., as well as current and former members of our Board of Directors, have been named as defendants in several lawsuits brought by our shareholders. Additional lawsuits may be filed against Lam Research, Novellus, the Merger subsidiary, and/or the directors of one of the foregoing companies in connection with the Merger.

One of the conditions to the closing of the Merger is that no order, injunction, decree or other legal restraint or prohibition shall be in effect that prevents completion of the Merger. Consequently, if a settlement or other resolution is not reached in the lawsuits referenced above and the plaintiffs secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting the defendants’ ability to complete the Merger, then such injunctive or other relief may prevent the Merger from becoming effective within the expected time frame or at all.

The market price of Lam Research common stock after the Merger may be affected by factors different from those currently affecting the shares of Novellus or Lam Research.

Our business and Lam Research’s business differ in important respects and, accordingly, the results of operations of the combined company and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent results of operations of Lam Research and us.

The Merger Agreement contains provisions that could discourage a potential competing acquiror of Novellus.

The Merger Agreement contains “no shop” provisions that, subject to limited exceptions, restrict our ability to solicit, initiate, or knowingly encourage and facilitate competing third-party proposals for the acquisition of our stock assets. Further, even if the Board of Directors withdraws or qualifies its recommendation with respect to the Merger, we will still be required to submit each of the Merger-related proposals to a vote at our special meeting, unless the Merger Agreement is earlier terminated. In addition, the other party generally has an opportunity to offer to modify the terms of the Merger in response to any competing acquisition proposals before the Board of Directors of the company that has received a third-party proposal may withdraw or qualify its recommendation with respect to the Merger. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, including certain terminations in connection with an alternative business combination transaction as permitted by the terms of the Merger Agreement, we may be required to pay Lam Research a termination fee of $120.0 million. In addition, if we breach the Merger Agreement’s covenant on non-solicitation and the Merger Agreement is terminated on this basis, we may be required to pay Lam Research a termination fee of $80.0 million.

These provisions could discourage a potential third-party acquiror that might have an interest in acquiring all or a significant portion of us from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the Merger. These provisions might also result in a potential third-party acquiror proposing to pay a lower price to the shareholders than it might otherwise have proposed to pay because of the added expense of the $120.0 million or $80.0 million termination fee that may become payable in certain circumstances.

If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger.

Our executive officers and directors have interests in the Merger that may be different from, or in addition to, the interests of our shareholders generally.

Our executive officers and directors have interests in the Merger that may be different from, or in addition to, the interests of our shareholders generally. Our executive officers negotiated the terms of the Merger Agreement. We have an Amended and Restated Employment Agreement with Mr. Hill that provides for severance benefits if his employment is terminated under certain circumstances following the completion of the Merger. In addition, Mr. Hill and Mr. Archer are negotiating agreements with Lam Research, which are expected to take effect following the Merger. Certain of our compensation and benefit plans and arrangements in which our executive officers participate provide for payment or accelerated vesting or distribution of certain rights or benefits upon completion of the Merger. Our executive officers and directors also have rights to indemnification and directors’ and officers’ liability insurance that will survive completion of the Merger. In addition, certain of our directors (who have not yet been identified) may be appointed as directors of Lam Research following the completion of the Merger.

Our Board of Directors was aware of these interests at the time it approved the Merger and the transactions contemplated by the Merger Agreement. These interests may cause our directors and executive officers to view the Merger proposal differently and more favorably than our shareholders may view it.

The shares of Lam Research common stock to be received by our shareholders as a result of the Merger will have different rights than the shares of our common stock.

Upon completion of the Merger, our shareholders will become Lam Research stockholders and their rights as stockholders will be governed by the Lam Research articles of incorporation and bylaws. The rights associated with our common stock are different from the rights associated with Lam Research common stock.

If the Merger does not qualify as a reorganization under Section 368(a) of the Code, our shareholders may be required to pay substantial U.S. federal income taxes.

As a condition to the completion of the Merger, each of Jones Day, tax counsel to Lam Research, and Morrison & Foerster LLP, tax counsel to us, will have delivered an opinion, dated on the closing date of the Merger, to the effect that the Merger will be treated for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code and that each of Lam Research, Novellus and Merger subsidiary will be a party to the reorganization within the meaning of Section 368(b) of the Code. These opinions will be based on certain assumptions and representations as to factual matters from Lam Research and us, as well as certain covenants and undertakings by Lam Research and us. If any of the assumptions, representations, covenants or undertakings is incorrect, incomplete, inaccurate or is violated in any material respect, the validity of the conclusions reached by counsel in their opinions could be jeopardized. Additionally, an opinion of counsel represents counsel’s best legal judgment but is not binding on the IRS or any court, so there can be no certainty that the IRS will not challenge the conclusions reflected in the opinions or that a court will not sustain such a challenge. If the IRS or a court determines that the Merger should not be treated as a “reorganization,” a holder of our common stock would recognize taxable gain or loss upon the exchange of our common stock for Lam Research common stock pursuant to the Merger.

Risks Related to Our Business and Industry

The semiconductor industry is highly cyclical and difficult to predict.

Our Semiconductor Group depends predominantly on the capital expenditures of semiconductor manufacturers, which in turn depend on current and anticipated market demand for integrated circuits and the products that use them. Our business has historically been cyclical due to changes in our customers’ manufacturing capacity requirements and capital spending, which are affected by factors such as capacity utilization, consumer demand for products, inventory levels, and our customers’ access to capital. We believe that macroeconomic factors, including those associated with catastrophic events that may occur from time to time in key regions, such as the March 2011 earthquake and tsunami in Japan, may affect some of our customers’ levels of investment in capital equipment in the short term. Our business has experienced periodic downturns that reduced the demand for semiconductor processing equipment. The timing, length, and severity of these business cycles are difficult to predict. The semiconductor industry and our operations are subject to fixed costs that are difficult to reduce in the short term. During periods of reduced and declining demand, we must be able to quickly and effectively align our variable costs with prevailing market conditions, and at the same time motivate and retain key employees, including our management team. Downturns in the industry have, at times, resulted in higher than optimal inventory levels and lower than optimal gross margins due to a decrease in demand and lower production volumes during these periods. Because of this volatility, we cannot provide any assurance that we will not be required to make inventory valuation adjustments in future periods. Industry downturns have historically been followed by periods of rapid growth. During periods of rapid growth, we must be able to acquire or develop sufficient manufacturing capacity and hire and assimilate a sufficient number of qualified people to meet customer demand. Net orders, net sales, and results of operations may be adversely affected if we fail to respond to changing industry and economic conditions in a timely and effective manner.

We experienced a decline in net orders during the second and third quarters of 2011, followed by increases in the fourth quarter of 2011 and the first quarter of 2012. We could ~~continue to~~ experience declines in net orders in the future, and, if so, our net sales and operating results could be adversely affected. Over the past several years, we have implemented reductions in workforce, consolidations of our manufacturing operations, and other cost reduction actions to align our business with then current industry and economic conditions. Future restructurings or other cost reduction actions may be required, which may have an adverse impact on our results of operations and our ability to capitalize on opportunities in a market recovery.

Our operating results and stock price are unpredictable.

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

•

economic conditions in the electronics and semiconductor industry generally, and the semiconductor equipment industry specifically;

•

the financial condition of our customers, their levels of investment in capital equipment, and their ability to purchase our products;

•

timing and cancellation of customer orders and shipments, including deferrals of orders of our existing products due to macroeconomic factors, catastrophic events and new product announcements by us or our competitors;

•

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

•

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

•

competitive pricing pressures;

• the effect of revenue recognized upon acceptance with little or no associated ~~costs~~cost;

32• unpredictability of demand for, and variability in the mix of, our products in our forecast, which can cause unexpected inventory adjustments in a particular period;

~~Table~~• unexpected changes in our operating results, which may result in increases to our compensation expense as we revise our estimates of ~~Contents~~the probability that performance-based awards will be obtained;

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

•

variability in manufacturing yields;

•

fluctuations in warranty costs;

•

foreign currency exchange rate fluctuations;

• emergence of new industry standards; and

• ability to fund capital requirements, which, in the future, could include debt or equity financing that could be dilutive to the existing holders of our common stock~~; and~~.

•In ~~unexpected~~addition, ~~changes~~the inmarket ~~our~~price ~~operating~~at ~~results,~~ which ~~may~~our ~~result~~2.625% inSenior ~~increases~~Convertible toNotes ~~our~~due ~~compensation~~May 15, ~~expense~~2041 as(Senior Convertible weNotes) ~~revise~~and our ~~estimates~~common ofstock ~~the~~trade ~~probability~~may ~~that~~be ~~performance-based~~influenced ~~awards~~by ~~will~~many befactors, ~~obtained.~~including:

In addition, the market price at which our Senior Convertible Notes and our common stock trade may be influenced by many factors, including:

•

our operating and financial performance and prospects;

•

the depth and liquidity of the market for our Senior Convertible Notes and our common stock which can affect, among other things, the volatility of their market prices;

•

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

•

the level of analyst research and media coverage of our common stock including changes in earnings estimates or buy/sell recommendations by analysts.

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

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. They may also have broader product lines, the ability to reduce prices through product bundling, greater experience with high-volume manufacturing, greater customer service capabilities, or larger and more established sales organizations and customer bases. To maintain or capture a position in the market, we must develop new and enhanced systems and introduce them at competitive prices on a timely basis, while managing our R&D, product, and warranty costs. Semiconductor manufacturers incur substantial costs to install and integrate capital equipment into their production lines. This increases the likelihood of continuing relationships with chosen equipment vendors, including our competitors, and the difficulty of penetrating new customer accounts. In addition, sales of our systems depend, in 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.

~~Rapid~~38 ~~technological change in the semiconductor industry requires substantial research and development expenditures and responsiveness to customer needs.~~

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

Rapid technological change in the semiconductor industry requires substantial R&D expenditures and responsiveness to customer needs.

We operate in intensely competitive industries that experience rapid technological developments, changes in industry standards, changes in customer requirements, and frequent new product introductions and improvements. If we are unable to respond quickly and successfully to these developments, we may lose our competitive position and our products or technologies may become uncompetitive or obsolete. We devote a significant portion of our personnel and financial resources to R&D programs and we seek to maintain close relationships with our customers in order to remain responsive to their product and manufacturing process needs. Our success depends, in part, on our ability to accurately predict evolving industry standards, develop innovative solutions and improve existing technologies, win market acceptance of our new and advanced technologies, and manufacture our products in a timely and cost-effective manner. Our products and processes must address changing customer needs in a range of materials, including copper and aluminum, at ever-smaller line widths and feature sizes, while maintaining our focus on manufacturing efficiency and product reliability. We must manage the risks associated with the cost, technical complexity, and timing of industry changes, including the transition from 300 mm to 450 mm wafers, and the resulting effect on demand for our products, as well as manufacturing equipment and services in general. If we do not continue to gain market acceptance for our new technologies and products, develop and introduce improvements in a timely manner in response to changing market conditions and customer requirements, or remain focused on R&D efforts that will translate into greater revenues, our business could be adversely affected.

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

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

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, net sales, and our ability to access cash from these operations, including, but not limited to:

• global or regional economic downturns and uncertain economic and industry growth rates in various countries;

•

adverse conditions in credit markets;

•

variations among, and changes in, local, regional, national, or international laws and regulations including the interpretation and application of such laws and regulations;

•

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;

•

foreign currency exchange controls, unfavorable foreign exchange rates and other limitations on our ability to repatriate earnings, including compliance with certain foreign regulations;

•

fluctuating raw material, commodity, and energy costs;

•

the need to regularly assess the size, capacity, and location of our global infrastructure and adjust accordingly;

•

inefficient and limited infrastructure and disruptions, such as large-scale outages or interruptions of service from utilities, transportation, or telecommunications providers and supply chain interruptions;

•

the need for an effective business continuity plan should disaster or other events occur that could disrupt our business operations;

•

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

• tariffs, interpretation and application of import and export licenses, and other trade and market barriers including potential difficulties associated with entry into new countries;

• challenges in staffing and managing foreign operations that have different cultures, customs, business practices, and work expectations, and providing prompt and effective field and technical support to our customers outside of the United States;

•

hiring and integration of new workers, including those in countries such as Vietnam;

•

variations in our ability to develop relationships with local customers, suppliers, and governments;

•

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;

•

positions taken by governmental agencies regarding possible national commercial and/or security issues;

•

customer or government supported efforts to increase or promote operations in a particular country such as Korea or China and political and social attitudes, laws, rules, regulations, and policies within countries that favor domestic companies over non-domestic companies;

•

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

• political instability, natural disasters, and acts of war or terrorism as well as the related effects on our operations, suppliers, and the overall value chains of the industries in which we participate.

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

There can be no assurance that any of these factors will not have a material adverse effect on our business, financial condition, or results of operations. In addition, each region in the global equipment market exhibits unique market characteristics that can cause capital equipment investment patterns to vary significantly from period to period. Many of these factors are present in Asia. We derive a substantial portion of our revenues from customers in Asia, and we believe that Asia will continue to present large potential markets for our products and an opportunity for growth over the long term, potentially at lower levels of profitability and margins for certain products than have historically been achieved in other regions. Any negative economic developments, legal or regulatory changes, terrorism or geopolitical instability in Asia, including the possible outbreak of hostilities or health-related epidemics involving Singapore, China, Taiwan, Korea, or Japan could result in the cancellation or delay by certain significant customers of orders for our products, which could adversely affect our business, financial condition, or results of operations. Our continuing expansion in Asia renders us increasingly vulnerable to these risks.

The threat of terrorism targeted at the regions of the world in which we do business increases the uncertainty in our markets. Any act of terrorism which affects the economy or the semiconductor industry could adversely affect our business. Increased international political instability in various parts of the world, disruption in air transportation, and further enhanced security measures as a result of terrorist attacks may hinder our ability to do business and may increase our costs of operations. Such continuing instability could cause us to incur increased costs in transportation, make such transportation unreliable, increase our insurance costs, and cause international currency markets to fluctuate. This instability could have the same effects on our suppliers and their ability to deliver their products timely. If international political instability continues or increases, our business and results of operations could be harmed. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

Our global operations require us to comply with a number of United States and international regulations. In particular, we must comply with the Foreign Corrupt Practices Act (FCPA), which prohibits uscompanies from providing anything of value to a foreign official or agent for the purposes of influencing any act or decision of these foreign officials in their official capacity, for instance, to obtain new business or an unfair advantage or to retain ongoing business. Failure ofto ~~our~~comply ~~compliance~~ with the FCPA could potentially result in penalties or restrictions on our ability to conduct business in certain global jurisdictions. These penalties and restrictions could adversely affect our results of operations or financial condition.

We40 ~~are exposed to risks associated with outsourcing activities, which could result in supply shortages that could affect our ability to meet customer demands.~~

We are exposed to risks associated with outsourcing activities and cloud computing, which could result in supply shortages or a reduction of our control over the performance of these outsourced services that may affect our ability to meet customer demands.

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

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

We also outsource certain services to service providers. Some of these outsourced service providers employ hosted software applications known as “cloud computing” technology. Cloud computing is an information technology hosting and delivery system in which data is stored outside of the user’s physical infrastructure and is delivered to and used by the user as an internet based application service. These providers’ cloud computing systems may be susceptible to intentional cyber attacks that are outside of our control. If we do not effectively manage and communicate our strategies with our outsourced service providers, or if they do not perform as required or do not protect our data from cyber-attack related incidences, we may experience operational difficulties which may adversely affect our business, financial condition, and results of operations.

We face risks related to the disruption of our primary manufacturing facilities.

Our business segments each have one primary manufacturing facility. Our operations are subject to disruption for a variety of reasons including, but not limited to, natural disasters, work stoppages, facility malfunctions, and terrorism. Such disruption at one or both of these facilities may cause delays in shipments of products to our customers which may result in cancellation of orders or loss of customers and could adversely affect our business.

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

Volatility in the financial markets and the weakened global economy, together with the ~~recent~~ downgrade of the United States credit rating in 2011 and the ongoing European debt crisis, have contributed to the current uncertain economic climate. Because our business is ultimately driven by global demand for electronic devices, the current economic climate could cause our customers to delay or discontinue spending on our products. Concerns regarding the availability of credit could make it more difficult for our customers to raise capital, whether debt or equity, to finance their purchases of capital equipment, including the products we sell. Furthermore, our customers may face liquidity issues, which could result in cancellations of equipment orders and increased payment delays or defaults. Reduced demand for our products and the general unavailability of financing for our customers could adversely affect our operating results. While our operating results generally improved during 2009 and 2010 along with the improvement in the economy, there can be no assurance that the economy and our operating results will stabilize or improve, that the economy will not experience another significant downturn, or that our operating results, financial condition, and business will not be adversely affected.

Fluctuations and uncertainties in the economy make it challenging for us to accurately forecast and plan future business activities and to identify risks that may affect our business, financial condition, and operating results. We cannot predict the timing, strength, or duration of any recovery, any future economic slowdowns, or the impact of economic conditions on the worldwide semiconductor industry. If the economy or the markets in which we operate do not improve or worsen from present levels, we could be required to record additional charges related to restructuring costs, which may have an adverse effect on our business, financial condition, and results of operations. The length of our sales cycle makes our results of operations particularly sensitive to changes in macroeconomic conditions. While past downturns in our business have been followed by periods of rapid growth, this correlation may not occur in the future.

A41 continued decline in the condition of the global financial markets could also adversely affect the market values or liquidity of our investments. Our investment portfolio includes corporate and government securities, auction rate securities, money market funds, and other types of debt securities. A decline in the capital and financial markets could adversely affect their market values and liquidity. For example, as of September 24, 2011, we held $53.5 million of auction-rate securities, net of $7.0 million in temporary impairment. Our auction rate securities are tax-exempt, with underlying assets that are either student loans substantially backed by the federal government or closed-end municipal bond funds. Due to auction failures for these securities, we will not have access to these funds until (i) future auctions are successful, (ii) the securities are called by the issuer, (iii) we sell the securities in a secondary market, or (iv) the underlying notes mature and are repaid. Currently, there are no active secondary markets for these securities. If current market conditions do not improve, additional temporary and other-than-temporary impairment charges could occur in future periods which would reduce the value of our investments and could negatively affect our results of operations.

Our investment portfolio includes corporate and government securities, auction-rate securities, money market funds, and other types of debt securities. A decline in the capital and financial markets could adversely affect their market values and liquidity. For example, as of March 31, 2012, we held $41.5 million of auction-rate securities, net of $5.9 million in temporary impairment. Our auction-rate securities are tax-exempt, with underlying assets that are either student loans substantially backed by the federal government or closed-end municipal bond funds. Due to auction failures for these securities, we will not have access to these funds until (i) future auctions are successful, (ii) the securities are called by the issuer, (iii) we sell the securities in a secondary market, or (iv) the underlying notes mature and are repaid. Currently, there are no active secondary markets for these securities. If current market conditions do not improve, additional temporary and other-than-temporary impairment charges could occur in future periods which would reduce the value of our investments and could negatively affect our results of operations.

Our financial results have fallen short of anticipated levels in the past and may fall short in the future.

~~Our~~We ~~management~~ typically ~~provides~~provide quarterly financial forecasts. These forecasts, when made, are based on estimates believed to be reasonable at the time. However, actual results may vary and have varied in the past from forecasted results for a variety of reasons, including, but not limited to, unanticipated manufacturing costs, changes in the economy or mix of products sold, unanticipated write-downs of inventory, a higher than anticipated effective tax rate, and unexpected changes in the volume or timing of customer orders and product acceptances. Our lengthy sales cycles make 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. Our revenues and operating results for any given quarter depend on us shipping orders as scheduled during that quarter, receiving customer acceptances during the quarter offor previously shipped products, and obtaining new orders for products to be shipped in that same quarter. We believe that macroeconomic factors may affect some of our customers’ levels of investment in capital equipment in the short term. 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 for any particular quarter. 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 investors, 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 revise our forecasts, the market price of our ~~notes~~Senior Convertible Notes and common stock could be affected.

Changes in tax rates, tax assets, and tax liabilities have negatively affected our financial results in the past and could negatively affect our future results.

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

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

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

•

changes in the regulatory environment, including changes to tax laws;

•

changes in accounting and tax standards or practices;

•

overall business conditions in the equipment industry;

•

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

•

our operating results before taxes.

Strategic alliances may have negative effects on our business.

Increasingly, semiconductor companies are entering into strategic alliances with one another to expedite the development of processes and other manufacturing technologies. Often, one of the outcomes of such an alliance is the definition of a particular tool set for a certain function or a series of process steps that use a specific set of manufacturing equipment. While this could work to our advantage, if our equipment becomes the basis for the function or process, it could work to our disadvantage if a competitor’s tool or equipment becomes the standard equipment for such function or process. Because semiconductor manufacturers must make a substantial investment to qualify and integrate wafer processing equipment into a semiconductor production line, we believe that once a semiconductor manufacturer selects a particular supplier’s processing equipment, the manufacturer generally relies upon that equipment for that specific production line application for an extended period of time. Accordingly, we expect it to be more difficult to sell to a given customer if that customer is currently using a competitor’s equipment. Additionally, even if our equipment was previously used by a customer, that equipment may be displaced in current and future applications by the tools standardized for use by the alliance.

Similarly, our customers may team with, or follow the lead of, educational or research institutions that establish processes for accomplishing various tasks or manufacturing steps. If those institutions utilize a competitor’s equipment when they establish those processes, it is likely that customers will tend to use the same equipment in setting up their own manufacturing lines. These actions could adversely affect our market share and financial results.

We face risks related to a highly concentrated customer base.

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

Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business.

Our ability to (i) make scheduled principal payments on, (ii) pay interest on, (iii) make cash payments upon conversion of, or (iv) refinance our indebtedness, depends on our future performance, which is subject to economic, financial, ~~competitive,~~ and ~~other~~competitive factors ~~beyond our control~~. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

We may not have the ability to raise the funds necessary to repurchase our Senior Convertible Notes upon the occurrence of a Fundamental Change or to pay the cash portion of the settlement amounts due when notes are due to be converted.

Holders of our Senior Convertible Notes have the right to require us to repurchase the notes upon the occurrence of a Fundamental Change at 100% of their principal amount, plus accrued and unpaid interest. In addition, upon any conversion of the Senior Convertible Notes, we will be required to make cash payments in respect of the notes being converted.

However, we may not have enough available cash or be able to obtain financing at the time we are required to pay the Fundamental Change repurchase price for a note or the cash amount due to a converting holder. In addition, our ability to repurchase the Senior Convertible Notes or to pay cash upon conversions of the notes may be limited by law, regulatory authority or by the agreements governing any future indebtedness that we may incur.

Our failure to repurchase our Senior Convertible Notes at a time when the repurchase is required by the indenture or to pay any cash amount payable upon conversion of a note as required by the indenture will constitute a default under the indenture. Our existing credit facility includes provisions which would cause our payment of the Fundamental Change repurchase price to constitute an event of default ~~thereunder~~there under. Accordingly, we would not be able to make such payment without obtaining an amendment to, or repaying outstanding amounts under, such facility.

The conditional conversion features of our Senior Convertible Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion features of our Senior Convertible Notes are triggered, holders will be entitled to convert the notes at any time during specified periods at their option. If one or more holders elect to convert their Senior Convertible Notes, we would be required to settle at least a portion of the applicable settlement amount through the payment of cash, which could adversely affect our liquidity. The portion settled in stock would have a dilutive impact on earnings per share. In addition, even if holders do not elect to convert their Senior Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

In accordance with the indenture governing our Senior Convertible Notes, on March 30, 2012 we notified the registered holders of our Senior Convertible Notes of the opening of the conversion window and the conversion rights in connection with the proposed merger with Lam Research Corporation. Accordingly, the carrying amount of Senior Convertible Notes has been reclassified from noncurrent to current liabilities in our balance sheet. The excess of the amount of cash payable, if converted, over the carrying amount of the notes has been reclassified from permanent to temporary equity. Should the proposed merger not be completed or when the conversion period closes, 35 days after the completion of the proposed merger, all notes not converted will be reclassified back to noncurrent liabilities and the temporary equity will be reclassified back to permanent equity. As of the issuance date of this financial statement, no holder has exercised the option to convert. See additional disclosures relating to our Senior Convertible Notes in Note 3 to the Condensed Consolidated Financial Statements.

To the extent we deliver shares of our common stock upon the conversion of a Senior Convertible Note, the issuance of shares of our common stock upon conversion of the Senior Convertible Note will dilute the ownership interest of the holders of our common stock at the time of such conversion, including holders who had previously converted their Senior Convertible Notes.

The conversion of some or all of the Senior Convertible Notes will dilute the ownership interests of existing shareholders to the extent that such Senior Convertible Notes are convertible into shares of our common stock. Any sales in the public market of any common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Senior Convertible Notes may encourage short selling by market participants because the conversion of the Senior Convertible Notes could be used to satisfy short positions, or anticipated conversion of the Senior Convertible Notes into shares of our common stock could depress the price of our common stock.

Certain provisions in the indenture governing the Senior Convertible Notes could delay or prevent an acquisition of us by a third party.

Certain provisions in the Senior Convertible Notes and the indenture could make it more difficult or more expensive for a third party to acquire us. For example, if a takeover would constitute a Fundamental Change, holders of the Senior Convertible Notes will have the right to require us to repurchase their Senior Convertible Notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their Senior Convertible Notes in connection with such takeover. In either case, and in other cases, our obligations under the Senior Convertible Notes and the indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management.

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. Although ~~Novellus~~we ~~does~~do not consider its business materially dependent upon any one single patent, ~~the~~ our rights ~~of Novellus~~ and the products made and sold under ~~its~~our patents, taken as a whole, are a significant element of ~~Novellus’~~our business. ~~Novellus’~~Our patents have varying remaining useful lives as determined by the applicable patent statute.

3844

Adverse outcomes in current or future legal disputes regarding patent and intellectual property rights could result in the loss of our intellectual property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties on terms that may not be reasonable or favorable to us, prevent us from manufacturing or selling our products, or compel us to redesign our products to avoid incorporating third parties’ intellectual property. As a result, our product offerings may be delayed, and we may be unable to meet customers’ requirements in a timely manner. Regardless of the merit of any legal disputes, we have incurred 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 that we enter into 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, we have generally entered into confidentiality or invention assignment agreements with our employees, as well as with consultants and other parties. If these agreements prove inadequate or are breached, our remedies may not be sufficient to cover our losses.

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

Intellectual Property Litigation

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

Other Litigation

In addition to the litigation risks and proceedings mentioned above or elsewhere in this filing, we are currently involved in 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 effect on our business, financial condition, and operating results.

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

We review our long-lived assets, including goodwill and other intangible assets, for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Negative industry or economic trends, including reduced market prices of our common stock, reduced estimates of future cash flows, disruptions to our business, slower growth rates, or lack of growth in either of our business segments, could lead to additional impairment charges of our long-lived assets, including goodwill and other intangible assets. If, in any period, our stock price decreases to the point where our fair value, as determined by our market capitalization, is less than the book value of our assets, this could also indicate a potential impairment and we may be required to record an impairment charge in that period, which would adversely affect our results of operations.

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

3945

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

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

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

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

We are exposed to various risks related to the regulatory environment.

We are subject to various risks related to (i) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by legislative bodies and/or regulatory agencies in the countries in which we operate, (ii) disagreements or disputes between national or regional regulatory agencies related to international trade, and (iii) the interpretation and application of laws, rules, and regulations. As a public company with global operations, we are subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, including those related to financial and other disclosures, corporate governance, privacy, and anti-corruption, such as the FCPA, and other local laws prohibiting corrupt payments to governmental officials, and anti-competition regulations, among others. Changes in laws, regulations, and standards may create uncertainty regarding compliance matters. Financial reform legislation and the regulations enacted under such legislation has added costs to our business by requiring advisory votes on executive compensation and severance packages~~, and has increased access to, and increased the number of proposals in our proxy statement~~. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with all evolving standards. Efforts to comply with new and changing regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If we are found by a court or regulatory agency not to be in compliance with the laws and regulations, our business, financial condition, and results of operations could be adversely affected.

We are subject to increasingly strict environmental regulations.

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

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

4046

New legal provisions are intended to provide transparency and accountability concerning the supply of minerals including those related to materials and rare earth elements coming from the conflict zones of the Democratic Republic of Congo and adjoining countries. The Dodd-Frank Act includes provisions requiring the SEC to adopt regulations governing the disclosure, among other things, of the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries and of the measures taken by such companies to exercise due diligence with respect to the source and chain of custody of such minerals. While the SEC has not yet adopted final regulations on this issue, the public reaction to these disclosures in the future could affect the sourcing and availability of minerals used in the manufacture of semiconductor devices. As a result, there may only be a limited pool of suppliers who provide conflict free metals, and we cannot be certain that we will be able to obtain products in sufficient quantities or at competitive prices. Because our supply chain is complex, we may face challenges from our customers and other stakeholders if we are unable to sufficiently verify the provenance of metals used in our products.

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

From time to time, in the normal course of business, we indemnify third parties with whom we enter into contractual relationships, including customers and lessors, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third party claims that our products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. We have been, and in the future may be, compelled to enter into or accrue for probable settlements of alleged indemnification obligations or become subject to potential liability arising from our customers’ involvements in legal disputes. It is difficult to determine the maximum potential amount of liability under any indemnification obligation, 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 could be materially adversely affected if we expend significant amounts in defending or settling any purported claims, regardless of their merit or outcomes.

We are exposed to risks associated with our diversification strategy.

Our core business and expertise have historically been in the development, manufacture, sale, and support of deposition technologies and wafer surface preparation. Our experience in the high-precision machine manufacturing equipment market serviced by our IAG business is limited compared with our knowledge and expertise in the semiconductor equipment industry, which is serviced by our ~~Semiconductor~~ Semiconductor Group. We cannot provide 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 the markets serviced by our IAG business.

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

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

•

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

•

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

•

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

•

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

•

difficulties in managing geographically dispersed operations;

•

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

•

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

•

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

•

diversion of management’s attention from normal daily operations of the business;

•

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

•

the incurrence of unforeseen obligations or liabilities.

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

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

ITEM 2:

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchase of Company Securities

In February 2004, our Board of Directors approved a stock repurchase plan that authorized the repurchase of up to $500.0 million of our outstanding common stock through February 2007. In September 2004, our Board of Directors authorized an additional $1.0 billion for repurchase of our outstanding common stock through September 2009. In October 2007, our Board of Directors authorized an additional $1.0 billion for repurchase of our outstanding common stock through October 2011. In connection with the issuance of ~~the~~$700.0 million of 2.625% Senior Convertible Notes due May 15, 2041 (Senior Convertible Notes) in May 2011, the Board increased our share repurchase authorization by $700.0 million. In October 2011, the remaining authorization as of September 24, 2011 of $264.2 million expired and our Board of Directors authorized $500.0 million for repurchases through December 2014.

~~The~~We ~~following~~did isnot arepurchase ~~summary~~any of our common stock ~~repurchases~~outstanding ~~for~~during the first quarter ~~ended~~of ~~September~~2012. There was $500.0 million available for repurchase under our board authorized program as of March 2431, ~~2011~~2012. The Merger Agreement prohibits us from redeeming, purchasing, or otherwise acquiring our own stock. As a result, we will not repurchase additional shares of our common stock pursuant to our board-authorized ~~stock~~ repurchase program, ~~which~~while ~~were~~the ~~affected~~Merger ~~through~~remains ~~open market transactions~~pending.

Period	Total Number ofShares Purchased		Average PricePaid PerShare		Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms		ApproximateDollar Value ofShares thatMay yet be PurchasedUnder the Plans orPrograms
June 26, 2011 through July 30, 2011		2,032,090	$	31.78		2,032,090	$	350.2 million
July 31, 2011 through August 27, 2011		1,547,394	$	27.66		1,547,394	$	307.4 million
August 28, 2011 through September 24, 2011		1,580,900	$	27.36		1,580,900	$	264.2 million
Total		5,160,384	$	29.19		5,160,384	$	264.2 million

For the three months ended March 31, 2012 we withheld 30,505 shares, with a value of $1.4 million, through net share settlements upon the vesting of restricted stock awards. For the majority of restricted stock awards granted, the number of shares issued on the date the restricted stock awards vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The price paid per share withheld is the closing price on NASDAQ on the date of vesting. These withheld shares are not included as common stock repurchases under our authorized stock repurchase program.

In addition to shares repurchased above, we withheld 12,330 shares, with a value of $0.4 million, through net share settlements for the three months ended September 24, 2011 upon the vesting of restricted stock awards. For the majority of restricted stock awards granted, the number of shares issued on the date the restricted stock awards vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The price paid per share withheld is the closing price on NASDAQ on the date of withholding. These withheld shares are not included as common stock repurchases under our authorized stock repurchase program.

ITEM 6:

EXHIBITS

(a) Exhibits

31.1		Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated ~~November~~May 27, ~~2011~~2012 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 John D. Hertz, Vice President and Chief Financial Officer of Novellus Systems, Inc. dated ~~November~~May 27, ~~2011~~2012 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~~May 27, ~~2011~~2012 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 John D. Hertz, Vice President and Chief Financial Officer of Novellus Systems, Inc. dated ~~November~~May 27, ~~2011~~2012 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Instance Document
101.SCH		Schema Document
101.CAL		Calculation Linkbase Document
101.DEF		Definition Linkbase Document
101.LAB		Labels Linkbase Document
101.PRE		Presentation Linkbase Document

4348

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/ John D. Hertz
John D. Hertz
Vice President and Chief Financial Officer
(Principal Financial Officer)
November 2, 2011
May 7, 2012

4449

EXHIBIT INDEX

31.1		Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated ~~November~~May 27, ~~2011~~2012 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 John D. Hertz, Vice President and Chief Financial Officer of Novellus Systems, Inc. dated ~~November~~May 27, ~~2011~~2012 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~~May 27, ~~2011~~2012 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 John D. Hertz, Vice President and Chief Financial Officer of Novellus Systems, Inc. dated ~~November~~May 27, ~~2011~~2012 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Instance Document
101.SCH		Schema Document
101.CAL		Calculation Linkbase Document
101.DEF		Definition Linkbase Document
101.LAB		Labels Linkbase Document
101.PRE		Presentation Linkbase Document

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