UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

(Amendment No.     )

Filed by the Registrant x

Filed by a Party other than the Registrant ¨

Check the appropriate box:

Novellus Systems, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

NOVELLUS SYSTEMS, INC.

4000 North First Street

San Jose, California 95134

April 8, 2010

To the Shareholders of Novellus Systems, Inc.:

You are cordially invited to attend the annual meeting of shareholders (the “Annual Meeting”) of Novellus Systems, Inc. (the “Company”) on May 11, 2010 at 8:00 a.m., Pacific Time. The Annual Meeting will be held at the Company’s principal executive offices, 4000 North First Street, San Jose, California 95134.

A description of the business to be conducted at the Annual Meeting is set forth in the attached Notice of Annual Meeting and Proxy Statement.

Whether or not you plan to attend the Annual Meeting, please submit your proxy as soon as possible so that your shares can be voted at the Annual Meeting in accordance with your instructions. You may submit your proxy (i) over the Internet, (ii) by telephone, or (iii) by completing, signing, dating and returning the enclosed Proxy Card promptly in the accompanying envelope. Your proxy is revocable in accordance with the procedures set forth in the Proxy Statement. If you attend the Annual Meeting and wish to change your proxy vote, you may do so simply by voting in person at the Annual Meeting.

NOVELLUS SYSTEMS, INC.

4000 North First Street

San Jose, California 95134

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

to be held May 11, 2010

To the Shareholders of Novellus Systems, Inc.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (“Annual Meeting”) of Novellus Systems, Inc. (the “Company”) will be held on May 11, 2010 at 8:00 a.m., Pacific Time, at the Company’s principal executive offices, 4000 North First Street, San Jose, California 95134, for the following purposes:

The foregoing items of business, including the nominees for directors, are more fully described in the Proxy Statement which is attached hereto and made a part hereof. The Annual Meeting will be open to shareholders of record, proxy holders, and others by invitation only. Beneficial owners of shares held by a broker or nominee must present proof of such ownership to attend the Annual Meeting.

The Board of Directors has fixed the close of business on March 25, 2010 as the record date for determining the shareholders entitled to receive notice of and to vote at, the Annual Meeting and any adjournment or postponement thereof.

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on May 11, 2010.

The proxy statement, annual report to shareholders and proxy card are available at www.proxyvote.com.

San Jose, California

April 8, 2010

NOVELLUS SYSTEMS, INC.

4000 North First Street

San Jose, California 95134

PROXY STATEMENT

Annual Meeting of Shareholders

May 11, 2010

General Information

The enclosed proxy is solicited on behalf of the Board of Directors of Novellus Systems, Inc., a California corporation (the “Company”), for use at the Annual Meeting of Shareholders to be held on May 11, 2010 at 8:00 a.m., Pacific Time (the “Annual Meeting”), and at any adjournment or postponement thereof, for the purpose of considering and acting upon the matters set forth herein. The Annual Meeting will be held at the Company’s principal executive offices, 4000 North First Street, San Jose, California 95134.

This Proxy Statement and the form of proxy are first being mailed on or about April 8, 2010 to shareholders entitled to vote at the Annual Meeting.

Record Date, Share Ownership and Quorum

Shareholders of record at the close of business on March 25, 2010 (the “Record Date”) are entitled to receive notice of, to attend, and to vote at the Annual Meeting. At the Record Date, 95,925,684 shares of the Company’s common stock (the “Common Stock”) were issued and outstanding. The presence in person or by proxy of a majority of these shares of Common Stock will constitute a quorum for the transaction of business at the Annual Meeting.

Voting and Solicitation

Each share of Common Stock outstanding on the Record Date is entitled to one vote. Under the Company’s cumulative voting provisions, each shareholder may cast his or her votes for a single nominee for director, or distribute among up to eight nominees a number of votes equal to eight multiplied by the number of shares held by that shareholder. However, cumulative voting will not be available unless, at the Annual Meeting, at least one shareholder has given written notice to the chairman of the Annual Meeting of his or her intent to cumulate votes prior to the voting. Cumulative voting will apply only to those candidates whose names have been placed in nomination prior to the voting.

If you are not planning to attend the Annual Meeting and vote your shares in person, your shares of Common Stock cannot be voted until either (i) a signed Proxy Card is returned to the Company, or (ii) voting instructions are submitted by accessing the Internet website at www.proxyvote.com as described on the enclosed Proxy Card and following the instructions provided or by calling (800) 690-6903 (the designated telephone number included on the enclosed Proxy Card) and following the recorded instructions. Specific instructions for shareholders of record who wish to use the Internet or telephone voting procedures are set forth on the enclosed Proxy Card. The Internet and telephone voting procedures are designed to authenticate shareholders’ identities, to allow shareholders to provide voting instructions, and to confirm that instructions have been recorded properly.

The enclosed Proxy Card also serves as a voting instruction to the trustee of the Novellus Systems, Inc. Retirement Plan for shares of Common Stock held in the Novellus Systems, Inc. Retirement Plan as of the

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Record Date, provided that instructions are furnished over the Internet or by telephone by 5:00 p.m. Eastern Time on May 7, 2010, or that the Proxy Card is signed, returned, and received by 5:00 p.m. Eastern Time on May 7, 2010. If instructions are not received over the Internet or by telephone by 5:00 p.m. Eastern Time on May 7, 2010, or if the signed Proxy Card is not returned and received by that date and time, the shares of Common Stock in the Novellus Systems, Inc. Retirement Plan will be voted by the trustee in the same proportions as the shares for which the trustee receives timely voting instructions.

The cost of managing the proxy process will be borne by the Company. The Company has retained the services of Georgeson, Inc. (“Georgeson”) to assist in the solicitation of proxies for a fee not to exceed $9,500 plus any customary out-of-pocket expenses and service fees. In addition, the Company will reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in forwarding proxy materials to those beneficial owners. Certain of the Company’s directors, officers and regular employees may also, without additional compensation, solicit proxies personally or by email, telephone, fax or personal solicitation.

The Inspector of Elections will tabulate votes cast by proxy or in person at the Annual Meeting with the assistance of Broadridge Financial Solutions, Inc. (“Broadridge”). The Inspector of Elections will also determine whether or not a quorum is present. Except with respect to the election of directors at the Annual Meeting whereby directors are elected by a plurality, the affirmative vote of a majority of shares of Common Stock represented and voting at a duly held Annual Meeting at which a quorum is present (which shares of Common Stock voting affirmatively also constitute at least a majority of the required quorum) is required under California law for approval of the proposals presented to shareholders at this Annual Meeting. In general, California law provides that a quorum consists of a majority of the shares of Common Stock entitled to vote, either in person or represented by proxy. With respect to any matter submitted to a vote of the shareholders, the Inspector of Elections will treat abstentions as shares that are present and entitled to vote for purposes of determining the presence of a quorum but as not voting for purposes of determining the approval of that matter. Any proxy which is returned using the form of proxy enclosed and which is not marked as to any one of the following items will be voted FOR the election of directors and FOR ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2010, and as the proxy holders deem advisable on other matters that may properly come before the Annual Meeting, with respect in each case to the particular item or items not marked. Management does not know of any matters to be presented at the Annual Meeting other than those set forth in this Proxy Statement and in the Notice accompanying this Proxy Statement, nor have we received notice of any matter by the deadline prescribed by SEC Rule 14a-4(c). Without limiting our ability to apply the advance notice provisions in our Amended and Restated Bylaws (the “Bylaws”) with respect to the procedures which must be followed for a matter to be properly presented at an annual meeting, if other matters should properly come before the meeting, the proxy holders will vote on such matters in accordance with their best judgment.

A “broker non-vote” occurs when a broker lacks discretionary voting power to vote on a “non-routine” proposal and a beneficial owner fails to give the broker voting instructions on that matter. As the result of a recent rule change, the election of directors is no longer considered a “routine” matter. Beneficial owners who hold their shares through a stock brokerage account will have to give voting instructions to their brokers in order for a broker to vote on the election of directors. If you are a beneficial owner, failure to provide instructions to your broker will result in your shares not being voted in connection with the election of directors. The ratification of the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal year 2010 is currently considered a “routine” matter, and a broker has the discretionary voting power to vote on this matter without any instructions from the beneficial owner. Broker non-votes are counted for purposes of determining a quorum, but will have no effect on the election of directors or the ratification of the selection of Ernst & Young LLP.

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Revocability of Proxies

A shareholder may revoke any proxy or voting instructions given pursuant to this solicitation at any time before its use by:

Attendance at the Annual Meeting in and of itself does not revoke a prior proxy.

Householding of Annual Meeting Materials

Some brokers and other nominee record holders may participate in the practice of “householding” proxy statements and annual reports. This means that only one copy of the proxy statement and annual report may have been sent to multiple shareholders in a shareholders’ household. The Company believes this “householding” rule will provide greater convenience for its shareholders, as well as cost savings for the Company by reducing the number of duplicate documents that are sent to shareholders’ homes.

The “householding” election appears on the Proxy Card accompanying this Proxy Statement. If you wish to participate in the “householding” program, please indicate “YES” when voting your proxy. Your affirmative or implied consent will be perpetual unless you withhold or revoke it. If you wish to continue to receive separate proxy statements and annual reports for each account in your household, you must withhold your consent to our “householding” program by so indicating when voting your proxy. Please note that if you do not respond, you will be deemed to have consented and “householding” will begin 60 days after the mailing of this document.

You may revoke your consent to “householding” at any time by contacting Broadridge, either by calling toll-free (800) 542-1061, or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717. If you revoke your consent to participate in the “householding” program, or if you submit a written or oral request to the Company to the attention of Karthik Rammohan, Corporate Secretary, 4000 North First Street, San Jose, California 95134, each shareholder at your address will receive individual copies of the Company’s disclosure documents within 30 days of receipt of your revocation or request.

Electronic Access of Annual Meeting Materials

We strongly encourage our shareholders to conserve natural resources, as well as significantly reduce our printing and mailing costs, by signing up to receive your shareholder communications electronically via e-mail or the Internet. With electronic delivery, we will notify you as soon as the annual report and the proxy statement are available on the Internet. Electronic delivery can also help reduce the number of bulky documents in your personal files and eliminate duplicate mailings. To sign up for electronic delivery:

1. Follow the voting instructions to vote using the Internet at www.proxyvote.com, and when prompted, indicate that you agree to receive or access shareholders communications electronically in future years.

2. Check the box on the proxy card, indicating your intent to consent to access future annual reports and proxy statements of the Company electronically over the Internet.

Your electronic delivery enrollment will be effective until you cancel it. If you have questions about electronic delivery, please contact Broadridge at http://enroll.icsdelivery.com/nvls.

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Deadline for Receipt of Shareholder Proposals

Requirements for Shareholder Proposals to be Brought Before an Annual Meeting. For shareholder proposals to be considered properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice in writing to the Corporate Secretary of the Company. To be timely for the Company’s 2011 annual meeting of shareholders, a shareholders’ notice must be delivered to or mailed and received by the Company at its principal executive offices between December 12, 2010 and February 10, 2011. A shareholder’s notice to the Corporate Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the shareholder proposing such business, (iii) the class and number of shares of the Company beneficially owned by the shareholder, and (iv) any material interest of the shareholder in such business.

Requirements for Shareholder Proposals to be Considered for Inclusion in the Company’s Proxy Materials. Shareholder proposals submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and intended to be presented at the Company’s 2011 annual meeting of shareholders must be received by the Company not later than December 9, 2010 in order to be considered for inclusion in the Company’s proxy materials for that meeting.

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PROPOSAL NO. 1

ELECTION OF DIRECTORS

The authorized number of directors is currently fixed at nine, as set by the Board of Directors pursuant to the Bylaws of the Company. Mr. Litster turned 71 years of age during his current term as a director and therefore, pursuant to our Bylaws, is not eligible to stand for re-election at the 2010 Annual Meeting of Shareholders. The Governance and Nominating Committee (the “Governance Committee”) determined not to nominate Mr. Litster as a director on this basis, and the Company’s Board of Directors has determined to fix the authorized number of directors at eight, effective upon the election of directors at the Annual Meeting.

The Company’s shareholders will elect eight directors at the Annual Meeting. The Governance Committee has recommended, and the Board of Directors has nominated, the eight persons listed below for election as directors at the Annual Meeting, each to serve until the 2011 annual meeting of shareholders, until each director’s successor is elected or appointed or until the earlier resignation or removal of the director. The eight nominees receiving the highest number of affirmative votes will be elected as directors. Unless otherwise instructed, the proxy holders will vote the proxies they receive FOR the eight nominees of the Board of Directors named below. Each nominee is currently a director of the Company, and has consented, if elected, to serve until his or her term expires. In the event that any nominee of the Board of Directors is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee designated by the present Board of Directors to fill the vacancy. As of the date of this Proxy Statement, the Board of Directors is not aware that any nominee will be unable or will decline to serve as a director. In the event that additional persons are nominated for election as directors, and a shareholder give proper written notice to effect cumulative voting, the proxy holders shall vote all proxies received by them in such a manner in accordance with cumulative voting as will assure the election of as many of the nominees listed below as possible, with any required selection among such nominees to be determined by the proxy holders.

The Board of Directors recommends a vote FOR the nominees listed below.

The term of office of each person elected as a director will continue until the next annual meeting of shareholders or until his or her successor has been elected and qualified. The Company’s Bylaws provide that no person may be elected to the Board of Directors if that director will, on or prior to the date of such meeting of shareholders, have reached an anniversary exceeding his or her 70^th anniversary of birth. If during any term of

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office a director reaches an anniversary exceeding his or her 70^th anniversary of birth, then that director shall be allowed to complete his or her term in office but shall not be eligible to seek election to the Board of Directors for a subsequent term. There is no family relationship between any director and any other director or executive officer of the Company.

Mr. Hill has been Chief Executive Officer and a member of the Board of Directors of the Company since December 1993. In May 1996, he was appointed Chairman of the Board of Directors. From 1981 to 1993, Mr. Hill was employed by Tektronix, Inc., a provider of communications network management and diagnostic solutions, where he held various positions, including President of the Tektronix Development Company, Vice President of the Test & Measurement Group, and President of Tektronix Components Corporation. Prior to joining Tektronix, Inc., Mr. Hill held engineering or management positions at General Electric Corporation, a multinational technology services conglomerate; Motorola Inc., a communications company; and Hughes Aircraft Company, an aerospace and defense company. Mr. Hill holds a Bachelor of Science degree in Bioengineering from the University of Illinois and a Master of Business Administration from Syracuse University. Mr. Hill is also a member of the Board of Directors of LSI Logic Corp., Arrow Electronics, Inc. and the University of Illinois Foundation.

The Board of Directors has concluded that Mr. Hill should serve as a director of the Company because of his more than 17 years of experience as Chief Executive Officer and Chairman of the Board of the Company, his more than 35 years of semiconductor industry experience and his educational background in Finance.

Mr. Bonke became a member of the Board of Directors in April 2004. Mr. Bonke is a private investor and is the retired Chairman of the Board of Directors and Chief Executive Officer of Electroglas, Inc., a semiconductor test equipment manufacturer. He also serves on the Board of Directors of Sanmina-SCI Corporation, an electronics manufacturing services company. Mr. Bonke is a past director of the San Jose State University Foundation. Mr. Bonke holds a Bachelor of Science degree in Engineering and Technical Marketing from Clarkson University.

The Board of Directors has concluded that Mr. Bonke should serve as a director of the Company because of his knowledge of the semiconductor industry, management experience, financial expertise and service as a director of publicly-traded semiconductor companies. In addition, the Board of Directors has based its recommendation on Mr. Bonke’s knowledge of the business and operations of the Company, resulting from his service as a director of the Company since 2004.

Mr. El-Mansy became a member of the Board of Directors in April 2004. Mr. El-Mansy is the retired Vice President, Director of Logic Technology Development, at Intel Corporation (“Intel”), a leading producer of microchips, computing and communications products, where he was responsible for managing technology development, the processor design center for Intel’s Technology and Manufacturing Group and two wafer manufacturing facilities. Mr. El-Mansy joined Intel in 1979 and led microprocessor technology development at Intel for 20 years. Prior to joining Intel, Mr. El-Mansy held engineering positions at Bell Northern Research, a telecommunications company in Canada. From July 2004 until June 2009, Mr. El-Mansy also served on the Board of Directors of Zygo Corporation, a designer and manufacturer of optical systems. Mr. El-Mansy holds Bachelor of Science and Masters degrees in Electronics and Communications from Alexandria University in Egypt and a Ph.D. in Electronics from Carleton University in Ottawa, Canada.

The Board of Directors has concluded that Mr. El-Mansy should serve as a director of the Company because of his more than 30 years of experience as an engineer and executive focused on the manufacturing of technological devices and components, as well as his public company experience as a director and member of the Compensation Committee of Zygo Corporation. This experience enables Mr. El-Mansy to provide management with a relevant technical and business perspective. In addition, the Board of Directors has based its recommendation on Mr. El-Mansy’s knowledge of the business and operations of the Company, resulting from his service as a director of the Company since 2004.

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Mr. Nishi joined the Board of Directors in May 2002. Mr. Nishi is a Professor of Electrical Engineering and Director of the Stanford University Nanofabrication Facility. Mr. Nishi joined Stanford University in May 2002 after serving as Director of Research and Development and Senior Vice President at Texas Instruments, Inc., a semiconductor company, from 1995 to 2002. Mr. Nishi joined Texas Instruments, Inc. in 1995 as Vice President and Director of Research and Development for the Semiconductor Group. From 1986 to 1995, Mr. Nishi held various senior management positions in research and development at Hewlett Packard Company (“Hewlett Packard”), a leading provider of products, technologies, software, solutions and services. From 1969 to 1985, Mr. Nishi held various managerial positions at Toshiba Corporation, an electronics corporation. From 1986 to 2002, Mr. Nishi was a Consulting Professor in the Department of Electrical Engineering and served on the Advisory Committee for the Center for Integrated Systems at Stanford University. From 1993 to 1996, Mr. Nishi taught at Waseda University in Japan as a visiting professor of the Material Sciences and Engineering Department and the Electronic Communication Engineering Department for intensive courses. Mr. Nishi served on a wide range of boards, committees and advisory boards including The Development Board and Executive Committee for the University of Texas, the Board of Directors of the Japan-America Society of Dallas/Fort Worth, the Advisory Committee, Information Sciences & Technology, Lawrence Livermore National Laboratory and the Board of Directors of SEMATECH. Since August 2006, Mr. Nishi has also been a member of the Supervisory Board of Qimonda A.G., the second largest supplier of DRAM memory products. Mr. Nishi holds a Bachelor of Science degree in Metallurgy from Waseda University and a Ph.D. in Electronics Engineering from the University of Tokyo.

The Board of Directors has concluded that Mr. Nishi should serve as a director of the Company because of his diverse experience in research and development as an engineer, an executive and a professor studying electrical engineering and nanofabrication. In addition, the Board of Directors has based its recommendation on Mr. Nishi’s knowledge of the business and operations of the Company, resulting from his service as a director of the Company since 2002.

Mr. Possley joined the Board of Directors in July 1991. He is currently a managing general partner of Glen-Ore Associates, a consulting enterprise focused on the semiconductor industry. Since 2003 he has served as an Executive Adviser and Investor for the Silicon Border Project. From October 1997 through December 1999, Mr. Possley was an associate consultant at N-Able Group, a semiconductor consulting company. From March 1994 to September 1997, Mr. Possley was President of SubMicron Technology, PCL, a semiconductor wafer manufacturing company. From April 1992 to May 1994, he was Senior Vice President of Manufacturing at Ramtron International, a semiconductor company. From January 1991 to March 1992, he was Vice President, Operations at Sandisk, Inc., a manufacturer of solid state memory systems. From January 1986 to December 1990, Mr. Possley was Senior Vice President of Manufacturing for Philips Semiconductor, Inc., a semiconductor company. Prior to joining Philips Semiconductor, Inc., he was Vice President, Wafer Fabrication and Research and Development at United Technologies Mostek, a multinational conglomerate, and held management and engineering positions with the Semiconductor Products Sector of Motorola Inc., a provide of broadband and wireless communications; Texas Instruments, Inc., a semiconductor company; Fairchild Camera and Instrument Corporation, an electronic research and development company, and the semiconductor division of General Electric Corporation, a multinational technology services conglomerate. Mr. Possley was also a director of Catalyst Semiconductor, Inc., until October 2008 when Catalyst was merged with ON Semiconductor, and is a director of ASAT Holdings Limited and ASAT New Finance, a global provider of semiconductor assembly, test, and design services, until February 2010 as ASAT Holdings Limited was sold to United Test and Assembly Corp. (UTAC) of Singapore. Mr. Possley holds a Bachelor of Science degree in Mathematics from Western Illinois University and a Ph.D. in Physical Chemistry from the University of Kentucky.

The Board of Directors has concluded that Mr. Possley should serve as a director of the Company because of his experience as an engineer and senior executive of several semiconductor fabrication and manufacturing companies. In addition, the Board of Directors has based its recommendation on Mr. Possley’s experience as a director of public companies and his knowledge of the business and operations of the Company, resulting from his service as a director of the Company since 1991.

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Ms. Rhoads joined the Board of Directors in February 2003. She is Executive Vice President and Chief Financial Officer of Zogenix, Inc., a pharmaceutical company. From 2000 through the end of 2009, Ms. Rhoads served as the Chief Financial Officer of Premier, Inc., a healthcare supply management company. From 1998 to 2000, she was Vice President, Strategic Initiatives at Premier, Inc. From 1993 to 1998, Ms. Rhoads was a Vice President of The Sprout Group, an institutional venture capital firm. Ms. Rhoads holds a Bachelor of Science degree in Finance from the University of Arkansas and a Masters degree from the Harvard Graduate School of Business Administration.

The Board of Directors has concluded that Ms. Rhoads should serve as a director and member of the Audit Committee of the Company because of her managerial experience and her financial skills and expertise. Ms. Rhoads’s qualifications include her service as a chief financial officer and vice president of Premier, Inc. her experience as an investment professional for The Sprout Group and her undergraduate and graduate degrees in Finance. In addition, the Board of Directors has based its recommendation on Ms. Rhoads knowledge of the business and operations of the Company, resulting from her service as a director of the Company since 2003.

Mr. Spivey joined the Board of Directors in May 1998. From 2000 to 2001, he was President, Chief Executive Officer and a Director of Luminent, Inc., a producer of fiber optic components. From 1997 to 2000, he was Group President, Network Products Group of Lucent Technologies a producer of world-wide communications products. From 1994 to 1997, he was Vice President of the Systems and Components Group of AT&T, a communications company. From 1991 to 1994, he was the President of Tektronix Development Company and Group President at Tektronix, Inc., a provider of communications network management and diagnostic solutions. Previously, Mr. Spivey held managerial positions at Honeywell, Inc. and General Electric Corporation, technology services companies with broad business divisions. Mr. Spivey also serves on the Board of Directors of Cascade Microtech, Inc., Laird PLC, Raytheon Company, and ADC Telecommunications. He also served on the Board of Directors of Lyondell Chemical Co. from May 2000 through December 2007. Mr. Spivey holds a Bachelor of Science degree in Physics from Duquense University, a Masters degree in Physics from Indiana University of Pennsylvania and a Ph.D. in Management from Walden University.

The Board of Directors has concluded that Mr. Spivey should serve as a director of the Company because of his managerial experience at several technology companies and his service as a director of multiple public companies during the past 12 years. In addition, the Board of Directors has based its recommendation on Mr. Spivey’s knowledge of the business and operations of the Company, resulting from his service as a director of the Company since 1998.

Mr. Whitaker joined the Board of Directors in March 2002. From 1968 to 2000, Mr. Whitaker was employed by Texas Instruments, Inc., a semiconductor company, where he held positions including Senior Vice President of Worldwide Analog and Standard Logic, Vice President of US Semiconductor Business, and various management positions in product departments, marketing and sales. Prior to joining Texas Instruments, Inc., Mr. Whitaker held an engineering position at General Electric Corporation, a multinational technology services conglomerate. Mr. Whitaker holds a Bachelor of Science degree in Electrical Engineering from Texas A&M University where he is a member of the Engineering Advisory Board.

The Board of Directors has concluded that Mr. Whitaker should serve as a director of the Company because of his more than 30 years of engineering and executive experience in the semiconductor industry and his expertise in the fields of sales and marketing. In addition, the Board of Directors has based its recommendation on Mr. Whitaker’s knowledge of the business and operations of the Company, resulting from his service as a director of the Company since 2002.

Independence of Directors

A majority of the Board of Directors must qualify as “independent” as that term is defined in Listing Rule 5605(a)(2) of the listing standards of the NASDAQ Stock Market LLC (“NASDAQ”). The Board of Directors

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has affirmatively determined that each of the following members of the Board of Directors, are independent under the applicable NASDAQ listing standards: Ms. Rhoads and Messrs. Bonke, El-Mansy, Litster, Nishi, Possley, Spivey and Whitaker.

The Company’s independent directors meet regularly in executive session without management. The Board of Directors has also designated a lead director to preside at executive sessions of independent directors. Mr. Spivey is currently the lead independent director.

Board Meetings and Committees

The Board of Directors held eight meetings during 2009. During the last year, no incumbent director attended fewer than 75% of the meetings of the Board of Directors and its committees on which he or she served that were held during the period in which he or she was a director. The Company encourages, but does not require, members of the Board of Directors to attend the annual meeting of shareholders. All of the members of the Board of Directors attended the 2009 annual meeting of shareholders.

The Board of Directors has an Audit Committee, a Stock Option and Compensation Committee (the “Compensation Committee”) and a Governance and Nominating Committee (the “Governance Committee”).

Audit Committee. During 2009, Ms. Rhoads and Messrs. Bonke, Possley and Whitaker served on the Audit Committee, which held 12 meetings over the course of the year. Ms. Rhoads is the chair of the Audit Committee. The Audit Committee oversees the accounting and financial reporting processes of the Company as well as the audits of the Company’s financial statements. The Audit Committee appoints and approves the services performed by the Company’s independent registered public accounting firm and is responsible for reviewing and evaluating the Company’s accounting principles and its system of internal control over financial reporting. All members of the Audit Committee meet the standards for independence set forth in Rule 10A-3(b) promulgated under the Exchange Act, and have been determined by the Board of Directors to be “independent” as that term is defined in Listing Rule 5605(a)(2) of the NASDAQ listing standards. The Board of Directors has further determined that Ms. Rhoads and Mr. Bonke are each an “audit committee financial expert” as defined by Item 407(d)(5)(ii) of Regulation S-K of the Exchange Act and are each independent as required by the applicable NASDAQ listing standards.

The Audit Committee operates under a written charter that sets forth its functions and responsibilities. A copy of the charter is posted on the Company’s website at www.novellus.com.

Compensation Committee. During 2009, Messrs. El-Mansy, Litster, Nishi and Spivey served on the Compensation Committee, which held six meetings during the year. Mr. Litster was the chair of the Compensation Committee during 2009. All members of the Compensation Committee are “independent” directors within the meaning of Listing Rule 5605(a)(2) of the NASDAQ listing standards. The Compensation Committee administers the issuance of restricted stock and the granting of options to purchase stock of the Company pursuant to the Company’s stock plans and, in accordance with the terms of the respective stock plans, determines the terms and conditions of such issuances and grants. In addition, the Compensation Committee reviews and approves the Company’s executive compensation policy, conducts an annual review of the compensation of each senior executive and makes recommendations to the Board of Directors regarding compensation for the Chief Executive Officer as described under “Executive Compensation and Related Information—Compensation Discussion and Analysis.”

The Compensation Committee operates under a written charter that sets forth its functions and responsibilities. A copy of the charter is posted on the Company’s website at www.novellus.com.

Governance Committee. During 2009, Messrs. El-Mansy, Litster, Nishi and Spivey served on the Governance Committee, which held four meetings during the year. Mr. Spivey is the chair of the Governance

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Committee. All members of the Governance Committee are “independent” directors within the meaning of Listing Rule 5605(a)(2) of the NASDAQ listing standards. The Governance Committee monitors the size and composition of the Board of Directors. Prior to the Company’s annual meeting of shareholders, the Governance Committee, pursuant to qualification guidelines, assists the Board of Directors in selecting the candidates that will be presented to the Company’s shareholders for election as directors at the next annual meeting. The Governance Committee considers and makes recommendations to the Board of Directors regarding any shareholder recommendations for candidates to serve on the Board of Directors. However, the Governance Committee has not adopted a formal process for that consideration because it believes that the informal consideration process has been adequate given the small number of shareholder recommendations in the past. Pursuant to the Company’s Amended and Restated Bylaws, shareholders wishing to recommend candidates for consideration by the Governance Committee may do so by writing to the Corporate Secretary of the Company at 4000 North First Street, San Jose, California 95134, providing the candidate’s name, biographical data and qualifications, a document indicating the candidate’s willingness to act if elected, and evidence of the nominating shareholder’s ownership of Common Stock not less than 90 nor more than 150 days prior to the next annual meeting of shareholders to assure time for meaningful consideration by the Governance Committee. There is no difference in the manner in which the Governance Committee evaluates nominees for director based on whether the nominee is recommended by a shareholder, by management or by the Board of Directors. Historically, the Company has not paid any third party to identify or assist in identifying or evaluating potential nominees.

In reviewing potential candidates to serve on the Board of Directors, the Governance Committee considers experience in the semiconductor equipment industry, general business or other experience, the Company’s need for an additional or replacement director, the candidate’s interest in the business of the Company, and other subjective criteria. Of greatest importance are the individual’s integrity, willingness to be actively involved and ability to bring to the Company experience and knowledge in areas that are most beneficial to the Company. The Board of Directors intends to continue to evaluate candidates for election to the Board of Directors on the basis of the foregoing criteria.

Diversity is one of the factors considered by the Governance Committee in the director nomination process. The overriding principle guiding our director nomination process is a desire to ensure that our Board of Directors as a whole collectively serves the interests of our shareholders. We believe that having diverse skills, experiences and perspectives represented on our Board of Directors provides the most value to the Company and its shareholders. When the Governance Committee evaluates diversity of director nominees, the Governance Committee considers the following diversity criteria, without assigning specific weights to any particular criteria:

All of the criteria set forth above are considered by the Governance Committee as it evaluates the directors that are nominated to serve on the Board of Directors. While the Governance Committee does not strive to make sure that every diversity factor listed above is represented on the Board of Directors, the committee does focus on making sure there is an appropriate mix, which the committee believes leads to more thoughtful and open Board of Director discussions and deliberations. The Governance Committee reviews and evaluates, at least annually, its performance and the performance of its members, including compliance with its charter and the effectiveness of its efforts to consider diversity in the director nomination process.

The Governance Committee operates under a written charter that sets forth its functions and responsibilities. A copy of the charter is posted on the Company’s website at www.novellus.com.

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Board Leadership

The Board of Directors believes that our current practice of combining the roles of Chairman of the Board (“Chairman”) and Chief Executive Officer (“CEO”) generally provides an efficient and effective leadership model for the Company as the Company is currently operated. We believe that this governance structure provides the appropriate balance between the need for consistent strategic direction and the need for objectivity and independence of the non-management directors. The Company believes that having a combined role of Chairman and CEO helps ensure that the Company will have clear and consistent leadership on critical strategic objectives. This structure maximizes the likelihood that these objectives will be attained, while eliminating any risk of a distracting clash on these issues between a Chairman and CEO.

Lead Director

Mr. Spivey, an independent director who serves on the Compensation Committee and is the chair of the Governance Committee, was selected by the Board of Directors to serve as the lead director for all meetings of the non-management directors held in executive session. The lead director has the responsibility of presiding at all executive sessions of the Board of Directors, consulting with the Chairman on Board of Director and committee meeting agendas, acting as a liaison between management and the non-management directors, including maintaining frequent contact with the Chairman and advising him on various matters and facilitating communication between the non-management directors and management, as well as other responsibilities.

Risk Management

The entire Board of Directors is responsible for reviewing and overseeing the Company’s internal risk management processes and policies to help ensure that the Company’s corporate strategy is functioning as directed and that necessary steps are taken to foster a culture of risk aware and risk-adjusted decision making throughout the Company. The Board of Directors has an active role, as a whole and also at the committee level, in overseeing management of the Company’s risks. The Board of Directors regularly reviews information regarding the Company’s credit, liquidity and operations, as well as the risks associated with each. The Company’s Compensation Committee is responsible for overseeing the management of risks relating to the Company’s executive compensation plans and arrangements. The Audit Committee oversees management of financial risks, financial reporting and tax. The Governance Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is regularly informed through committee reports about such risks.

Corporate Governance

The Company has adopted a set of Principles of Corporate Governance. The Governance Committee is responsible for overseeing the Principles of Corporate Governance and reporting and making recommendations to the Board of Directors concerning corporate governance matters. The Principles of Corporate Governance are posted on the Company’s website at www.novellus.com.

Code of Conduct

The Board of Directors has adopted a Code of Conduct that applies to all directors, officers, and employees of the Company as required by applicable securities laws, rules of the Securities and Exchange Commission (the “SEC”), and the applicable NASDAQ listing standards. The Code of Conduct is posted on the Company’s website at www.novellus.com. The Company will post on its website any amendments to, or waivers from, any provision of its Code of Conduct.

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Communication between Shareholders and Directors

The Board of Directors does not currently have a formal process for shareholders to send communications to it. Nevertheless, every effort has been made to ensure that the views of shareholders are heard by the Board of Directors or by individual directors, as applicable, and that timely and appropriate responses are provided. The Board of Directors does not recommend that formal communication procedures be adopted at this time because it believes that informal communications are sufficient to communicate questions, comments and observations that could be useful to the Board of Directors. Shareholders wishing to formally communicate with the Board of Directors may send communications directly to Richard S. Hill, Chairman of the Board, and/or William R. Spivey, Lead Director, c/o Novellus Systems, Inc., 4000 North First Street, San Jose, California 95134.

Compensation Committee Interlocks and Insider Participation

Messrs. Litster, El-Mansy, Nishi, and Spivey, all of whom are “independent” under the applicable NASDAQ listing standards, served on the Compensation Committee in 2009. No member of the Compensation Committee is or was formerly an officer or an employee of the Company or its subsidiaries. There were no interlocks or insider participation between any member of the Board of Directors or the Compensation Committee and any member of the board of directors or compensation committee of another company.

Risk Assessment Related to the Company’s Compensation Programs

The Compensation Committee is primarily responsible for the design and oversight of the Company’s equity and executive compensation programs. The Compensation Committee also monitors the policies and practices of the Company’s overall compensation programs and has reviewed and discussed the concept of risk as it relates to the Company’s compensation programs. The Compensation Committee has concluded that none of the Company’s compensation programs create risks that are reasonably likely to have a material adverse effect on the Company. The largest portion of most employees’ total compensation is a fixed, base salary. The incentive portions of each employee’s pay links performance-based short term and long term rewards to financial goals that serve the interests of the Company and the Company’s shareholders without encouraging unnecessary or excessive risk taking by Company employees.

Director Compensation

Directors who are not employees of the Company receive an annual retainer of $30,000, a fee of $2,000 for each meeting of the Board of Directors attended and a fee of $1,000 for each meeting of a committee of the Board of Directors attended. Each Committee Chairperson receives an additional fee of $12,500.

Stock options have not been granted to non-employee directors since 2004, and all previously issued stock options were fully vested at the grant date. Beginning in 2005, non-employee directors receive an annual restricted stock award of 5,000 shares of Common Stock under the Company’s Amended and Restated 2001 Stock Incentive Plan. Accordingly, on May 12, 2009, Ms. Rhoads and Messrs. Bonke, El-Mansy, Litster, Nishi, Possley, Spivey and Whitaker were each awarded 5,000 shares of restricted stock. One-third of the shares of restricted stock will vest on each successive anniversary of the award. Vesting of all restricted stock awards granted to non-employee directors will automatically fully accelerate upon a change of control.

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Director Compensation in 2009

The following table sets forth certain information concerning the compensation of the Company’s non-employee directors for the fiscal year ended December 31, 2009:

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PROPOSAL NO. 2

RATIFICATION OF APPOINTMENT OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Ernst & Young LLP has served as the Company’s independent registered public accounting firm since 1986, and the Audit Committee has selected Ernst & Young LLP to audit the financial statements of the Company for the year ending December 31, 2010. The Board of Directors recommends that shareholders ratify such selection. Unless otherwise instructed, the proxy holders will vote the proxies they receive FOR the ratification of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2010. Ratification of this proposal requires the affirmative vote of a majority of the outstanding shares of Common Stock present in person or represented by proxy and entitled to vote at the Annual Meeting. In the event that a majority of the shares present or represented and entitled to vote are not voted in favor of ratification, the Audit Committee will reconsider its selection.

Representatives of Ernst & Young LLP will be present at the Annual Meeting, will have the opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Audit and Non-Audit Fees

In connection with the audit of its financial statements for the year ended December 31, 2009, the Company entered into an engagement agreement with Ernst & Young LLP which set forth the terms by which Ernst & Young LLP will perform audit services for the Company. That agreement is subject to alternative dispute resolution procedures and an exclusion of punitive damages.

The following table presents fees for professional services rendered by Ernst & Young LLP for the audit of the Company’s annual financial statements for the years ended December 31, 2009 and December 31, 2008 and of the effectiveness of the Company’s internal control over financial reporting at December 31, 2009 and December 31, 2008, and fees billed for other services rendered by Ernst & Young LLP during those periods.

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Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the Company’s independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.

The Board of Directors recommends a vote FOR the ratification of

Ernst & Young LLP as the Company’s independent registered public accounting firm

for the year ending December 31, 2010.

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OTHER INFORMATION

Executive Officers

In addition to Mr. Hill, the executive officers of the Company as of April 1, 2010, were as follows:

Mr. Addiego is currently Executive Vice President of Corporate Operations. He joined the Company in February 2005 as Senior Vice President of Corporate Operations. From November 1996 to February 2005, Mr. Addiego was employed at Applied Materials, Inc, a producer of nanomanufacturing technology solutions, where he last served as Senior Vice President and General Manager of ETEC Systems. From March 1995 to November 1996, Mr. Addiego was employed at KLA Instruments Incorporated, a semiconductor company, where he served as Vice President of Engineering, Advanced Inspection Division. Mr. Addiego was employed by Photon Dynamics Incorporated, a supplier of integrated yield-management solutions for the flat panel display market, from 1990 to February 1995, where he last served as Vice President, General Manager of Test and Repair Products. Mr. Addiego holds a Bachelor of Science degree and a Ph.D. in Electrical Engineering from the University of California, Berkeley.

Mr. Archer is currently Executive Vice President of Sales, Marketing and Customer Satisfaction. Since joining the Company in 1994, Mr. Archer has held a number of positions, including Executive Vice President, PECVD and Electrofill Business Units from November 2008 to September 2009; Senior Vice President, PECVD and Electrofill from September 2007 to November 2008; Senior Vice President, Dielectrics Business Group from February 2006 to September 2007; Senior Vice President, PECVD and Electrofill Business Unit from October 2005 to February 2006; Vice President and General Manager for the Electrofill Business Unit from April 2002 to October 2005; Senior Director of Technology for the Electrofill Business Unit from April 2001 to April 2002; and Senior Director of Technology for Novellus Systems Japan from July 1999 to April 2001. Prior to joining the Company, Mr. Archer was employed at Tektronix, Inc., a provider of communications network management and diagnostic solutions. Mr. Archer completed the Program for Management Development at Harvard Business School and holds a Bachelor of Science degree in Applied Physics from the California Institute of Technology.

Mr. Benzing is currently the Executive Vice President and Chief Administrative Officer and is the Principal Financial Officer of the Company, a position he has held since February 2008. On January 8, 2010, Mr. Benzing and the Company entered into an agreement pursuant to which Mr. Benzing will retire, effective as of June 26, 2010, from his current positions with the Company but will remain in the Company’s employment as described more fully below in the section entitled “Employment and Severance Agreements.” Since joining the Company in November 1988 as Director of Special Projects, Mr. Benzing has held a number of positions, including Executive Vice President and Chief Administrative Officer from December 2007 through February 2008, Executive Vice President and Chief Business Officer from February 2004 through December 2007, Executive Vice President of the Depositions and Surface Integrity Business Groups from January 2002 through February 2004; Executive Vice President, Systems Development, Engineering and Manufacturing Operations from July 1999 through December 2001; and Vice President of Product Development from July 1992 through June 1999. From 1984 to 1988 Mr. Benzing served as Vice President of Engineering at Benzing Technologies, Inc., from 1979 to 1984, Mr. Benzing served in various technical and management positions at Hewlett Packard, Inc. Mr. Benzing holds a Bachelor of Science degree from the University of California, Berkeley and a Master of Science degree from Stanford University, both in mechanical engineering.

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Mr. Chen is currently Executive Vice President, Semiconductor Systems Products. Mr. Chen joined the Company in October 2004 as Senior Vice President of Asia-Pacific Operations. He also held the position of Executive Vice President and Chief Technology Officer from October 2005 to September 2009. From January 1994 to September 2004, Mr. Chen was employed at Applied Materials, Inc. (“Applied Materials”), a provider of nanomanufacturing technology solutions, as the Group Vice President and General Manager for the Copper Physical Vapor Deposition (PVD) & Interconnect Product Business Group. Prior to joining Applied Materials, Mr. Chen worked at LSI Logic and SGS-Thomson Microelectronics, both semiconductor companies. Mr. Chen received his Bachelor of Science degree in Materials Science & Engineering from the National Tsing Hua University in Taiwan and his doctorate in Materials Science & Engineering from the State University of New York at Stony Brook. He holds more than 60 U.S. patents and has authored over 50 technical publications. Mr. Chen has been a member of the Board of Directors of GT Solar International, Inc. since May 2008. He also served on the Board of Directors of Electroglas, Inc., a semiconductor test equipment manufacturer, from January 2006 until June 2008.

Mr. Hertz is Vice President of Corporate Finance and Principal Accounting Officer, a position he has held since October 2007. Mr. Hertz joined the Company in June 2007 as Vice President and Corporate Controller. Prior to joining the Company, Mr. Hertz worked for Intel Corporation, a leading producer of microchips, computing and communications products, where he held a number of positions, including Central Finance Controller of the Digital Enterprise Group from October 2006 through June 2007, Finance Controller of the Enterprise Platform Services Division from April 2005 through October 2006 and Accounting Policy Controller from June 2000 through April 2005. Prior to joining Intel, Mr. Hertz was a Senior Manager with KPMG, a global company that provides audit, tax and advisory services. Mr. Hertz received his Bachelor of Science in Business with an accounting emphasis from Montana State University and was a Practice Fellow at the Financial Accounting Standards Board from July 1998 to June 2000.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Philosophy. The Company’s compensation philosophy is to pay for performance. Accordingly, the compensation of each Novellus employee is based in part upon the achievement of company-wide performance objectives. In particular, the incentive compensation of Mr. Hill, the Company’s Chairman and Chief Executive Officer, is based predominantly upon the achievement of corporate performance objectives, and the achievement of these objectives has a significant impact on the incentive compensation of each other senior executive officer.

In establishing the corporate performance objectives, the Company looks to use the same metrics that it believes investors use in determining whether to purchase the Company’s stock: revenue growth, earnings and return on assets. As a result, compensation is driven by the achievement of the same results the Company believes its investors are looking for.

Independent Compensation Consultant. Since August of 2007, the Compensation Committee has engaged Towers Watson (formerly Towers Perrin) to perform independent compensation consulting services for the Compensation Committee. These services included a competitive compensation review for the Chief Executive Officer and the senior executive officers (including the Named Executive Officers). Though Towers Watson has been engaged by, and reports to, the Compensation Committee, the Compensation Committee has authorized Towers Watson to work with management as necessary. Before Compensation Committee meetings, Towers Watson may meet with management to review relevant materials that will be presented to and discussed by the Compensation Committee. The consultant was paid an aggregate of approximately $82,000 for such work in 2009, and provided no other services to the Company.

Benchmarking. In preparation for gathering compensation information in 2009, the Compensation Committee’s independent compensation consultant recommended revising the peer groups that were developed in 2008 (“Compensation Peers”). Broadcom Corporation, Spansion Inc. and Vishay Intertechnology Inc were removed. Cymer, Inc, FEI Company and Verigy, Ltd. were suggested as appropriate additions to the Industry Peer Group based on size, scope of operations and financial position. Invitrogen Corporation, one of the nine companies on the 2008 Broader Technology Peer Group, merged with Applied Biosystems and is now known as Life Technologies Corporation.

As a result, the Compensation Peers consist of an Industry Peer Group (composed of 21 companies that are considered competitors for investor dollars and key employee talent within the semiconductor capital equipment and semiconductor industries), and a broader Technology Peer Group (composed of the 21 members of the Industry Peer Group along with nine other technology companies that are competitors for key talent within the broader technology and medical device industries). The revised peer groups were reviewed by the Compensation Committee and management and then adopted by the Compensation Committee as an appropriate peer group for benchmarking purposes in 2009.

For most senior executive officers, members of the Industry Peer Group are the primary compensation benchmark. For certain positions (e.g., Principal Accounting Officer, General Counsel), the Compensation Committee has determined that the broader Technology Peer Group is a more appropriate benchmark, as the functional expertise required for the position was likely to be found outside the semiconductor industry as well.

Industry Peer Group:

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Technology Peer Group:

Includes the 21 companies in the Industry Peer Group listed above, plus

The Compensation Peers were selected based upon a number of factors, including, industry sector, size, market, market share, and other attributes. In reviewing compensation for individual executives, the compensation practices of particular companies in the semiconductor capital equipment business, particularly Applied Materials, Inc., KLA-Tencor Corp. and Lam Research Corp., may be accorded greater weight.

Data on the compensation practices of the Compensation Peers is gathered through publicly reported information as well as custom surveys taken from the Radford Surveys. Data is gathered with respect to base salary, bonus, total cash compensation, equity awards, and total direct compensation. Deferred compensation and benefits which are generally available to all employees are not analyzed annually, but are reviewed by the Company from time to time to ensure the benefits the Company offers are competitive.

Corporate Performance Objectives. The Company’s corporate performance objectives have historically consisted of (i) increasing revenues at 150% of the industry growth rate in upturns, while declining at less than 50% of the industry rate in downturns, (ii) earning a 15% net profit after tax, and (iii) turning the Company’s controllable assets at least 1.5 times annually. The Company believes these metrics are important to its shareholders, and that a focus on achieving them should eventually manifest itself in an increase in shareholder value. As the Company continues to monitor overall economic demand, the resulting impact on the semiconductor industry and the Company’s competitive position in that industry, these historical corporate performance objectives may be modified accordingly.

The Company uses the growth rate target in setting certain individual objectives, and historically used the net profit after tax and asset turns targets to establish a “corporate factor,” as described further below under “Bonuses.” The corporate factor is a significant driver for the annual bonus of each senior executive officer, although achievement of individual objectives is a factor as well. Mr. Hill does not have individual objectives; he is evaluated solely with respect to the Company’s performance as a whole.

During 2009, the evolving dynamics of the semiconductor industry, coupled with the global debt crisis and the resulting worldwide recession have made the achievement of the above objectives more difficult. For the purposes of determining 2009 compensation, however, the Compensation Committee determined that continued adherence to these objectives was appropriate, although the result was that no executive officer would earn a bonus, and no Company employee would participate in profit sharing (as the Company’s threshold 3% net profit after tax objective was not achieved in 2009).

Senior Executive Review Process. The Compensation Committee conducts an annual review of the base salary, bonus and equity awards made to each senior executive officer, including the senior executive officers identified in the “Summary Compensation Table” below (the “Named Executive Officers”). In 2009, the Compensation Committee was assisted in this review by its compensation consultant. Typically, Mr. Hill meets with the Compensation Committee and makes initial compensation recommendations with respect to the senior executives who report to him. Mr. Hill’s recommendation, made in December 2008 with respect to 2009 compensation, was based in part upon the compensation information gathered by the Company’s human resources professionals and also based upon information developed by the Compensation Committee’s compensation consultant. This information, as well as financial information gathered by the Company’s corporate development professionals, is also made available to the Compensation Committee. The senior executives are not present at the time the recommendations are made. In each case, the Compensation Committee

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takes into account the executive’s scope of responsibilities and experience and balances these against competitive compensation levels, including retention requirements and succession planning with respect to each executive.

The Compensation Committee has the opportunity to meet with the executives at various times during the year, which allows the Compensation Committee to form its own assessment of the executive’s performance. In addition, at the end of each year Mr. Hill typically shares with the Compensation Committee his evaluation of each executive, including with respect to recent contribution and performance, strengths, weaknesses, development plans and succession potential. Based upon this input, as well as the information provided by the Company’s human resources and corporate development professionals and the Compensation Committee’s independent consultant, the Compensation Committee makes its own assessments and approves compensation for each executive officer, other than Mr. Hill. Both Mr. Hill and the Compensation Committee retain the discretion to adjust compensation objectives, evaluations and determinations in the face of industry and macroeconomic factors which, particularly in the current environment, are subject to rapid change and revision. With respect to Mr. Hill, the Compensation Committee makes a recommendation to the Board of Directors, which makes the final determination concerning Mr. Hill’s compensation.

Components of Senior Executive Compensation. The primary elements of annual compensation for senior executives are base salary, cash bonuses (which fall within the SEC’s definition of “Non-Equity Incentive Plan Compensation” for the purposes of the “Summary Compensation Table” and otherwise) and equity awards, the aggregate of which is described as Total Direct Compensation (TDC). As described further below, senior executives also receive other forms of compensation, including various benefit plans made available to most of the Company’s employees, but these are not independently evaluated in connection with the annual determination of senior executive compensation. Mr. Hill also has an agreement with the Company that govern aspects of his compensation, as described below under “Employment and Severance Agreements.” In January of 2010, the Company entered into an agreement with Mr. Benzing in connection with his retirement from the Company effective as of June 26, 2010 which will govern his compensation thereafter, as described below under “Employment and Severance Agreements.”

TDC for each senior executive is designed to be competitive with that of executives serving in a comparable capacity in the Compensation Peers, as well as to align the executive’s incentives with the long-term interests of the Company’s shareholders. The Company uses cash bonuses to reward short-term performance, and uses equity awards to both recognize recent performance and to create incentives for long-term performance. The Company does not assign a fixed weighting to any individual component of compensation, as the Company believes that TDC for each executive must be tailored to meet the competitive characteristics applicable to the executive’s personal and professional circumstances, as well as the performance of the business the executive is responsible for. While the Compensation Committee has the discretion to modify the individual components of compensation Mr. Hill recommends for each senior executive, and the Board of Directors has the discretion to modify the individual components of compensation the Compensation Committee recommends for Mr. Hill, neither the Compensation Committee nor the Board exercised such discretion with respect to 2009 compensation for the Named Executive Officers.

Base Salary. Base salary for senior executives is established annually by the Compensation Committee. Base salaries for executives other than Mr. Hill are based upon his recommendation, which is in turn based upon information gathered by the Company’s human resources professionals and the Compensation Committee’s consultant.

Individual base salary recommendations are made based upon the executive’s performance over both the short and long term. That performance is weighed against the cost and risk of making management changes, including the anticipated level of difficulty in replacing the individual with someone of comparable experience and skill.

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Base salary is generally targeted at the 50^th percentile for similarly-situated executives. Base salary benchmarking and alignment is critical to the Company’s overall compensation program because bonus potential is stated as a percentage of base salary.

Base salaries for 2009 for all executive officers, including the Named Executive Officers, were initially determined in December 2008. The Compensation Committee, with the assistance of the Compensation Committee consultant and the Company’s human resources professionals, reviewed the base salaries of the senior executive officers on the basis described above. Although this review determined that the base salaries of certain of the executive officers were below market levels, Mr. Hill recommended, and the Committee agreed, that no increases in base salaries would be made in 2009 (other than for Mr. Archer, whose base compensation was increased 7% in connection to his promotion to Executive Vice President). This included the fact that the Company had recently undertaken a reduction in force, and that it was anticipated that non-executive employees would also not be receiving base salary increases in 2009.

Beginning January 1, 2009, at the request of Mr. Hill, the Company paid Mr. Hill fifty percent (50%) of his 2008 base salary and on January 14, 2009 the Company announced each of the executive officers would be taking a 10% decrease in base salary for 2009. On May 22, 2009, the Company announced that effective June 1, 2009, Mr. Hill’s base salary would be ninety percent (90%) of his 2008 base salary. The base salary paid to each Named executive Officer in 2009 is set forth under “Salary” in the “Summary Compensation Table.”

Bonuses. In 2009, all senior executives, including the Named Executive Officers, were eligible to participate in the Company’s senior executive bonus programs. These bonus programs provide for a cash bonus based on the degree to which the corporate performance objectives as well as individual performance goals are achieved. For the Named Executive Officers, this consists primarily of the 162(m) Bonus Program, described below. For the remaining executive officers, their bonus program operates generally as described below, although for executives other than Named Executive Officers the deductibility of amounts payable under the bonus program is not subject to the Section 162(m) limitations.

162(m) Bonus Program. The starting point for the senior executive bonus program is the determination of a target bonus potential for each executive, which is stated as a percentage of base salary. Base salary under the 162(m) Bonus Program means the participant’s annual salary rate on the last day of the year. The percentage is established by the Compensation Committee at the end of each year for the following year, although a change in the executive’s responsibilities or extraordinary performance could result in the Compensation Committee acting to modify the percentage during the year. For senior executives other than Mr. Hill, the percentage is based upon his recommendation, although the Compensation Committee makes the final determination in all cases. The percentage is determined by evaluating the practices of the Compensation Peers and is intended to provide an aggregate cash compensation package that would exceed what the executive would receive from competitors in the event that the aggressive individual goals and the corporate performance objectives established by the Company are exceeded.

Individual performance goals for each executive are outlined by Mr. Hill in the first quarter of the year based upon discussions with the executive. At the end of the year, each executive reviews his individual performance with Mr. Hill, who in turn makes a recommendation to the Compensation Committee as to the executive’s percentage achievement of the previously outlined individual goals.

Individual objectives may change over the course of the year, including as the result of changes in the executive’s responsibilities. In addition, the Company does not believe an exclusively algorithmic approach to the determination of cash bonuses is appropriate for employees who do not have responsibility for the entire Company. Accordingly, both Mr. Hill’s evaluation of the executive’s performance and the Compensation Committee’s determination of the cash bonus necessarily involve a subjective evaluation of the extent to which the executive has achieved his or her individual objectives. Mr. Hill’s cash bonus is determined by the Compensation Committee based solely on the degree to which the Company meets the corporate performance objectives described above.

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In addition to individual objectives, the bonus of each executive officer has historically been impacted by the operation of the corporate factor, which measures the extent to which the Company has met its corporate performance objectives (e.g., achieving a 15% net profit after tax and turning the Company’s controllable assets 1.5 times annually). The corporate factor is determined annually by the Compensation Committee based upon the Company’s financial position and results of operations. Each objective is weighted at 50%, and certain minimums and maximums are applied to ensure that the corporate factor is achieved using a balanced approach.

The corporate factor is calculated on a shipments basis rather than on a revenue basis, as the Company believes that, for compensation purposes, shipments more accurately reflect actions within its employees’ control. Asset turnover is based upon controllable asset turns, which the Company defines as assets other than goodwill and fixed assets previously accounted for as synthetic leases, less cash and short-term investments in excess of short-term operating requirements. The Compensation Committee has the discretion to include or exclude the impact of certain items in calculating the corporate factor. Examples of items which may be excluded are charges and benefits from legal settlements and restructuring activities.

The calculation of the corporate factor with respect to the Chief Executive Officer and Principal Financial Officer is based upon the Company’s performance on a consolidated basis, while the calculation for the other Named Executive Officers is based upon the performance of the Company’s Semiconductor Group operating segment, which constitutes approximately 90% of the Company’s business and is defined in Note 18 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009. Once the corporate factor has been determined, the Compensation Committee then approves a cash bonus for each of the Named Executive Officers other than Mr. Hill based upon the following formula:

Base Salary x Target Bonus % x Individual Goal Achievement % x Corporate Factor

Using the approach described above, in December 2008, the Compensation Committee, with input from Mr. Hill with respect to the other Named Executive Officers, determined that the target bonus percentage payable to each of the Named Executive Officers would remain unchanged in 2009. Ultimately, in December of 2009 it was determined that no senior executive officer, including Mr. Hill, would receive a payout under any senior executive bonus program, as the Company had not achieved the minimum 3% net profit after tax threshold required in 2009 for employees to be eligible for profit sharing in general.

Equity Awards. The Company’s equity compensation program for senior executive employees includes two forms of long-term incentives: restricted stock and stock options. Award size and frequency is based on each executive’s demonstrated level of performance over time. The Company annually reviews award levels and practices to ensure their competitiveness. In making individual awards, the Compensation Committee considers industry practices, the recent performance of each executive, the value of the executive’s previous awards and the Company’s views on executive retention and succession.

The Company believes compensation plans that are tied to company performance, rather than stock performance against an index, are the optimum way of providing incentives to executives and to reward success, since they are linked to performance elements that are more likely to be within the individual’s control, and since success in these areas will, over the long term, enhance shareholder value.

In December 2009, the Compensation Committee approved the issuance of restricted stock units (“RSUs”), performance-based restricted stock units and stock options to senior executives and employees as part of the annual performance review cycle.

For employees at the vice president level and above, including Mr. Hill and the other Named Executive Officers, 40% of the RSUs were granted with vesting contingent upon meeting specified revenue growth goals over the 2010-2012 timeframe. The remaining 60% of the RSUs were granted with annual vesting based on continued service over four years. The performance-based RSU awards continue to be in place to motivate and

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reward senior management to achieve key growth goals over a multi-year period, which the Compensation Committee and management believe will drive the creation of long-term shareholder value.

Performance Objectives for the Performance-Based Restricted Stock Units. For the performance-based RSUs granted in December 2009, the performance measurement date will be December 31, 2012 and the vesting date will be March 31, 2013. Employees at the vice president level and above, including the Named Executive Officers, received performance-based RSU grants. The payout of the RSU grants will be determined based on three components: (i) the Company’s revenue growth achievement, (ii) a modifier based on the Company’s revenue growth performance relative to its peers, as described below and (iii) an adder equivalent to the service based portion of the RSU grant if the three-year compound annual revenue growth achievement is over the 7.5% target.

The Target for 100% payout is 7.5% compound annual growth rate (CAGR) between base year 2009’s and measurement year 2012’s reported consolidated revenue. Acquisitions will be included when determining the Company’s measurement year 2012 consolidated revenue. There will be lower or higher payouts if the CAGR is below or above the 7.5% target as follows:

The above RSU payout will be modified based on the Company’s CAGR between base year 2009’s revenue and measurement year 2012’s revenue relative to the combined calendarized CAGR between base year 2009’s revenue and measurement year 2012’s revenue of peer companies Applied Materials, Inc., KLA-Tencor Corp., Lam Research Corp., Tokyo Electron Limited and Varian Semiconductor Equipment Associates, Inc. as follows:

The threshold for the relative growth modifier of 0.5 represents a change from 2008 where the threshold was zero. The Compensation Committee, based upon a recommendation from its independent consultant, made this change so that the opportunity for positive or negative adjustments are balanced for participants based on the Company’s growth relative to the designated peers.

Recipients of the performance-based RSUs will be eligible for an additional RSU payout if the Company achieves compounded annual revenue growth over 7.5% for the three year period ended December 31, 2012. The amount of this payout would be equal to the size of the executive’s service based December 2009 year end grant. The achievement measurement date will be December 31, 2012 and the vesting date will be March 31, 2013.

Except for the change to the relative growth modifier described above, management recommended, and the Compensation Committee agreed, that no change in the performance objectives should be made between the December 2008 grants and the December 2009 grants. This goal setting approach recognizes the cyclicality of the Company’s business and is intended to provide consistent goals and objectives for participants over time with the result that the compensation ultimately earned and received may vary significantly from period to period. Commensurate with this variability in potential outcomes, the determination of the grant date fair value of the Company’s performance-based awards as reported in the “Summary Compensation Table” and “Grants of Plan-Based Awards Table” may vary considerably from year to year even though the target number and target value of the awards granted to an individual executive may be fairly stable from year to year.

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The vesting schedule and number of options or shares of restricted stock the Compensation Committee grants to each senior executive is determined based upon a number of factors, including market data collected with respect to the Compensation Peers and the evaluation each executive is given by Mr. Hill. In December of 2008, based upon the compensation information gathering and the senior executive review processes described above, the Compensation Committee concurred in the equity award recommendations made for each Named Executive Officer by Mr. Hill for 2009. In December of 2009, based upon a similar process, with the addition of the recommendations of its compensation consultant, the Compensation Committee concurred with Mr. Hill’s recommendations for 2010.

In concurring with Mr. Hill’s recommendations with respect to the other Named Executive Officers in December 2008, and in making its recommendations with respect to Mr. Hill’s equity awards, the Compensation Committee considered the executive’s equity ownership interest in the Company, whether executives had realized the intended value of previous equity awards, the number of options held and their exercise price, the volume and value of awards held by other executives at the same level of authority in the Company and the need to retain and motivate the executives, each of whom is important to the Company’s continued success. The Board of Directors approved the Compensation Committee’s recommendation with respect to Mr. Hill’s equity awards for 2009 without modification. The equity awards for the Named Executive Officers for 2009 are set forth under “Stock Awards” and “Option Awards” in the “Summary Compensation Table.”

Equity Award Mechanics. Equity awards are granted pursuant to the Company’s 2001 Stock Incentive Plan as described in the “Equity Compensation Plan Information.” Awards are made at the Compensation Committee’s scheduled meetings or by unanimous written consent. Awards typically fall into two categories: annual awards and new hire and promotion awards. New hire and promotion awards are made on the same day of each month, and annual awards are made at the Compensation Committee’s December meeting. The Compensation Committee may make grants at other times in connection with employee retention or otherwise.

All stock option awards have a per share exercise price equal to the closing price of our Common Stock on the grant date. Restricted stock and restricted stock unit awards may be based upon either performance or the passage of time or both. In most cases, the Company must achieve certain performance goals within the time frame established in connection with the award, in order for performance-based restricted stock to be earned. See the “Outstanding Equity Awards Table.” In the future, performance goals may be scaled so that the recipient can receive a portion of the award in the event the stated performance goals are not fully achieved.

The Compensation Committee has not granted, nor does it intend in the future to grant, equity awards in anticipation of the release of material nonpublic information. Similarly, the Company has not timed, nor does it intend in the future to time, the release of material nonpublic information based upon equity award grant dates. The Compensation Committee’s schedule is generally determined several months in advance, and the proximity of any awards to earnings announcements or other market events is coincidental.

Deferred Compensation. Directors and eligible employees, including the Named Executive Officers, are entitled to defer a portion of their salary, and all or a portion of their bonus payments, pursuant to the Company’s nonqualified deferred compensation plan. Amounts credited to the plan may be allocated by the participant among 23 hypothetical investment alternatives. The amounts deferred are not actually invested in the alternatives; the alternatives exist to enable the Company to calculate what a participant is owed at the time the deferred amounts are distributed. The Company purchases insurance to secure a portion of its obligations to the participants. The Named Executive Officers did not participate in the Company’s nonqualified deferred compensation plan during 2009.

Retirement Plans. In addition to participating in the Company’s 401(k) plan, certain senior executive officers who meet certain eligibility criteria are entitled to continued medical and dental coverage following their retirement (the “Post-Retirement Healthcare Plan”). To be eligible, a Named Executive Officer, other than Mr. Hill, is required to be employed by the Company at age 60, and the sum of his or her age at retirement plus

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the number of years employed must equal or exceed 72. To be eligible for the program, an executive officer must be in good standing at the time of retirement. The program permits the executive to continue his or her existing medical and dental coverage until the later to occur of the death of the executive or the executive’s spouse. Participants in the program would be required to pay premiums for such coverage which would be equal to rates then applicable to active employees and their spouses. No Named Executive Officers are currently eligible to participate in the program with the exception of Jeffrey C. Benzing. The Company’s obligations to Mr. Hill upon retirement are described below under “Employment and Severance Agreements” and in the “Pension Benefits Table” below. Mr. Hill also has a supplemental executive retirement plan (“SERP”) as described in footnote 2 to the “Pension Benefits Table” below.

Perquisites and Other Benefits. The Company annually reviews the perquisites that senior executives receive. In general, such perquisites are limited. Other than as described in the “Summary Compensation Table” or under the “Pension Benefits Table” below, the Company’s senior executives are entitled to few benefits that are not otherwise available to all of its employees.

Regulatory Considerations. It is the Company’s policy to make reasonable efforts to cause executive compensation to be eligible for deductibility under section 162(m) of the Code. Under Section 162(m), the federal income tax deductibility of compensation paid to the Company’s Chief Executive Officer and to each of its four other most highly compensated executive officers may be limited to the extent that such compensation exceeds $1 million in any one year. Under Section 162(m), the Company may deduct compensation in excess of $1 million if it qualifies as “performance-based compensation”, as defined in Section 162(m).

At the 2009 Annual Meeting of Shareholders, the shareholders reapproved the Company’s 162(m) Bonus Program and ratified and amended the Company’s 2001 Stock Incentive Plan. The Company’s 162(m) Bonus Program is a performance-based bonus program where awards to management for achieving certain performance objectives are generally payable in cash. However, the Compensation Committee reserves the right to declare any award wholly or partially payable in an equivalent amount of restricted stock awards and restricted stock units issued under the Company’s 2001 Stock Incentive Plan. The 2001 Stock Incentive Plan is designed to permit the Compensation Committee to grant equity awards that are performance-based and therefore tax deductible under Section 162(m), to the extent that such compensation is not in excess of $1 million and qualifies as “performance-based compensation”, as defined in Section 162(m).

In the recent past, compensation paid to the Company’s Chief Executive Officer and to each of its four other most highly compensated executive officers has been deductible by the Company even though certain compensation may not have qualified as “performance-based compensation.” However, it is possible that non-qualifying compensation paid to the Company’s executive officers may exceed $1 million in a taxable year and therefore limit the deductibility by the Company of a portion of such compensation. For example, each of the Company’s Named Executive Officers has been granted restricted stock, some of which will continue to vest over the next several years based upon a time based vesting schedule. Please see the “Outstanding Equity Awards Table” for more details regarding such restricted stock awards.

Employment and Severance Agreements

Mr. Hill. Effective as of July 24, 2008, the Company entered into an amended and restated employment agreement with Mr. Hill. This agreement amends and restates in its entirety Mr. Hill’s prior employment agreement dated as of October 1, 1998, as amended December 17, 1999, January 14, 2004 and March 15, 2005. The employment agreement was amended and restated principally to comply with the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and to address certain recent changes to the application of Section 162(m) of the Code described in IRS Revenue Ruling 2008-13. The amendments do not otherwise materially change the parties’ respective obligations and commitments. The amended and restated agreement provides for an initial employment term through December 31, 2010, with automatic renewals for successive two year periods if Mr. Hill continues to serve on the last day of each term. The agreement further

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provides that Mr. Hill will receive a base salary of $878,000 per annum which may be amended from time to time and will be eligible to participate in the Company’s then-existing executive bonus plan.

In addition, Mr. Hill is entitled to receive certain benefits and/or payments in connection with the termination of the agreement. These benefits and/or payments will vary depending upon whether termination of the agreement occurs as a result of Mr. Hill’s death, disability, resignation for “Good Reason” or termination “Not for Cause” (all as defined in the agreement). If the agreement is terminated by reason of Mr. Hill’s death, the Company will continue to pay salary and benefits to Mr. Hill’s estate through the second full month after his death. If the agreement is terminated by reason of Mr. Hill’s disability, as defined, the Company will continue to employ Mr. Hill. For the first 180 days of disability Mr. Hill will receive 100% of his base salary in effect at the time he becomes disabled and thereafter Mr. Hill will receive 66 ²/₃% of his base salary until he reaches 65. Coverage under the Company’s health insurance benefit plans shall continue pursuant to the agreement in the case of Mr. Hill’s disability until he reaches age 65. If the Company terminates the agreement Not for Cause or if Mr. Hill resigns for Good Reason, Mr. Hill will be entitled to receive (i) the greater of (x) a severance payment equal to two years of his then-current base salary, or (y) his base salary through the expiration date of the agreement, which amount shall be payable in the form of salary continuation for two years on the Company’s normal payroll schedule; (ii) a single lump-sum payment equal to 300% of his base annual salary as in effect on the date of the termination payable in a single lump sum payment within 30 days following his date of termination; (iii) payment of health insurance premiums in accordance with the Company’s Post-Retirement Healthcare Plan without regard to any age or length of service limitations for that program; (iv) continued vesting of his stock options through the salary continuation period, with vested options to be exercised within three years following the end of such period, during which time Mr. Hill will serve as a consultant; and (v) immediate vesting of his restricted stock awards such that the Company’s right to repurchase such restricted stock shall immediately lapse. Payments during this salary continuation period are conditioned upon Mr. Hill’s not competing with the Company during that period. Mr. Hill’s right to terminate for Good Reason shall continue for two years following a “Change of Control” (as defined in the agreement) in which he accepts a position with the Company or its successor other than as Chairman and Chief Executive Officer. Mr. Hill’s Change of Control payments and benefits may be reduced such that they would not constitute a “parachute payment” within the meaning of Section 280G of the Code, or be subject to the excise tax imposed by Section 4999 of the Code. If the Company (a) terminates the agreement for “Cause” (as defined in the agreement), (b) if Mr. Hill terminates Not for Cause, or (c) upon Mr. Hill’s death after reaching the age of fifty-five and still being employed by the Company, no further rights to compensation or benefits will accrue to Mr. Hill, except that in the case of a termination Not for Cause or upon Mr. Hill’s death after reaching the age of fifty-five while still employed by the Company (i) Mr. Hill and his qualified dependents shall receive continued health insurance coverage under the Company’s officer retirement health benefit program, without regard to any age or length of service limitations for that program, and (ii) if Mr. Hill is age fifty-five or older at the time of his termination Not for Cause or death, he or his estate will receive a payment equal to twenty-four times his highest base monthly salary and an additional payment calculated according to the schedule set forth in the agreement. If Mr. Hill terminates his employment “Not for Cause” or retires after being disabled he will also receive the benefits he is entitled to under the Company’s July 1993 Board of Directors’ Resolution Regarding Officers’ Retirement, Medical and Dental Coverage; these may include lifetime health insurance for himself and his qualified dependents. See the “Pension Benefits Table” and “Potential Payments Upon Termination or Change-in-Control” below.

In addition, effective as of November 15, 2005, the Compensation Committee authorized the addition of the retirement benefits provided under Mr. Hill’s employment agreement to the plans and programs covered by the Company’s existing rabbi trust agreement with Union Bank of California as trustee. See the “Pension Benefits Table” and “Potential Payments Upon Termination or Change-in-Control” below.

Mr. Benzing. On January 8, 2010, the Company entered into an agreement (the “Benzing Agreement”) with Mr. Benzing in connection with his retirement from the Company. The Benzing Agreement becomes effective as of June 27, 2010 and expires on June 26, 2014, unless sooner terminated. Under the Benzing Agreement Mr. Benzing will (i) serve as a member of the Company’s Technical Advisory Board, (ii) provide advice and

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assistance as needed to the Company’s management during on-site product design reviews and (iii) serve as a member of the Company’s Patent Committee. In exchange for these services, Mr. Benzing will receive an aggregate salary of $390,000 over the term of the Benzing Agreement and is eligible to receive a pro-rata share of any management bonus that he would otherwise be entitled to receive related to his position as Executive Vice President, Chief Administrative Officer and Principal Financial Officer to the extent the Company pays such management bonuses for year 2010 performance. Additionally, if Mr. Benzing continues to be employed by the Company on July 15, 2010, Mr. Benzing will be granted restricted stock units equivalent to $390,000 using the Company’s stock price on June 25, 2010. The restricted stock units will vest on the date of grant. The terms of the Benzing Agreement also provide that Mr. Benzing is entitled to participation in the Company’s Executive Officers’ Retirement Medical and Dental Coverage Plan.

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COMPENSATION COMMITTEE REPORT

The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that Novellus specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act.

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis. Based on that review and its discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

J. David Litster

Youssef A. El-Mansy

Yoshio Nishi

William R. Spivey

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Summary Compensation Table

The following table sets forth certain information concerning compensation of each Named Executive Officer during the fiscal years ended December 31, 2007, December 31, 2008 and December 31, 2009:

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Grants of Plan Based Awards Table

The following table sets forth certain information concerning grants of awards made to each Named Executive Officer during the fiscal year ended December 31, 2009:

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The “Summary Compensation Table” and “Grants of Plan-Based Awards Table” should be read in conjunction with both the preceding “Compensation Discussion and Analysis,” which provides detailed information regarding our compensation philosophy and objectives and “Employment and Severance Agreements,” which provides a description of the material terms of any employment arrangements with our Named Executive Officers.

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Outstanding Equity Awards Table

The following table sets forth certain information concerning outstanding equity awards for each Named Executive Officer as of December 31, 2009:

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Option Exercises and Stock Vested Table

The following table sets forth certain information concerning all exercises of stock options and vesting of restricted stock for each Named Executive Officer during the fiscal year ended December 31, 2009:

Pension Benefits Table

The following table sets forth certain information concerning each plan that provides for payments or other benefits at, following, or in connection with retirement for each Named Executive Officer during the fiscal year ended December 31, 2009:

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Potential Payments Upon Termination or Change-in-Control

All of the Company’s employees are employees at will, with the exception of Mr. Hill as described below. Accordingly, they may be terminated at any time, with or without cause. Effective as of July 24, 2008, the Company entered into an amended and restated employment agreement with Mr. Hill. This agreement amends and restates in its entirety Mr. Hill’s prior employment agreement dated as of October 1, 1998, as amended December 17, 1999, January 14, 2004 and March 15, 2005. With respect to Mr. Hill, his employment agreement with the Company requires certain payments upon termination depending upon the reason their employment is terminated. See “Employment and Severance Agreements.” Other than Mr. Hill’s right to terminate his employment for Good Reason (as defined in his agreement), which continues for two years following a “Change of Control” (as defined in his agreement) under certain circumstances, a change-in-control of the Company does not result in the payment to any Named Executive Officer of any amounts to which the executive would not otherwise be entitled absent a change-in-control.

The table below sets forth the estimated amount of payments and other benefits each Named Executive Officer would be entitled to receive upon the occurrence of the indicated event, assuming that the event occurred on December 31, 2009. Amounts potentially payable under plans which are generally available to all salaried employees, such as life and disability insurance, are excluded from the table. The values related to vesting of stock options and awards are based upon the fair market value of our Common Stock of $23.34 as reported on the NASDAQ Global Select Market on December 31, 2009, the last trading day of our fiscal year. Actual payments made at any future date would vary, including based upon the amount the Named Executive Officer would have accrued under the applicable benefit or compensation plan as well as based upon the price of our Common Stock.