NOVELLUS SYSTEMS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1995

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

For the transition period from _______________ to _______________

Commission file number 0-17157

NOVELLUS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

CALIFORNIA 77-0024666
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

3970 NORTH FIRST STREET, SAN JOSE, CA 95134
(Address of principal executive offices) (Zip Code)

(408) 943-9700
(Registrant's telephone number
including area code)

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange on
Title of Each Class Which Registered
------------------- ------------------------
None N/A

Securities registered pursuant to Section 12(g) of the Act:

Common Stock
(Title of Class)

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

As of March 7, 1996 the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $580,386,508.00 based on the
average of the high and low prices of the Common Stock as reported on the Nasdaq
National Market on such date. Shares of Common Stock held by officers,
directors and holders of more than 5% of the outstanding Common Stock have been
excluded from this calculation because such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

The number of shares of Common Stock outstanding on March 7, 1996 was
15,999,199.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Documents Incorporated by Reference: Part II of this Report on Form 10-K
incorporates information by reference to Registrant's 1995 Annual Report to
Shareholders. Part III of this Report on Form 10-K incorporates information by
reference from the Registrant's Proxy Statement for its 1996 Annual Meeting of
Shareholders.

PART I

ITEM 1. BUSINESS

Novellus is a leading supplier of high productivity chemical vapor
deposition (CVD) systems used in the fabrication of integrated circuits. CVD
systems are used to deposit all of the dielectric (insulating) layers and
certain of the conductive metal layers on the surface of a semiconductor
wafer. The overall growth in the semiconductor industry and the increasing
number of layers used in complex integrated circuits have lead to increased
demand for advanced CVD equipment. The Company's products are differentiated
by their simultaneous ability to provide superior film quality while
providing the highest productivity and lowest cost of ownership in the
advanced CVD market. The Company's strategy is to focus on major
semiconductor manufacturers, and the Company has sold one or more of its
systems to each of the 20 largest semiconductor manufacturers in the world.

INDUSTRY BACKGROUND

The semiconductor industry has experienced significant growth in recent
years due to the continued growth of the personal computer market, the expansion
of the telecommunications industry, the emergence of new applications such as
consumer electronics products, wireless communications devices and mobile
computers and the increased semiconductor content in these electronics systems.
Many of these new applications have been made possible by significant advances
in the performance of and lower costs for integrated circuits. In response to
the growth in demand for integrated circuits, the semiconductor industry is
significantly increasing its manufacturing capacity through the expansion of
existing facilities and construction of new facilities.

The fabrication of integrated circuits requires a number of complex and
repetitive processing steps, including deposition, photolithography and etch.
Deposition is a process in which a film of either electrically insulating or
electrically conductive material is deposited on the surface of a wafer. The
two principal methods of thin film deposition are CVD, which can be used to
deposit both insulating and conductive films, and physical vapor deposition
(PVD), which is used primarily for sputtering conductive metals onto the wafer
surface. In the CVD process, wafers are typically placed in a reaction chamber
and a variety of pure and precisely metered gases are introduced while some form
of energy is added to activate a chemical reaction on the wafer surface. The
result of this reaction is the deposition of a film on the wafer. CVD has become
the predominant deposition solution for smaller line width geometry
semiconductor devices because CVD is more effective than PVD in uniformly
filling the narrower spaces and holes in depositing insulating material and
certain metals in advanced devices.

CVD processes are used to deposit all of the dielectric films and certain
conductive, metal films in an integrated circuit. The dielectric layers in an
integrated circuit include the initial interlayer, portions of the interconnect
layers and the final passivation layer. CVD is also used for deposition of
conductive metal layers, particularly those metals that are more difficult to
deposit in smaller line width geometry devices through conventional PVD or other
deposition technology. CVD technology is particularly effective for depositing
blanket tungsten as a "plug" layer that connects one conductive metal layer to
another in a multi-level integrated circuit. For such applications, tungsten is
replacing aluminum, which has certain physical properties that reduce its
efficacy for the smaller interconnect holes of devices with smaller line width
geometries.

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Advanced integrated circuit technology has created increased demand for
more sophisticated semiconductor processing equipment. Today's complex
semiconductor devices, such as 64 megabit DRAM memories and 64-bit
microprocessors, are being designed with .35 micron and below micron line width
geometries, and the microprocessors have up to four layers of interconnect
circuitry. The next generation of semiconductor devices, including 256 megabit
DRAMs and 64-bit microprocessors, are being designed with .25 micron line
geometries, and the microprocessors will incorporate four or more interconnect
layers. Each additional interconnect layer requires three separate layers of
deposition, which include the initial metal layer, a non-conductive dielectric
layer and then a "plug" metal film to fill patterned holes in the dielectric
layer that connects the metal layers on either side of the dielectric. The
Company believes that the greater complexity and number of interconnect layers
in advanced integrated circuits will enable the markets for dielectric and metal
CVD systems to experience significant growth.

Semiconductor manufacturers generally measure the cost performance of their
production equipment in terms of "cost per wafer," which is determined by
factoring in the fixed costs for acquisition and installation of the system, its
variable operating costs and its net throughput rate. A system with higher
throughput allows the semiconductor manufacturer to recover the purchase price
of the system over a greater number of wafers and thereby reduce the cost of
ownership of the system on a per wafer basis. Throughput is most accurately
measured on a net or overall basis, which takes into account the processing
speed of the system and any non-operational downtime for cleaning, maintenance
or other repairs. Yield and film quality are also significant factors to the
semiconductor manufacturer in selecting processing equipment. The increased
costs of larger and more complex semiconductor wafers have made high yields
extremely important to semiconductor manufacturers. To achieve higher yields and
better film quality, deposition systems must be capable of repeating the
original process on a consistent basis without a disqualifying level of defects.
This characteristic, known in the industry as "repeatability," is extremely
important in achieving commercially acceptable yields. Repeatability is more
easily achieved in those systems that can operate at desired throughput rates
without requiring the system to approach its critical tolerance limits.

The continuing evolution of semiconductor devices to smaller line width
geometries and more complex multi-level circuitry has significantly increased
the cost and performance requirements of the capital equipment used to
manufacture these devices. Many of the advanced eight inch fabrication lines
that are currently planned or in construction will cost up to $1 billion each,
representing a substantial increase over the costs of prior generation
fabrication facilities. Increased capital depreciation costs will continue to
become a much larger percentage of the aggregate production costs for
semiconductor manufacturers relative to labor, materials and other variable
manufacturing costs. As a result, there has been an increasing focus by the
semiconductor industry on obtaining increased productivity and higher returns
from its semiconductor manufacturing equipment, thereby reducing the effective
cost of ownership of such systems.

THE NOVELLUS SOLUTION

Novellus focuses on advanced CVD systems that provide superior film quality and
yield while attaining the high levels of productivity required to meet the
semiconductor industry's need for high volume, low cost wafer production. The
Company's multi-station continuous processing architecture enables its systems
to address each of the following critical parameters of CVD system performance:

THROUGHPUT, COST PER WAFER. In contrast to CVD systems which process
only one wafer at a time in a chamber, the Company's multi-station continuous
processing systems can process five, six, or seven wafers at the same time in a
chamber, leading to higher throughput levels. The design

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simplicity and automatic cleaning capabilities of the Company's systems further
increase net throughput by reducing production downtime. The Company believes
that its systems attain the highest levels of productivity and lowest cost per
wafer in the advanced CVD equipment market.

YIELD AND FILM QUALITY. With Novellus' unique sequential,
multi-station chamber design, each wafer receives a fraction of the desired film
thickness at each of five, six, or seven deposition stations in the process
chamber. The "averaging" effect created by this design tends to reduce
anomalies in film thickness and thereby improves film uniformity and quality.
The Company's systems can obtain within-wafer and wafer-to-wafer uniformity
levels of +/- 1% of film thickness as measured at one standard deviation, which
the Company believes is the highest in the industry.

PROCESS REPEATABILITY. Because of the inherently higher throughput
potential of continuous processing, the Company's systems are able to deposit
materials at lower, more controlled rates than single wafer processing systems
which generally deposit at faster rates closer to the process performance limits
to achieve production-level throughputs. Lower deposition rates avoid straining
the system's process tolerance limits and thereby permit increased process
control and repeatability.

STRATEGY

The Company's objective is to increase its market share in the worldwide
CVD market and strengthen its position as a leading supplier of semiconductor
processing equipment. The key elements of the Company's strategy are as
follows:

EMPHASIS ON HIGH PRODUCTIVITY SYSTEMS. Novellus focuses on providing
high productivity CVD systems to leading semiconductor companies. The Company
addresses the needs of semiconductor manufacturers through its unique continuous
processing architecture which enables its systems to attain high levels of wafer
throughput, yield and film quality. The architecture's simple design also
provides the Company's systems with greater up-time and smaller footprints
compared to competitive systems, resulting in additional cost of ownership
advantages. The Company intends to retain its focus on productivity by
leveraging its continuous processing architecture in product enhancements and
new product offerings.

LEADERSHIP IN CVD TECHNOLOGY. The Company's strategy is to provide a
family of deposition systems which utilize advanced CVD technologies to address
leading-edge wafer processing needs. The Company's Concept One-Dielectric offers
a proprietary dual frequency deposition technology to achieve superior results
for a wide variety of films on wafers as large as eight inches and geometries as
small as .35 micron. The Company's Concept One-W is used by manufacturers to
connect multiple metal layers in advanced devices and the Company believes that
it is currently the only system that provides full coverage tungsten deposition.
The Company's Concept Two system is a modular CVD system designed to address the
needs of wafer fabs that demand greater levels of wafer processing integration,
higher volume production and increased factory automation. The Company is
focusing its research and development efforts on additional Concept Two modules
and "gap fill" technology for the next generation of reduced geometry
fabrication lines.

FOCUS ON MAJOR SEMICONDUCTOR MANUFACTURERS. The Company has sold
one or more CVD systems to each of the 20 largest semiconductor manufacturers
in the world. The long-term growth prospects for semiconductors has caused
many of these manufacturers to plan major capacity expansions over the next
several years. The Company's sales objective is to work closely with
customers to secure purchase orders for multiple systems as such customers
expand existing facilities and build next

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generation wafer fabs. The Company seeks to build customer loyalty and achieve
a high level of repeat business by offering high reliability products,
comprehensive field support and a responsive parts replacement and service
program.

EXPANSION OF ASIAN MARKET PRESENCE. An industry source estimates that
Asian manufacturers accounted for over half of the worldwide market for
processing semiconductor equipment in 1995, due to Japan's large semiconductor
industry and the recent rapid growth of manufacturers in Korea, Taiwan and
Singapore. While Novellus derives a significant percentage of its net sales from
the Asian marketplace, the Company believes that substantial additional growth
potential exists. Currently, the Company's local presence in Asia includes
sales and support offices through the Company's wholly owned subsidiary in Japan
and one in each of Korea, Taiwan, Mainland China and Singapore. The Company also
sells its products through a distributor in Japan and manufacturers
representatives in other Asia-Pacific countries. To improve its market presence
in Asia, Novellus in 1994 created and filled the position of President of
Novellus Asia. Novellus feels it is an important part of its current business
strategy to aggressively build its infrastructure in Asia to serve this rapidly
growing region.

LOW MANUFACTURING COST STRUCTURE. Novellus utilizes an outsourcing
strategy for the manufacture of major subassemblies and performs system design,
assembly and testing in-house. Novellus believes that outsourcing enables it to
minimize its fixed costs and capital expenditures while also providing the
flexibility to increase capacity as needed. This strategy also allows the
Company to focus on product differentiation through system design and quality
control. Through the use of third party manufacturing specialists, the Company
ensures that its subsystems incorporate advanced technologies in robotics, gas
panels and microcomputers. The Company works closely with its suppliers to
achieve mutual cost reduction through joint design efforts.

PRODUCTS

Since the introduction of its original Concept One-Dielectric system
in 1987, the Company has developed and now offers a family of processing systems
for the CVD dielectric and metal markets. The Concept One-Dielectric deposits a
variety of insulating or "dielectric" films on wafers including Oxide, Nitride
and TEOS. In 1990, the Company introduced a modified version of the Concept
One-Dielectric, the Concept One-W, which also uses a CVD process to deposit
blanket tungsten metal films on wafers primarily as the metal interconnect
between conductor layers in the integrated circuit layers. In November 1991,
the Company introduced the Concept Two which is a modular, integrated production
system that is capable of depositing both dielectric and conductive metal layers
by combining one or more processing chambers around a common, automated robotic
wafer handler.

CONCEPT ONE-DIELECTRIC

The Concept One-Dielectric is shipped in two versions, the Concept One-150,
which processes 100, 125, and 150 mm (approximately 4, 5, and 6 inches) wafers
and the Concept One-200, which processes 125, 150 and 200 mm (approximately 5, 6
and 8 inches) wafers and is designed for advanced eight inch fabrication lines.
The Concept One consists principally of two attached chambers and associated
hardware and electronics. The first chamber of the system, called the
"loadlock," isolates the process chamber from the outside environment.
Depending on the model of the Concept One-Dielectric, the loadlock accepts up to
75 wafers sized from 100 to 200 mm (approximately 4 to 8 inches) in diameter in
cassette carriers. The operator inserts the cassettes of wafers in batches into
the loadlock, and the pressure inside the

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loadlock is decreased to create a vacuum, which matches the constant pressure
level of the process chamber. A robotic arm, as the wafer transport mechanism,
in the center of the loadlock transfers wafers one at a time from the cassettes
to the process chamber and, upon completion of the deposition process, returns
the finished wafers to the cassettes. The loadlock isolates the process chamber
from the fabrication environment, permitting the process chamber to remain at
constant temperature and pressure while wafers are transferred from the
cleanroom to the loadlock and from the loadlock to the process chamber. These
stable process chamber conditions enhance film quality, process repeatability,
and throughput. The loadlock design also reduces particulate contamination
because the robotic arm is the only moving mechanism in the loadlock and because
the wafer cassettes are isolated from the cleanroom.

The process chamber for the Concept One-Dielectric has six or eight
stations depending on the particular model. One station is used as a
load/unload site and the remaining five or seven stations are used for wafer
deposition. Each deposition station employs a dedicated shower head which
delivers gases and plasma energy to the wafer surface. In a six station process
chamber for example, each wafer moves through the system and stops at each of
the five deposition stations to receive one-fifth of its preprogrammed film
thickness. Some CVD products, called "single wafer" systems, process only one
wafer at a time in a process chamber, while multistation continuous process
systems, like the Concept One, can process numerous wafers at the same time.
The continuous processing capabilities of a multistation system generally enable
such systems to attain higher throughput while using a less critical, more
repeatable process than would be required for a single wafer system at
equivalent throughput levels. This multiple deposition design also results in
greater film uniformity and improved film quality because small variations in
deposition at any single station tend to be offset by deposition of the same
film at other stations.

After the entire batch of up to 75 wafers has been processed and returned
to the cassettes, an automatic cleaning cycle in the process chamber removes
residual deposition materials, which could otherwise cause particulate
contamination in a subsequent deposition process. During this cleaning cycle,
the loadlock automatically returns to atmospheric pressure, enabling the
operator to remove the cassettes of finished wafers without impacting system
throughout.

The Concept One-Dielectric uses electrical, radio frequency (RF) plasma
energy to enhance thermal energy, enabling the system to process wafers at a
relatively low temperature, thereby reducing the risk of heat damage to existing
metal layers during processing. The system also suppresses hillock formation by
limiting the time that the wafer is exposed to elevated temperatures prior to
deposition. The wafer is heated for 10 seconds or less in advance of deposition
in the Concept One-Dielectric, which the Company believes is one of the shortest
preheat times of any CVD system. Stress related defects are addressed through
the system by addition of a proprietary dual frequency, "stress control" option
which the Company offers. The system's vacuum loadlock reduces the level of
particulates, thereby improving film quality by isolating the process chamber of
the Concept One-Dielectric from temperature and pressure fluctuations. In
addition, the automatic cleaning capability and relatively simple mechanical
design of the system reduce particulate contaminants and thereby increase yields
and film quality.

In 1995, the Company introduced an extension to its Concept One-Dielectric
system, the Concept One Maxus. The Maxus extends the Company's leadership in
nitride passivation by enhancing the nitride deposition rate while retaining
superior nitride film performance. It also enhances the gap fill capability of
TEOS films by enabling fluorinated-TEOS (F-TEOS) processing for .35 micron gap
fill. F-TEOS enables the customer to lower the dielectric constant to 3.7, an
important capability in enhancing device performance.

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The Maxus is available on both the Concept One and Concept Two platform.

CONCEPT ONE-W

The Concept One-W was introduced in 1990 to address the tungsten CVD
market. The Concept One-W deposits blanket tungsten metal films, which are
increasingly used in advanced semiconductor devices to connect multiple metal
layers in the integrated circuit. Like the Concept One-Dielectric, the Concept
One-W uses a multistation, sequential deposition design that achieves high
throughput with desirable film properties for the entire range of film
thickness. The Concept One-W also uses an approach patented by the Company to
provide full-coverage frontside tungsten deposition while preventing deposition
of tungsten on the backside of the wafer. This capability helps prevent the
generation of damaging particles on the wafer and eliminates the need for
time-consuming etching on the backside of the wafer to remove the film.

During 1993, the Concept One-W successfully completed a 21 day, 24 hour per
day wafer manufacturing trial at SEMATECH, a U.S. semiconductor industry
consortium. The results of this extended manufacturing trial demonstrated that
the Concept One-W achieved or surpassed all program goals, which included system
availability, film uniformity, particulates and other film properties. SEMATECH
has also announced that the Concept One-W was one group of U.S. manufactured
semiconductor production tools capable of producing devices with 0.35 micron
geometries. The success of the Concept One-W in these SEMATECH trials was a
major milestone for the Company in attaining market acceptance for the Concept
One-W at major U.S. semiconductor manufacturers and in enabling the Company to
penetrate certain of these important accounts.

CONCEPT TWO

The Concept Two, which was introduced in November 1991, is a modular,
integrated production system that is capable of depositing both dielectric and
conductive metal layers by combining one or more processing chambers around a
common, automated robotic wafer handler. The Concept Two enables the
semiconductor manufacturer to increase production throughput and system
capability as needed without equipment replacement by adding additional process
modules through the Concept Two's modular configuration. The Concept Two was
initially available with a tungsten process chamber and a PVD process module for
deposition of certain metal layers. In late 1994, a dielectric process module
became available for Concept Two systems. The Concept Two has been designed to
be compatible with the modular equipment interface standard established by the
Modular Equipment Standards Committee (MESC), which is sponsored by SEMATECH.

The Concept Two in a typical configuration incorporates a central cassette
module and wafer handler that interfaces with the cleanroom and has multiple
interfaces for process or transport modules. The cassette module manages wafer
movement through its robotics between the various processing stations that can
be included in a particular Concept Two configuration. Different cassette
modules are available depending on the customer requirements. An optional
isolation chamber is also available that is connected to the cassette module to
connect high vacuum process chambers and other portions of the system.

In 1993, the Company introduced the Concept Two-ALTUS, which combines the
modular architecture of the Concept Two system with an advanced tungsten CVD
process chamber. The system features a new dual loadlock cassette module with
full factory automation capability to meet the high throughput requirements of
high volume automated eight inch wafer fabs. This dual loadlock cassette

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handler permits continuous operation of the process chamber with one loadlock,
while a second loadlock is simultaneously being loaded or unloaded by the
operator in the cleanroom. Through its modular configuration, the Concept Two
enables the semiconductor manufacturer to combine multistation modules for
slower processes with single wafer modules for faster processes to balance the
throughput of the overall system. A dielectric version of the Concept Two
ALTUS, the Concept Two SEQUEL, was shipped in late 1994. This new system brings
the same level of factory automation and throughput to the dielectric market as
the ALTUS does to the metals market. The Concept Two SEQUEL was initially
shipped in a single chamber version targeted at thin dielectric films used in
volume 200mm IMD production applications.

In 1994, the Company introduced the Concept Two-Dual ALTUS tungsten
deposition system. The Dual ALTUS features the production proven performance of
Novellus' tungsten CVD chamber in a dual chamber configuration that delivers the
throughput power to dramatically lower the cost of tungsten deposition. The
Company feels that the Dual ALTUS is the best solution in the industry for very
high volume 200mm wafer fabs producing state-of-the-art 0.35um semiconductor
devices.

Subsequent to 1994, the Company has continued to expand its Concept Two
product offerings as follows:

CONCEPT TWO DUAL SEQUEL

This dual chamber version of the SEQUEL dielectric family is designed for
high throughput deposition of thick films, such as layers before CMP (chemical-
mechanical planarization), and dual layer passivation films. It utilizes two
process chambers to provide the throughput power of twelve stations, resulting
in dramatic improvements in productivity for these types of films.

CONCEPT TWO SEQUEL-S

This enhanced version of the SEQUEL system offers improved throughput
performance for both thick and thin dielectric films, while occupying 40% less
space than previous versions. It also provides a range of improved
maintainability features and design enhancements that reduce customer facilities
costs. It is available in both single and dual chamber versions.

In addition, in 1995 the Company began accepting orders for its Concept
Two Titanium Nitride (TiN) system. This system will be used to form a high
quality, low cost barrier/adhesion layer prior to depositing tungsten (W).

CONCEPT TWO SPEED

Introduced in February 1996, SPEED is the Company's advanced dielectric
gap fill system, the semiconductor capital equipment industry's first
high-density plasma deposition solution capable of high-volume manufacturing.
Speed is targeted for advanced inter-metal dielectric (IMD) deposition for
0.35 micron devices and below. The IMD market is the largest segment in
dielectric CVD and is also the fastest growing. Speed is offered either as a
stand alone gap fill system or integrated with the Concept Two SEQUEL to
provide a complete high-throughput, low-cost gap fill and chemical mechanical
polishing cap layer solution for logic manufacturing. The system utilizes a
patented hemispherical source design and a proprietary electrostatic chuck to
provide excellent fill, superior reproducibility, low damage and high
throughput. The Company is shipping initial production deliveries in the
first quarter of 1996.

MARKETING, SALES AND SERVICE

Novellus markets its products worldwide to manufacturers of semiconductors,
including both captive fabrication lines, which produce semiconductors primarily
for internal consumption, and merchant semiconductor manufacturers, which
produce semiconductors primarily for sales to third party customers. In North
America, the Company sells products primarily through a direct sales force. It
has one manufacturer's representative. The Company's U.S. sales and support
offices are located in Boston, Austin, Dallas, Phoenix, Hopewell Junction, New
York, Williston, Vermont and Beaverton, Oregon. In Europe, the Company's
products are predominantly sold through a wholly owned subsidiary, Novellus
Systems, Ltd, which has a sales and support facility outside London and in
Scotland. The Company also has a sales and support office in The Netherlands
(Eindhoven). In Asia, the Company sells its products through a wholly owned
subsidiary and a distributor in Japan, through wholly owned subsidiaries in
Korea, Taiwan, Singapore and Mainland China, and manufacturers representatives
in other Asia Pacific countries. The

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Company's Japanese subsidiary maintains four offices in Japan located outside
Tokyo and in Kyoto and Fukuoka. The Company also has one sales and support
office located in Seoul, Korea. In 1994, the Company established a sales and
service office in Taiwan, and in 1995, the Company formed sales and service
offices in Singapore and Mainland China (Shanghai).

The ability to provide prompt and effective field support is critical to
the Company's sales efforts, due to the substantial operational and financial
commitments made by customers that purchase a CVD system. The Company's strategy
of supporting its installed base through both its customer support and research
and development groups has served to encourage use of the Company's systems in
production applications and has accelerated penetration of certain key accounts.
The Company believes that its marketing efforts are enhanced by the technical
expertise of its research and development personnel who provide customer process
support and participate in a number of industry forums such as conferences and
publications.

The Company believes that its ability to service its customers is enhanced
by the design simplicity of its systems. The Company generally warrants its
products against defects in design, materials, and workmanship. In 1992, the
Company became the first semiconductor equipment manufacturer to extend its
warranty to 24 months from shipment and in 1993 also included the cost of all
consumable parts in the system and preventative maintenance parts. The Company
offers maintenance contracts as an additional service to its customers.
For the years ended December 31, 1995 and 1994, respectively, one customer, Seki
Technotron (a distributor in Japan), accounted for 11% and 13% of the Company's
net sales, respectively. For the year ended December 31, 1993, an additional
customer, Advanced Micro Devices, accounted for 12% of net sales.

Export sales for the year ended December 31, 1995 were approximately $137.0
million, or 37% of net sales. For the years ended December 31, 1993, and 1994,
export sales were $36.1 million and $92.9 million, respectively, or 32% and 41%,
respectively. Export sales do not include sales made by the Company's Japanese
subsidiary. Export sales increased due to strong international demand for
semiconductor processing equipment, particularly in the Far East.

Historically, the Company has sold a significant proportion of its systems
in any particular period to a limited number of customers. Sales to the
Company's ten largest customers in 1995 and 1994 accounted for 58% and 65% of
net sales, respectively. The Company expects that sales of its products to
relatively few customers will continue to account for a high percentage of its
net sales in the foreseeable future.

BACKLOG

As of December 31, 1995, the Company's backlog was $151,456,000, as
compared to a backlog of $102,184,000 at December 31, 1994. The Company includes
in its backlog only those customer orders for which it has accepted purchase
orders and assigned shipment dates within twelve months. All orders are subject
to cancellation or rescheduling by customers with limited or no penalties.
Because of orders received in the same quarter in which a system is shipped,
possible changes in system delivery schedules, cancellations of orders and
delays in systems shipments, the Company's backlog at any particular date is not
necessarily a reliable indicator of actual sales for any succeeding period.

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RESEARCH AND DEVELOPMENT

The semiconductor manufacturing industry is subject to rapid technological
change and new product introductions and enhancements. The Company's ability to
remain competitive in this market will depend in part upon its ability to
develop new and enhanced systems and to introduce these systems at competitive
prices and on a timely and cost-effective basis. Accordingly, the Company
devotes a significant portion of its personnel and financial resources to
research and development programs and seeks to maintain close relationships with
its customers to remain responsive to their product needs.

The Company's current research and development efforts are directed at
development of new systems and processes and improving existing system
capabilities. The Company is focusing its research and development efforts on
additional Concept Two modules, gap fill technology, and additional advanced
technologies for the next generation of smaller geometry fabrication lines.

Expenditures for research and development during 1995, 1994 and 1993 were
$41,009,000, $26,012,000, and $16,860,000, respectively. The Company expects in
future years that research and development expenditures will continue to
represent a substantial percentage of net sales.

The success of the Company in developing, introducing and selling new and
enhanced systems depends upon a variety of factors, including product selection,
timely and efficient completion of product design and development, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. There can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing its existing products.
As is typical in the semiconductor capital equipment market, the Company has
experienced delays from time to time in the introduction of, and certain
technical and manufacturing difficulties with, certain of its systems and
enhancements and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. The Company's inability to complete the development or meet the
technical specifications of any of its new systems or enhancements or to
manufacture and ship these systems or enhancements in volume in a timely manner
would materially adversely affect the Company's business, financial condition
and results of operations. In addition, the Company may incur substantial
unanticipated costs to ensure the functionality and reliability of its future
product introductions early in the product's life cycle. If new products have
reliability or quality problems, reduced orders or higher manufacturing costs,
delays in collecting accounts receivable and additional service and warranty
expense may result. Any of such events could materially adversely affect the
Company's business, financial condition and results of operations.

MANUFACTURING

The Company's manufacturing activities consist primarily of assembling and
testing components and subassemblies which are acquired from third party vendors
and then integrated into a finished system by the Company. The Company utilizes
an outsourcing strategy for the manufacture of major subassemblies and performs
system design, assembly and testing in-house. Novellus believes that outsourcing
enables it to minimize its fixed costs and capital expenditures while also
providing the flexibility to increase production capacity. This strategy also
allows the Company to focus on product differentiation through system design and
quality control. Through the use of manufacturing specialists, the Company
ensures that its subsystems incorporate advanced technologies in robotics, gas
panels and microcomputers. The Company works closely with its suppliers on
achieving mutual cost reduction through joint design efforts.

10

The Company manufactures its system units in clean-room environments which
are similar to the clean rooms used by semiconductor manufacturers for wafer
fabrication. This procedure is intended to reduce the amount of particulates
and other contaminants in the final assembled system, which in turn improves
yield and reduces the level of contaminants at the customer level. Following
assembly, the completed system is packaged in a plastic shrink wrap to maintain
cleanroom standards during shipment.

Certain of the components and subassemblies included in the Concept
One-Dielectric, Concept One-W and Concept Two are obtained from a limited group
of suppliers. Although the Company seeks to reduce its dependence on these
limited source suppliers, disruption or termination of certain of these sources
could occur and such disruptions could have at least a temporary adverse effect
on the Company's operations. Moreover, a prolonged inability to obtain certain
components could have a material adverse effect on the Company's business and
results of operations and could result in damage to customer relationships.

COMPETITION

Significant competitive factors in the semiconductor equipment market
include system performance and flexibility, cost, the size of each
manufacturer's installed customer base, capability for customer support and
breadth of product line. The Company believes that it competes favorably in the
CVD marketplace primarily on the basis of system performance and flexibility,
cost and customer support capability.

The semiconductor equipment industry is highly competitive. The Company
faces substantial competition in the markets in which it competes from both
established competitors and potential new entrants. In the CVD market, the
Company's principal competitor is Applied Materials, Inc., which is a major
supplier of CVD systems and has established a substantial base of CVD and other
equipment in large semiconductor manufacturers. Certain of the Company's
competitors have greater financial, marketing, technical or other resources,
broader product lines, greater customer service capabilities and larger and more
established sales organizations and customer bases than the Company. The Company
may also face future competition from new market entrants from Japan and other
overseas and domestic sources. The Company expects its competitors to continue
to improve the design and performance of their products. There can be no
assurance that the Company's competitors will not develop enhancements to or
future generations of competitive products that will offer superior price or
performance features. In addition, a substantial investment is required by
customers to install and integrate capital equipment into a semiconductor
production line. As a result, once a semiconductor manufacturer has selected a
particular vendor's capital equipment, the Company believes that the
manufacturer will be generally reliant upon that equipment for the specific
production line application. Accordingly, the Company may experience difficulty
in selling a product line to a particular customer for a significant period of
time if that customer selects a competitor's product. Increased competitive
pressure could lead to lower prices for the Company's products, thereby
adversely affecting the Company's operating results. There can be no assurance
that the Company will be able to compete successfully in the future.

PATENTS AND PROPRIETARY RIGHTS

The Company intends to continue to pursue primarily the legal protection of
its technology through patent and trade secret protection. The Company currently
holds nine patents in the United States, some with pending foreign counterparts,
has ten patent applications pending in the United States and intends to file
additional patent applications as appropriate. There can be no assurance that
patents

11

will issue from any of these pending applications or that any claims allowed
from existing or pending patents will be sufficiently broad to protect the
Company's technology. While the Company intends to protect its intellectual
property rights vigorously, there can be no assurance that any patents held by
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company.
The Company also relies on trade secrets and proprietary technology that it
seeks to protect, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others.

On January 30, 1995, Applied Materials, Inc. (Applied) filed suit against
the Company in the United States District Court, Northern District (the Court),
alleging that the Company's TEOS products infringe one of Applied's patents that
was issued in November 1994. Applied is requesting injunctive relief to enjoin
the Company from allegedly infringing the subject patent, and is seeking
unspecified damages for alleged past infringement, treble damages for alleged
willful infringement and attorneys' fees and costs related to the suit. The
Company filed counterclaims against Applied seeking a declaration that the
subject patent is not infringed and is invalid and unenforceable, and seeking an
injunction and unspecified actual and punitive damages from Applied in
connection with certain conduct by Applied concerning the Company's customers.
On April 12, 1995, the Court severed and stayed discovery on the Company's
counterclaim against Applied in which the Company seeks an injunction against
and damages from Applied in connection with certain conduct by Applied
concerning the Company's customers.

On September 15, 1995, the Company filed suit in the United States District
Court, Northern District of California against Applied alleging that Applied's
Tungsten products infringe U.S. Patent No. 5,238,499 ('449 patent) issued August
24, 1993 and assigned to the Company. The Company is requesting injunctive
relief to enjoin Applied from infringing the '499 patent, and is seeking
unspecified damages for past infringement, treble damages for willful
infringement, and attorney's costs and fees related to the suit.

Also on September 15, 1995 Applied filed suit against the Company in
United States District Court, Northern District of California, alleging that
one of the Company's Tungsten processes infringes on U.S. Patent No.
5,028,565 ('565 patent) issued July 2, 1991 and assigned to Applied. Applied
is requesting injunctive relief to enjoin the Company from infringing the
'565 patent, and is seeking unspecified damages for past infringement, treble
damages for willful infringement, and attorney's costs and fees related to
the suit. Applied is also requesting a finding that Applied has not infringed
on any valid claims of the Company's '499 patent, and that the '499 patent is
invalid and void.

On October 10, 1995, the Company filed a counterclaim in United States
District Court, Northern District of California in response to Applied's suit
for infringement of the '565 patent alleging that Applied's TEOS products
infringe on U.S. Patent No. 5,425,803 issued June 20, 1995 and assigned to the
Company. The Company is requesting injunctive relief to enjoin Applied from
infringing the subject patent, and is seeking unspecified damages for past
infringement, treble damages for willful infringement, and attorney's costs and
fees related to the suit.

On October 26, 1995, the Company filed an amended counterclaim in United
States District Court, Northern District of California in response to Applied's
suit for infringement of the '565 patent, alleging that Applied's Tungsten
products infringe U.S. Patent No. 5,374,594, issued December 20, 1994 and
assigned to the Company. The Company is requesting injunctive relief to enjoin
Applied from

12

infringing the subject patent, and is seeking unspecified damages for past
infringement, treble damages for willful infringement, and attorneys' costs and
fees related to the suit.

The Company intends to vigorously pursue its claims and counterclaims, and
defend Applied's claims. Management's expectations are that the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial position, cash flows, or results of operations, however
based on future developments, management's estimate of the ultimate outcome
could change in the near term.

In addition, in the normal course of business, the Company from time to
time receives inquiries with regard to possible other patent infringements. The
Company believes it is unlikely that the outcome of the patent infringement
inquiries will have a material adverse effect on the Company's financial
position or results of operations.

There has been substantial litigation regarding patent and other
intellectual property rights in semiconductor-related industries. Although the
Company is not aware of any infringement by its products of any patents or
proprietary rights of others except as claimed by Applied, further
commercialization of the Company's products could provoke claims of infringement
from third parties. In the future, litigation may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. Any such litigation could result in substantial cost and diversion of
effort by the Company, which by itself could have a material adverse effect on
the Company's financial condition and operating results. Further, adverse
determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent the
Company from manufacturing or selling its products, any of which could have a
material adverse effect on the Company's financial condition and results of
operations.

OTHER CAUTIONARY STATEMENTS

Certain of the statements contained in this Annual Report on Form 10-K are
forward-looking statements that involve a number of risks and uncertainties, in
addition to those risks and uncertainties described above. These additional
risks and uncertainties could cause actual results to differ materially from
those described herein and include the following:

- MARKET RISK. The Company's business depends predominantly on capital
expenditures of semiconductor manufacturers, which, in turn, depend on the
current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. The semiconductor industry has historically been
very cyclical and has experienced periodic downturns, which have had a material
adverse effect on the semiconductor industry's demand for semiconductor
processing equipment, including equipment manufactured and marketed by the
Company. No assurance can be given that the Company's net sales and operating
results will not be adversely affected if downturns or slowdowns in the rate of
capital investment in the semiconductor industry occur in the future. In
addition, the semiconductor equipment industry is highly competitive, and
subject to rapid change and new products and enhancements.

- COMPETITION. The Company faces substantial competition in each of the
markets in which it sells its products. Certain of the Company's competitors
are larger, and have greater resources, financial and otherwise, than the
Company. There can be no assurance that the Company will be

13

successful, or as successful as its competitors, in selecting, developing,
manufacturing, and marketing its new products, or enhancing its existing
products. Failure to successfully develop new products could materially
adversely affect the Company's business, financial condition, and results of
operations.

- PATENTS AND PROPRIETARY RIGHTS. There has also been substantial
litigation regarding patent and other intellectual property rights in
semiconductor related industries. The Company is currently involved in such
litigation (see Note 9 to the consolidated financial statements), and, although
it is not aware of any infringement by its products of any patent or proprietary
rights of others, it could become involved in additional litigation in the
future. Although the Company does not believe the outcome of the current
litigation will have a material impact on the Company's financial condition or
results of operations, no assurances can be given that this litigation or future
litigation will not have such an impact.

- INTERNATIONAL OPERATIONS. Export sales accounted for approximately
37%, 41%, and 32% of net sales in 1995, 1994, and 1993, respectively. The
Company anticipates that export sales will account for a significant portion of
net sales in the foreseeable future. As a result, a significant portion of the
Company's sales will be subject to certain risks, including tariffs and other
barriers, difficulties in staffing and managing foreign subsidiary operations,
difficulties in managing distributors, potentially adverse tax consequences, and
the possibility of difficulty in accounts receivable collection. The Company is
also subject to the risks associated with the imposition of legislation and
regulations relating to the import or export of semiconductor products. The
Company cannot predict whether quotas, duties, taxes, or other charges or
restrictions will be implemented by the United States or any other country upon
the importation or exportation of the Company's products in the future. There
can be no assurance that any of these factors or the adoption of restrictive
policies will not have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, sales of systems
shipped by the Company's Japanese subsidiary are denominated in Japanese Yen.
The Company sells the systems to its Japanese subsidiary in U.S. Dollars. It
then enters into forward foreign exchange contracts to hedge against the short-
term impact of foreign currency fluctuations of intercompany accounts payable
denominated in U.S. Dollars recorded by the Japanese subsidiary.

EMPLOYEES

At December 31, 1995, the Company had 790 full time employees.

The success of the Company's future operations depends in large part on the
Company's ability to recruit and retain engineers and technicians, as well as
marketing, sales, service and other key personnel, who in each case are in great
demand. There can be no assurance that the Company will be successful in
retaining or recruiting key personnel.

None of the Company's employees is represented by a labor union and the
Company has never experienced a work stoppage, slowdown, or strike. The Company
considers its employee relations to be good.

ITEM 2. PROPERTIES

The Company's operations are conducted primarily in four buildings located
near each other in San Jose, California. The first serves as corporate
headquarters and consists of 42,048 square feet under a sublease that expires in
1999. The second is used for research and development and customer
demonstrations. It consists of 58,000 square feet under a lease that expires in
2001. The third is used

14

primarily for manufacturing and contains 42,624 square feet under a lease that
expires in 1997 (with an option to renew through 2001). The fourth consists of
59,904 square feet under two subleases that expire in 1998 and 1999, and is used
primarily for sales and service office space and warehousing.

The Company also operates facilities in Machida, Tokyo Prefecture and
Sagamihara, Kanagawa Prefecture, Japan. The former serves as corporate
headquarters and sales offices and the latter as a service, technology, and
customer demonstration center for the Company's Japanese subsidiary. The
facility in Machida is operated under a two year lease expiring in 1996. The
facility in Sagamihara is operated under a lease of two years with options to
renew every two years up to a total of ten years. If all the options to renew
are exercised, the lease would end in 2001.

The Company leases various other smaller facilities worldwide which are
used as sales and customer service centers.

In January 1996, the Company entered into certain agreements which, if
consummated, will result in the leasing of five buildings, three of which are
already under lease or sublease.

ITEM 3. LEGAL PROCEEDINGS

See Item 1, Patents and Proprietary Rights.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

15

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The information required by this item is included under "Stock Information"
on page 21 of the Company's 1995 Annual Report to Shareholders and is
incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The information required by this item is included under "Selected
Consolidated Financial Data" on page 17 of the Company's 1995 Annual Report to
Shareholders and is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information required by this item is included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 18-20 of the Company's 1995 Annual Report to Shareholders and is
incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included on pages 21-33 of the
Company's 1995 Annual Report to Shareholders and is incorporated herein by
reference. Such information is listed under Item 14 of Part IV of this Report on
Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is included under "Proposal No. 1:
Election of Directors," "Other Information - Executive Officers" and "Compliance
with Section 16(a) of the Exchange Act" in the Company's Proxy Statement to be
filed in connection with its 1996 Annual Meeting of Shareholders and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is included under "Other Information
- - Executive Compensation" in the Company's Proxy Statement to be filed in
connection with its 1996 Annual Meeting of Shareholders and is incorporated
herein by reference.

16

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is included under "Other
Information - Security Ownership of Certain Beneficial Owners and Management" in
the Company's Proxy Statement to be filed in connection with its 1996 Annual
Meeting of Shareholders and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is included under "Other
Information - Certain Transactions" in the Company's Proxy Statement to be filed
in connection with its 1996 Annual Meeting of Shareholders and is incorporated
herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS. The following financial statements and
schedules of the Registrant are contained on pages 21-33 of the Company's 1995
Annual Report to Shareholders and are incorporated herein by reference:

Report of Ernst & Young, LLP Independent Auditors.

Consolidated Balance Sheets at December 31, 1995 and 1994.

Consolidated Statements of Income for each of the three years in
the period ended December 31, 1995.

Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended December 31, 1995.

Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1995.

Notes to Consolidated Financial Statements.

2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules for each of the three years in the period ended December 31, 1995 are
filed as part of this Report on Form 10-K and should be read in conjunction with
the financial statements:

Schedule II - Valuation and Qualifying Accounts.

Schedules not listed above have been omitted because they are
either inapplicable or the required information has been given in the financial
statements or the notes thereto.

(b) REPORTS ON FORM 8-K. None filed during quarter ended
December 31, 1995.

17

(c) Exhibits.

3.1 (5) Amended and Restated Articles of Incorporation of Registrant.
3.2 (1) Form of Bylaws of Registrant, as amended to date.
4.1 (1) Registration Rights Agreement dated December 21, 1987 between
Registrant, holders of Series A Preferred Stock, Series B Preferred
Stock, Series D Preferred Stock, Warrants to purchase Series B and
Series C Preferred Stock and Robert F. Graham, and amendment
thereto.
10.1 (8) Credit Agreement dated June 23, 1992 between Registrant and Bank of
America National Trust and Savings Association.
10.2 (9) First Amendment dated May 1, 1993 to Credit Agreement dated June 23,
1992 between Registrant and Bank of America National Trust and
Savings Association.
10.3(10) Second Amendment dated April 30, 1994 to Credit Agreement dated
June 23, 1992 between Registrant and Bank of America National Trust
and Savings Association.
10.4 Third Amendment dated April 28, 1995 to Credit Agreement dated June
23, 1992 between Registrant and Bank of America National Trust and
Savings Association.
10.5 (9) Credit Agreement dated April 30, 1993 between Registrant and Sanwa
Bank of California, as amended August 19, 1993.
10.6 (9) Guaranty dated November 29, 1993 between Registrant and The Sanwa
Bank Ltd.
10.7(10) Line of Credit Agreement dated June 13, 1994 between Registrant and
Sanwa Bank of California.
10.8 Amendment dated May 2, 1995 of Commercial Credit Agreement dated
June 13, 1994 between Registrant and Sanwa Bank of California.
10.9 (5) Business Loan Agreement dated August 2, 1990 between Registrant and
Silicon Valley Bank.
10.10 (7) Change in Terms Agreement dated September 23, 1991 to Business Loan
Agreement dated August 2, 1990 between Registrant and Silicon Valley
Bank.
10.11 (8) Change in Terms Agreement dated July 29, 1992 to Business Loan
Agreement dated August 2, 1990 between Registrant and Silicon Valley
Bank.
10.12(9) Change in Terms Agreement dated May 12, 1993 to Business Loan
Agreement dated August 2, 1990 between Registrant and Silicon Valley
Bank.
10.13(9) Modification dated May 12, 1993 to Business Loan Agreement dated
August 2, 1990 between Registrant and Silicon Valley Bank, as
amended September 23, 1991 and July 29, 1992.
10.14(10) Loan Modification Agreement dated July 15, 1995 between Registrant
and Silicon Valley Bank.
10.15(9) Commercial Guaranty dated May 12, 1993 between the Registrant,
Silicon Valley Bank and Individual Employees of Novellus
Systems, Inc.
10.16(7) Loan and Guaranty Agreement dated November 29, 1991 between
Registrant and The Japan Development Bank.
10.17 Commercial Loan Agreement dated November 15, 1995 between Registrant
and Sumitomo Bank of California.
10.18 Guarantee dated August 31, 1995 between Registrant and The
Mitsubishi Bank, Limited.
10.19(5) Commercial Lease dated October 19, 1990 between Registrant and
Sobrato Development Companies #871, concerning property located at
81 Vista Montana, San Jose, California.
10.20(1) Commercial Lease dated March 11, 1987 between Registrant and
California Second, Ltd., concerning property located at 3950 North
First Street, San Jose, California.
10.21(3) First Amendment dated February 8, 1989 to Commercial Lease dated
March 11, 1987 between Registrant and California Second Ltd.,
concerning property located at 3950 North First Street, San Jose,
California.

18

10.22 Lease dated September 26, 1995 between Registrant and W. F. Batton &
Co., Inc. concerning property located at 3590 North First Street,
San Jose, California.
10.23(10) Standard Sublease dated April 28, 1994 between Registrant and
Granada Computer Services, Inc., concerning property located 3940
North First Street, San Jose, California.
10.24 Sublease Agreement dated January 13, 1995 between Registrant and LTX
Corporation concerning property located at 3970 North First Street,
San Jose, California.
10.25 Assignment and Assumption of Lease dated November 22, 1995 among
Registrant, Circadian, Incorporated (Assignor) and California
Second, Ltd. (Landlord) concerning property located at 3942 North
First Street, San Jose, California.
10.26 Lease Agreement dated January 11, 1996 between Registrant and South
Bay/Fortran concerning property located at 4415 Fortran Court, San
Jose, California.
10.27(1) Commercial Lease dated May 2, 1988 between Registrant and Aetna Life
Insurance Company, concerning property located at 12820 Hillcrest
Road, Suite 122, Dallas, Texas.
10.28(6) Amendment dated March 27, 1990 to Commercial Lease dated May 2, 1988
between Registrant and Aetna Life Insurance Company, concerning
property located at 12820 Hillcrest Road, Suite 122, Dallas, Texas.
10.29(9) Amendment dated March 29, 1993 to Lease dated May 2, 1993 between
Registrant and Aetna Life Insurance Company, concerning property
located at 12820 Hillcrest Road, Suite 122, Dallas, Texas.
10.30(10) Standard Office Building Lease Agreement dated August 15, 1994
between Registrant and Aetna Life Insurance Company concerning
property located at 12840 Hillcrest Road, Suite 104, Dallas, Texas.
10.31(6) Lease Agreement dated May 1, 1990 between Registrant and East
Williston Road Associates, concerning property located at One Blair
Park, Blair Park, Williston, Vermont.
10.32(7) Amendment dated May 23, 1991 to Lease Agreement dated May 1, 1990
between Registrant and East Williston Road Associates, concerning
property located at One Blair Park, Blair Park, Williston, Vermont.
10.33(9) Letter Extension dated October 25, 1993 to Lease Agreement dated
May 1, 1990 between Registrant and East Williston Road Associates,
concerning property located at One Blair Park, Blair Park,
Williston, Vermont.
10.34 Addendum dated August 10, 1995 to Lease Agreement dated May 1, 1990
between Registrant and East Williston Road Associates, concerning
property located at One Blair Park, Blair Park, Williston, Vermont.
10.35(7) Office Lease dated July 1, 1991 between Registrant and Ray Prather,
concerning property located at 4090 W. State Street, Boise, Idaho.
10.36(8) Office Lease dated January 29, 1992 between Registrant and Alan
Arkawy, concerning property located at 1123 Route 52, Fishkill, New
York.
10.37 Lease dated August 14, 1995 between Registrant and East Fishkill
Corporate Park Investments concerning property located at 25
Corporate Park Drive, Route 52, East Fishkill, New York.
10.38(7) Commercial Lease dated February 1, 1991 between Registrant (Nippon
Novellus Systems, K.K.) and Tenko, K.K., concerning property located
at 1-12-3 Kamitsuruma, Sagimihara City, Kanagawa Prefecture, Japan.
10.39(8) Commercial Lease dated June 15, 1992 between Registrant (Novellus
Systems, Ltd.) and Exploitatiemaatschappij Dillenberg B.V.,
concerning property located at Dillenburgstraat 5-B Eindhoven, The
Netherlands.
10.40(8) Commercial Lease dated March 26, 1992 between Registrant (Novellus
Systems, Ltd.) and W.B. Properties Ltd., concerning property located
at 1 to 5 Pyrford Road, West End Garage, West Byfleet, Surrey,
United Kingdom.

19

10.41(9) Lease dated August 17, 1993 between Registrant and OTR, acting as
the duly authorized nominee of the Board of State Teachers
Retirement System of Ohio, concerning property located at 1701
Directors Boulevard, Austin, Texas.
10.42 Lease Agreement dated May 26, 1995 between Registrant and OTR,
acting as the duly authorized nominee of the Board of State Teachers
Retirement System of Ohio, concerning property located at 1701
Directors Boulevard, Austin, Texas.
10.43(9) Lease dated November 2, 1993 between Registrant and Arnbil
Associates, concerning property located at 5 Mount Royal Avenue,
Marlborough, Massachusetts.
10.44(9) Lease dated November 4, 1993 between Registrant and Canterbury
Associates, concerning property located at 19 Walnut Hill Road,
Poughkeepsie, New York.
10.45(9) Lease dated November 17, 1992 between Registrant and Aetna Casualty
and Surety Company, concerning property located at Two Gateway,
Suite 420, Phoenix, Arizona.
10.46(9) First Amendment dated November 30, 1993 to Lease dated November 17,
1992 between Registrant and Aetna Casualty and Surety Company,
concerning property located at Two Gateway, Suite 420, Phoenix,
Arizona.
10.47(9) Lease dated April 25, 1990 between Registrant and Korea Women's
Missionary Union.
10.48 Office Rental Contract dated November 28, 1994 between Registrant
(Novellus Systems Korea Co., Ltd.) and Suh Won Building Management
Company concerning property located at 57 Garak-Dong Songpa-Gu,
Seoul, Korea.
10.49 Sublease executed February 2, 1995 between Registrant (Novellus
Systems, Ltd.) and Leyland DAF Finance PLC with the consent of
Central Regional Council concerning property located at the Upper
Ground Floor (East Wing), The Forum, Callendar Business Park,
Falkirk, Scotland.
10.50 Commercial Lease Agreement dated February 1, 1996 between Registrant
and Faison & Associates, Inc. d/b/a Southland Management Company,
not individually, but solely as Management and Leasing Broker for
Plaza Central I concerning property located at 6220 S. Orange
Blossom Trail, Suite 186, Orlando, Florida.
10.51 Office Lease dated March 20, 1995 between Registrant and Hartford
Underwriters Insurance Company concerning property located at 15350
North West Greenbrier Parkway, Suite B-340, Beaverton, Oregon.
10.52 Lease dated February 15, 1995 between Registrant (Novellus Systems
Taiwan) and Mr. Woo-Shung Lin and Mr. Wing-Yee Lee concerning
property located at 5F-1, No. 295, Sec. 2, Kwang Fu Road, Hsinchu,
Taiwan R.O.C. (English translation of original exhibit in the
Chinese language).
10.53(2) Equipment Lease dated March 28, 1989 between Registrant and Matsco
Leasing Company.
10.54(7) Distribution Agreement dated April 1, 1991 between Registrant and
Seki Technotron Corporation.
10.55(9) First Amendment dated January 1, 1993 to Distribution Agreement
dated April 1, 1991 between the Registrant and Seki Technotron
Corporation.
10.56 Distribution Agreement dated January 1, 1996 between Registrant and
Seki Technotron Corporation.
*10.57(7) Registrant's Amended and Restated 1984 Stock Option Plan, together
with forms of agreements thereunder.
*10.58(9) Registrant's 1992 Stock Option Plan, together with forms of
agreements thereunder.
*10.59(8) Registrant's 1992 Employee Stock Purchase Plan.
*10.60(1) Form of Agent Indemnification Agreement and amendment thereto.
*10.61(4) Employment Agreement dated June 1, 1989 between Registrant and Evert
van de Ven.
*10.62(8) Employment Agreement dated as of June 15, 1992 between the
Registrant and Peter Hanley.
*10.63(9) Offer Letter Agreement dated November 1, 1993 between Registrant and
Richard S. Hill.
*10.64(8) Promissory Note secured by Deed of Trust between Registrant and
Daniel Queyssac secured by property located at 6051 Reston Road,
Care Creek, Arizona.

20

property located at 6051 Reston Road, Care Creek, Arizona.
13.1 Registrant's 1995 Annual Report to Shareholders (only portions of
this document specifically incorporated herein by reference are
included in this exhibit).
22.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young, LLP, Independent Auditors.
25.1 Powers of Attorney (see page 22).
___________
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-23011, which was declared
effective August 11, 1988.
(2) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 31,
1989.
(3) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-28108, which was declared
effective May 2, 1989.
(4) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 30,
1990.
(5) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-37607, which was declared
effective November 19, 1990.
(6) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 29,
1991.
(7) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 30,
1992.
(8) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on
February 26, 1993.
(9) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on February
18, 1994.
(10) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 16,
1995.

* Management contracts or compensatory plans or arrangements.

21

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in San Jose,
California on the 13th day of March, 1996.

NOVELLUS SYSTEMS, INC.

By: /s/William J. Wall
-------------------------------------
William J. Wall
VICE PRESIDENT, FINANCE AND
ADMINISTRATION,
CHIEF FINANCIAL OFFICER AND SECRETARY

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard S. Hill and William J. Wall, and
each of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on
Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

SIGNATURE CAPACITY DATE
--------- -------- ----

/s/Richard S. Hill President, Chief Executive Officer March 13, 1996
- ---------------------- and Director (Principal Executive
Richard S. Hill Officer)

/s/William J. Wall Vice President, Finance and March 13, 1996
- ---------------------- Administration, Chief Financial
William J. Wall Officer and Secretary (Principal
Financial and Accounting Officer)

/s/Robert F. Graham Chairman of the Board of Directors March 13, 1996
- ----------------------
Robert F. Graham

Director March , 1996
- ----------------------
D. James Guzy

/s/Tom Long Director March 13, 1996
- ----------------------
Tom Long

22

/s/Glen Possley Director March 13, 1996
- ----------------------
Glen Possley

/s/Robert H. Smith Director March 13, 1996
- ----------------------
Robert H. Smith

/s/Joseph Van Poppelen Director March 13, 1996
- ----------------------
Joseph Van Poppelen

23

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
($ IN THOUSANDS)

Description Balance at Charged Deductions(1) Balance at
- ----------- Beginning to Costs ------------- End of
of Period and Period
--------- Expenses ---------
--------

Year Ended December 31, 1993
Allowance for Doubtful Accounts $ 740 $ 178 $ 119 $ 799
Year Ended December 31, 1994
Allowance for Doubtful Accounts 799 1,097 135 1,761
Year Ended December 31, 1995
Allowance for Doubtful Accounts 1,761 495 60 2,196
_______________

(1) Charges for uncollectable accounts

24

INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT SEQUENTIALLY
- -------------- -------- NUMBERED PAGE
-------------

3.1 (5) Amended and Restated Articles of Incorporation
of Registrant. . . . . . . . . . . . . . . . . . . .
3.2 (1) Form of Bylaws of Registrant, as amended
to date. . . . . . . . . . . . . . . . . . . . . . .
4.1 (1) Registration Rights Agreement dated
December 21, 1987 between Registrant, holders
of Series A Preferred Stock, Series B Preferred
Stock, Series D Preferred Stock, Warrants to
purchase Series B and Series C Preferred Stock
and Robert F. Graham, and amendment thereto. . . . .
10.1 (8) Credit Agreement dated June 23, 1992 between
Registrant and Bank of America National Trust
and Savings Association. . . . . . . . . . . . . . .
10.2 (9) First Amendment dated May 1, 1993 to Credit
Agreement dated June 23, 1992 between Registrant
and Bank of America National Trust and Savings
Association. . . . . . . . . . . . . . . . . . . . .
10.3 (10) Second Amendment dated April 30, 1994 to Credit
Agreement dated June 23, 1992 between Registrant
and Bank of America National Trust and Savings
Association. . . . . . . . . . . . . . . . . . . . .
10.4 Third Amendment dated April 28, 1995 to Credit
Agreement dated June 23, 1992 between Registrant
and Bank of America National Trust and Savings
Association. . . . . . . . . . . . . . . . . . . . .
10.5 (9) Credit Agreement dated April 30, 1993 between
Registrant and Sanwa Bank of California, as
amended August 19, 1993. . . . . . . . . . . . . . .
10.6 (9) Guaranty dated November 29, 1993 between Registrant
and The Sanwa Bank Ltd. . . . . . . . . . . . . . .
10.7 (10) Line of Credit Agreement dated June 13, 1994
between Registrant and Sanwa Bank of California. . .
10.8 Amendment dated May 2, 1995 of Commercial Credit
Agreement dated June 13, 1994 between Registrant
and Sanwa Bank of California.. . . . . . . . . . . .
10.9 (5) Business Loan Agreement dated August 2, 1990
between Registrant and Silicon Valley Bank.. . . . .
10.10(7) Change in Terms Agreement dated
September 23, 1991 to Business Loan Agreement
dated August 2, 1990 between Registrant and
Silicon Valley Bank. . . . . . . . . . . . . . . . .
10.11 (8) Change in Terms Agreement dated July 29, 1992
to Business Loan Agreement dated August 2, 1990
between Registrant and Silicon Valley Bank.. . . . .
10.12(9) Change in Terms Agreement dated May 12, 1993 to
Business Loan Agreement dated August 2, 1990
between Registrant and Silicon Valley Bank.. . . . .
10.13(9) Modification dated May 12, 1993 to Business
Loan Agreement dated August 2, 1990 between
Registrant and Silicon Valley Bank, as amended
September 23, 1991 and July 29, 1992.. . . . . . . .
10.14(10) Loan Modification Agreement dated July 15, 1995
between Registrant and Silicon Valley Bank.. . . . .

25

INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT SEQUENTIALLY
- -------------- -------- NUMBERED PAGE
-------------

10.15(9) Commercial Guaranty dated May 12, 1993 between
the Registrant, Silicon Valley Bank and Individual
Employees of Novellus Systems, Inc.. . . . . . . . .
10.16(7) Loan and Guaranty Agreement dated November 29, 1991
between Registrant and The Japan Development Bank. .
10.17 Commercial Loan Agreement dated November 15, 1995
between Registrant and Sumitomo Bank of California .
10.18 Guarantee dated August 31, 1995 between Registrant
and The Mitsubishi Bank, Limited . . . . . . . . . .

10.19(5) Commercial Lease dated October 19, 1990 between
Registrant and Sobrato Development Companies #871,
concerning property located at 81 Vista Montana,
San Jose, California.. . . . . . . . . . . . . . . .
10.20(1) Commercial Lease dated March 11, 1987 between
Registrant and California Second, Ltd., concerning
property located at 3950 North First Street,
San Jose, California.. . . . . . . . . . . . . . . .
10.21(3) First Amendment dated February 8, 1989 to
Commercial Lease dated March 11, 1987 between
Registrant and California Second Ltd., concerning
property located at 3950 North First Street,
San Jose, California.. . . . . . . . . . . . . . . .
10.22 Lease dated September 26, 1995 between Registrant
and W. F. Batton & Co., Inc. concerning property
located at 3590 North First Street, San Jose,
California.. . . . . . . . . . . . . . . . . . . . .
10.23(10) Standard Sublease dated April 28, 1994 between
Registrant and Granada Computer Services, Inc.,
concerning property located 3940 North First
Street, San Jose, California.. . . . . . . . . . . .
10.24 Sublease Agreement dated January 13, 1995
between Registrant and LTX Corporation
concerning property located at 3970 North
First Street, San Jose, California.. . . . . . . . .
10.25 Assignment and Assumption of Lease dated
November 22, 1995 among Registrant,
Circadian, Incorporated (Assignor) and
California Second, Ltd. (Landlord) concerning
property located at 3942 North First Street,
San Jose, California . . . . . . . . . . . . . . . .
10.26 Lease Agreement dated January 11, 1996 between
Registrant and South Bay/Fortran concerning
property located at 4415 Fortran Court, San
Jose, California.. . . . . . . . . . . . . . . . . .
10.27(1) Commercial Lease dated May 2, 1988 between
Registrant and Aetna Life Insurance Company,
concerning property located at 12820 Hillcrest
Road, Suite 122, Dallas, Texas.. . . . . . . . . . .
10.28(6) Amendment dated March 27, 1990 to Commercial
Lease dated May 2, 1988 between Registrant
and Aetna Life Insurance Company, concerning
property located at 12820 Hillcrest Road,
Suite 122, Dallas, Texas.. . . . . . . . . . . . . .
10.29(9) Amendment dated March 29, 1993 to Lease dated
May 2, 1993 between Registrant and Aetna Life
Insurance Company, concerning property located
at 12820 Hillcrest Road, Suite 122, Dallas, Texas. .
10.30(10) Standard Office Building Lease Agreement dated
August 15, 1994 between Registrant and Aetna
Life Insurance Company concerning

26

INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT SEQUENTIALLY
- -------------- -------- NUMBERED PAGE
-------------

property located at 12840 Hillcrest Road, Suite 104,
Dallas, Texas. . . . . . . . . . . . . . . . . . . .
10.31(6) Lease Agreement dated May 1, 1990 between
Registrant and East Williston Road Associates,
concerning property located at One Blair Park,
Blair Park, Williston, Vermont.. . . . . . . . . . .
10.32(7) Amendment dated May 23, 1991 to Lease Agreement
dated May 1, 1990 between Registrant and East
Williston Road Associates, concerning property
located at One Blair Park, Blair Park,
Williston, Vermont.. . . . . . . . . . . . . . . . .
10.33(9) Letter Extension dated October 25, 1993 to Lease
Agreement dated May 1, 1990 between Registrant
and East Williston Road Associates, concerning
property located at One Blair Park, Blair Park,
Williston, Vermont.. . . . . . . . . . . . . . . . .
10.34 Addendum dated August 10, 1995 to Lease Agreement
dated May 1, 1990 between Registrant and East
Williston Road Associates, concerning property
located at One Blair Park, Blair Park,
Williston, Vermont.. . . . . . . . . . . . . . . . .
10.35(7) Office Lease dated July 1, 1991 between Registrant
and Ray Prather, concerning property located at
4090 W. State Street, Boise, Idaho.. . . . . . . . .
10.36(8) Office Lease dated January 29, 1992 between
Registrant and Alan Arkawy, concerning property
located at 1123 Route 52, Fishkill, New York.. . . .
10.37 Lease dated August 14, 1995 between Registrant
and East Fishkill Corporate Park Investments
concerning property located at 25 Corporate
Park Drive, Route 52, East Fishkill, New York. . . .
10.38(7) Commercial Lease dated February 1, 1991 between
Registrant (Nippon Novellus Systems, K.K.)
and Tenko, K.K., concerning property located
at 1-12-3 Kamitsuruma, Sagimihara City,
Kanagawa Prefecture, Japan.. . . . . . . . . . . . .
10.39(8) Commercial Lease dated June 15, 1992 between
Registrant (Novellus Systems, Ltd.) and
Exploitatiemaatschappij Dillenberg B.V.,
concerning property located at Dillenburgstraat
5-B Eindhoven, The Netherlands.. . . . . . . . . . .
10.40(8) Commercial Lease dated March 26, 1992 between
Registrant (Novellus Systems, Ltd.) and W.B.
Properties Ltd., concerning property located
at 1 to 5 Pyrford Road, West End Garage,
West Byfleet, Surrey, United Kingdom.. . . . . . . .
10.41(9) Lease dated August 17, 1993 between Registrant
and OTR, acting as the duly authorized nominee
of the Board of State Teachers Retirement
System of Ohio, concerning property located at
1701 Directors Boulevard, Austin, Texas. . . . . . .
10.42 Lease Agreement dated May 26, 1995 between
Registrant and OTR, acting as the duly authorized
nominee of the Board of State Teachers Retirement
System of Ohio, concerning property located at
1701 Directors Boulevard, Austin, Texas. . . . . . .
10.43(9) Lease dated November 2, 1993 between Registrant
and Arnbil Associates, concerning property located
at 5 Mount Royal Avenue,

27

INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT SEQUENTIALLY
- -------------- -------- NUMBERED PAGE
-------------

Marlborough, Massachusetts.. . . . . . . . . . . . .
10.44(9) Lease dated November 4, 1993 between Registrant
and Canterbury Associates, concerning property
located at 19 Walnut Hill Road, Poughkeepsie,
New York.. . . . . . . . . . . . . . . . . . . . . .
10.45(9) Lease dated November 17, 1992 between Registrant
and Aetna Casualty and Surety Company, concerning
property located at Two Gateway, Suite 420,
Phoenix, Arizona.. . . . . . . . . . . . . . . . . .
10.46(9) First Amendment dated November 30, 1993 to Lease
dated November 17, 1992 between Registrant and
Aetna Casualty and Surety Company, concerning
property located at Two Gateway, Suite 420,
Phoenix, Arizona.. . . . . . . . . . . . . . . . . .
10.47(9) Lease dated April 25, 1990 between Registrant
and Korea Women's Missionary Union.. . . . . . . . .
10.48 Office Rental Contract dated November 28, 1994
between Registrant (Novellus Systems Korea Co., Ltd.)
and Suh Won Building Management Company concerning
property located at 57 Garak-Dong Songpa-Gu,
Seoul, Korea.. . . . . . . . . . . . . . . . . . . .

10.49 Sublease executed February 2, 1995 between
Registrant (Novellus Systems, Ltd.) and Leyland DAF
Finance PLC with the consent of Central Regional
Council concerning property located at the Upper
Ground Floor (East Wing), The Forum, Callendar
Business Park, Falkirk, Scotland.. . . . . . . . . .
10.50 Commercial Lease Agreement dated
February 1, 1996 between Registrant and
Faison & Associates, Inc. d/b/a Southland
Management Company, not individually, but
solely as Management and Leasing Broker for
Plaza Central I concerning property located at
6220 S. Orange Blossom Trail, Suite 186,
Orlando, Florida.. . . . . . . . . . . . . . . . . .
10.51 Office Lease dated March 20, 1995 between
Registrant and Hartford Underwriters Insurance
Company concerning property located at 15350
North West Greenbrier Parkway, Suite B-340,
Beaverton, Oregon. . . . . . . . . . . . . . . . . .
10.52 Lease dated February 15, 1995 between Registrant
(Novellus Systems Taiwan) and Mr. Woo-Shung Lin
and Mr. Wing-Yee Lee concerning property located
at 5F-1, No. 295, Sec. 2, Kwang Fu Road,
Hsinchu, Taiwan R.O.C. (English translation
of original exhibit in the Chinese language).. . . .
10.53(2) Equipment Lease dated March 28, 1989 between
Registrant and Matsco Leasing Company. . . . . . . .
10.54(7) Distribution Agreement dated April 1, 1991
between Registrant and Seki Technotron Corporation..
10.55(9) First Amendment dated January 1, 1993 to Distribution
Agreement dated April 1, 1991 between the Registrant
and Seki Technotron Corporation. . . . . . . . . . .
10.56 Distribution Agreement dated January 1, 1996 between
Registrant and Seki Technotron Corporation.. . . . .
*10.57(7) Registrant's Amended and Restated 1984 Stock Option
Plan, together with forms of agreements thereunder..
*10.58(9) Registrant's 1992 Stock Option Plan, together with
forms of agreements thereunder.. . . . . . . . . . .

28

INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT SEQUENTIALLY
- -------------- -------- NUMBERED PAGE
-------------

*10.59(8) Registrant's 1992 Employee Stock Purchase Plan.. . .
*10.60(1) Form of Agent Indemnification Agreement and amendment
thereto. . . . . . . . . . . . . . . . . . . . . . .
*10.61(4) Employment Agreement dated June 1, 1989 between
Registrant and Evert van de Ven. . . . . . . . . . .
*10.62(8) Employment Agreement dated as of June 15, 1992
between the Registrant and Peter Hanley. . . . . . .
*10.63(9) Offer Letter Agreement dated November 1, 1993
between Registrant and Richard S. Hill.. . . . . . .
*10.64(8) Promissory Note secured by Deed of Trust between
Registrant and Daniel Queyssac secured by property
located at 6051 Reston Road, Care Creek, Arizona.. .
13.1 Registrant's 1995 Annual Report to Shareholders
(only portions of this document specifically
incorporated herein by reference are included in
this exhibit). . . . . . . . . . . . . . . . . . . .
22.1 Subsidiaries of Registrant.. . . . . . . . . . . . .
23.1 Consent of Ernst & Young, LLP, Independent Auditors.
25.1 Powers of Attorney (see page 22).. . . . . . . . . .

___________

(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-23011, which was declared
effective August 11, 1988.
(2) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on
March 31, 1989.
(3) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-28108, which was declared
effective May 2, 1989.
(4) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission
on March 30, 1990.
(5) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-37607, which was declared
effective November 19, 1990.
(6) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission
on March 29, 1991.
(7) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission
on March 30, 1992.
(8) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission
on February 26, 1993.

29

(9) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission
on February 18, 1994.
(10) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission
on March 16, 1995.

* Management contracts or compensatory plans or arrangements.

30