Novellus Systems, Inc. Analyst and Press Event at Semicon West 2008 - Final

UNIDENTIFIED COMPANY REPRESENTATIVE: This PowerPoint presentation contains forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933, as amended, and Section 21-E of the Securities Exchange Act of 1934, as amended, including statements related to the Company's views regarding our belief that there continues to be momentum and growth in the electronic industry; our expectations of the Company's long-term growth rate will remain strong in me IC unit segment; our beliefs regarding megafab trends in memory manufacturing; our plan to transition to specialized equipment platforms; our expectations that there will be changes in investment patterns specifically with respect to CapEx consolidation, a shift to memory-dominating spending, and an increase in technology alliances; our plan to transition from aluminum to copper to avoid the cost of additional complexity; our belief that copper technology spending will represent approximately 64% of total WFE in 2008 as the leading memory players adopt copper; our plan with respect to growing our customer base and leveraging our logic position as memory transitions to copper; our plan to take advantage of the economic downturn to gain market position; our belief that the electronics and semiconductor industries will continue to grow, even with the backdrop of macro economic woes; our belief digital projects will drive demand; our belief that ASP declines are required for demand to remain at historic levels; our belief that Moore's Law affordability dilemma is changing the industry dynamic; our plan to leverage our logic position for memory conversion to copper; our plan to implement the Novellus Play; our belief that our latest products meet the needs of the market; our belief that PE CVD growth rate will be higher than the overall wafer fab equipment market; our expectations with respect to the number of Vector Express systems installed through the fourth quarter of 2008; our expectation with respect to the rapid adoption of the Vector Extreme System through the fourth quarter of 2008; our expectations with respect to the production of the Vector Extreme megafab wafer output; our belief regarding the reliability and performance of Vector Extreme; our AHM investment plan over the next five years due to the growing need from lithography-enabling film; our beliefs as to the benefits of the Vector Extreme AHM system; our belief that the Vector Extreme AHM delivers the highest quality as well as being the easiest to integrate film; our belief that the Vector Extreme AHM provides the lowest cost to customers while providing the highest productivity solution; our production plan with respect to the Vector Extreme AHM system; our belief that the Vector Extreme AHM builds on the Company's momentum and will increase the Company's market share growth in PE CVD patterning films through the fourth quarter of 2008; our belief that the Company's PE CVD opportunity is growing faster than the overall market; our belief that patterning films will continue to be the fastest-growing segment of the PE CVD market; our belief that the launch of the Vector Extreme AHM provides memory megafabs with the lowest cost, coupled with the highest throughput AHM solution; our belief that HDP will be a $500 million to $600 million market between 2008 and 2012; our belief that 70% of the HDP business is from memory makers; our belief that SPEED Max addresses the needs of customers due to the benefits of process configurability, high rate of productivity, capital expenditures and the extended technology and variability of application; our beliefs regarding the benefits of the SPEED Max platform; our beliefs regarding the factors driving HDP growth and the introduction of new products; our beliefs regarding the acceptability of the SPEED Max platform worldwide through the fourth quarter of 2008; and our belief that SPEED Max is the industry benchmark and is well positioned to gain further market share.

Such risks and uncertainties include but are not limited to uncertainties related to growth in the electronic industry; unexpected changes in the IC unit segment negatively affecting our long-term growth rate; inability to accurately predict megafab trends in memory manufacturing; inefficiencies in the allocation of funds to our strategic product research and development efforts; unexpected loss of a large customer; uncertainties in the semiconductor industry; uncertainties related to the acceptance of new technology into the memory market; unexpected increase in the cost of copper which is cost-prohibitive; inability to accurately predict the cost of copper and amount of resources necessary to attain sufficient amounts of copper to fulfill customer demands for memory players; introduction of new products by competitors; inability to gain market position during the economic downturn; difficulties in predicting supply and demand for newly introduced digital products; lack of ASP declines; no change in the semiconductor industry due to Moore's Law affordability dilemma; unexpected manufacturing and production complications impacting our ability to leverage our logic position from memory conversion to copper; inability to allocate resources to effectively implement the Novellus play; unexpected shift in market demand; inability to accurately predict the PE CVD growth rate; inability to accurately predict the Company's ability to maximize its position within the semiconductor industry; unexpected technical complications affecting the rates at which Vector Extreme Systems are installed through 2008; inability to accurately predict the rate at which Vector Extreme Systems will be adopted in the remainder of 2008; increase in costs relating to the production of Vector Extreme Systems; inefficiencies related to the costs associated with developing the Vector Extreme System; inability to accurately predict the cost and time needed to manufacture and produce the Company's they AHM product; lack of demand for lithography-enabling film; introduction of competing AHM products which prove more cost effective for our customers; inefficiency in the manufacturing and production of Vector Extreme AHM systems; inability to increase the Company's market share growth in PE CVD patterning films throughout the remainder of 2008 due to unexpected changes in the market demand for PE CVD products; inability to accurately predict the HDP market through 2012; inability to accurately predict the percentage of the HDP business attributable to memory makers; introduction of products which compete with our SPEED Max products; inability to accurately predict customer adoption of the SPEED Max platform; difficulties in predicting the factors driving HDP growth; failure to introduce new products into the market, and lack of customer acceptance of the SPEED Max platform; as well as other risks indicated in our filings with the Securities and Exchange Commission.

For more details, please refer to our SEC filings and the amendments thereto, including our annual report on Form 10-K for the year ended December 31, 2007, our quarterly report on Form 10-Q for the quarter ended March 28, 2008, and our current report on Form 8-K.

Forward-looking statements are made and based on information available to us on the date of this PowerPoint presentation, and we assume no obligation to update them.

UNIDENTIFIED PARTICIPANT: Ladies and gentlemen, we do ask you, in deference to those around you and those on stage, to please take your cell phones and any other electronic communication devices and turn them to "silent" or turn them completely off. Thank you for your cooperation.

Ladies and gentlemen, welcome to the Novellus Systems Semicon West Analyst and Press Event. Please welcome Chairman and CEO, Rick Hill.

RICK HILL, CHAIRMAN, CEO, NOVELLUS SYSTEMS, INC.: Good afternoon, ladies and gentlemen. Thank you for joining us today at the Novellus Theatre at the Yerba Buena Center for the Arts. It's hard to believe ten years has gone by which we entered a partnership with the Yerba Buena to use this every Semicon time in order to be able to have a specialist special event for analysts and customers.

Recently, you will have noticed that we announced a long-term agreement over the next ten years where the theatre itself is -- actually carries the Novellus name. We are very proud of our contribution to the semiconductor industry and also our contribution here in San Francisco to the arts and the Yerba Buena Center which has been so good to us over the last ten years. We look forward to this year where we have a display that we will see shortly, and also we look forward to the future years of presenting to you here at the Yerba Buena Theatre Center of the Arts.

Before I start, one of the things you saw was a very, very long notice on the things we are going to talk about today, which are really forward-looking statements. Today, I think we are going to take a bold step. In these uncertain market times, we are going to try to delve into some detail about the potential for all of our products -- PE CVD and [HPP], in particular, as well as an overview of the Company on what we see the opportunity.

Most of you know we just made our announcement for the second quarter prior to this meeting. We announced that we had generated $158 million in cash with -- prior to the one-time charge we took, we made $0.06 a share. In these very, very turbulent times, we are happy with those results but more, we are happy with the progress that we've made in products and operationally throughout the Company. We believe, while the market may not be ideal right now, the long-term opportunity for semiconductor remains very, very positive. We believe that Novellus will be a major enabler of extending Moore's Law with semiconductor technology.

Today, we are going to talk about the dynamics in the industry and how we are going to respond to that. You'll get a special presentation by Kaihan Ashtiani regarding our new SPEED Max introduction. Tim Archer will talk about our PE CVD business and the Vector Extreme, the new Ashable hard Mask tool which you'll see immediately following the presentation in the reception area next door. We will have a reception from 5:30 to 7 p.m. Of course no analyst and press event at Novellus is complete without a full and open Q&A session; I believe we will even have an open line from people who are on the call outside. That may not be true this year; I'm not sure we're able to affect that.

So anyway, without further, ado I'd like to introduce Tom Caulfield, who will talk about the industry dynamics.

TOM CAULFIELD, EVP SALES, MARKETING & CUSTOMER SERVICE, NOVELLUS SYSTEMS, INC.: Thank you, Rick. Welcome. I'm Tom Caulfield, Executive Vice President-Sales and Marketing and our customer service team. I have a worldwide responsibility for how we drive wins within our (inaudible) customers.

So let's talk a little bit about these industry dynamics. You know, despite the economic environment we find ourselves in with high oil prices, the credit crunch, and this great cloud that's over everybody's head, we still see key segments of the electronic industry growing strong and thereby the semiconductor industry, our customers, continuing to do well.

You can't talk about how the electronic industry is doing without first looking at the PC market. It represents 30% of what makes up the electronics industry, and it has very healthy growth. It's on track to grow 12% this year to 300 million units. The growth is driven in emerging and developing nations to 150 million units at an 18% CAGR, and laptop unit growth, this whole idea of mobility is leading the charge from a product perspective at 30% growth. In mobile phones, another 10% CAGR in unit growth demand in 2008 to 1.3 billion units. Smart phones are really meeting the charge in that with a 41% growth, the advent of higher content coming through our wireless devices.

Then lastly, consumer electronics -- LCD TVs are growing at 30% in 2008. With a run rate we entered this year, year-over-year in the first quarter '08 at 41%, and of course the portable media player, this convergence of some of these devices like the iPhone with media players, that's growing at 10%. For our customers, who feed and supply this electronic industry, we see unit demand continuing to grow greater than 10% on a year-over-year basis CAGR, and their revenue growing at 4.3%.

So here we are with these macroeconomic woes. The industry, electronic industry is continuing its healthy growth rate. There may be some pauses a little bit because of this, but you see the long-term growth rate is still there because of the pervasiveness of electronics.

What's going on in this equipment industry is the electronics guys are growing and unit demand is growing for our customers, why are we in such a downturn right now? To go through this discussion, I'm going to bring back a chart I showed a year ago on this stage, and it rationalizes supply/demand dynamics in this industry for our customers.

The first line is unit demand, so units shipped, starting in 2004, January of 2004, all the way through the present quarter we are in. You can see this blue line has some variations to it; this is the seasonality of how demand goes with the holiday season. During the course of every year, there's a cyclicality or a seasonality to it. If we could take, like we did last year, and give a best-fit line through the curve, and no matter where you look, it's a constant 10% over a certain horizon of a couple of quarters. This constant growth rate in units shipped to the field, shipped to the electronic industry, a 10% CAGR. And then on top of this, we could put this white line, which is how capacity has been added in our industry by our customers, to go after this demand. Then we can see and hone in on the different points, no different that we did last year, that when the supply and demand, the capacity our customers put on and the unit demand diverge, there is a temporary pause in how they spend it with capacity on. It creates these downturns for the equipment industry, but they come back and they come back with a vengeance.

To get an idea of a little bit more fidelity, let's blow up this top-right section of the chart and you can see the following. We truncate everything before January 2004 and look all the way through January '08. The blue line is the unit demand; the yellow line is the best fit through that unit demand growing at a greater than 10% CAGR; and the white line is how our customers are putting capacity on.

You can then go and fast forward or look forward and say, okay, given the seasonality of demand, given the 10% growth rate of unit demand, we can show how that demand is going to modulate with the dotted line below the yellow fit and we can see the forecasted capacity that's going on, comprehending the fact that our customers have slowed down some of their capacity additions. You can see where a couple of quarters here where this thing has to converge and our customers will need to put capacity on to meet the demand.

So fundamentally, as long as our industry continues to grow or the US economy continues to drive a 10% compounded annual growth rate of ICs, the supply/demand balance will come in and our customers will need to invest.

I think fundamentally what happened here is, in the '06/'07 timeframe, there was a bit of an overzealous capacity being added and no one truly comprehended or should they some of the macro economic woes we were going to have, so the capacity got a little ahead of demand, but it will catch up.

So with that, what's going to keep driving this unit demand? What's going to keep this 10%? Well, it's ubiquitous electronics. It's the digital area; we called it a consumer-led marketplace, but really what the consumer-led marketplace is about is digital products, (inaudible) demand and the pervasiveness of digital products (inaudible) business devices and our personal use of electronics kind of -- well, what is my cell phone? Is my cell phone a consumer product? Is it a business? Is it a mobile unit? Well, it's all of that; it's a digital product that provides value to my personal life, my ability to do my job in this business.

In any case, what drives this? It starts with PCs, as I said before. PCs and notebooks drive overall demand, 30% of the electronics market. We have the adoption of Windows Vista that doubles the amount of memory that computers need and soon the DRAM, as you are starting to see DRAM pricing bounce back, this will continue to drive the need for more and more DRAM.

Solid-state drives -- a key application for NAND. We see 2009, towards the end of 2010 where price parity is going to drive solid-state drives to becoming a real growth engine for NAND. Handsets and smart phones, another key application for NAND. Then they are rounding out the rest of the electronics, whether it's GPS and flat-panel, digital media with HDTV and Blu-ray, or the gaming stations. This is what's going to keep that 10% growth rate.

But it requires something; it requires something that's no different than what this industry has built upon. It is about taking the cost of electronics, the cost of functionality down over time and create the new applications and a new volume opportunity for our customers. So our customers need to continue to drive their average selling prices down like they have historically, so they can continue to grow the market and grow this unit demand. Fundamentally, if they have to take the cost of price down like that to drive the demand, they have to continue to take the cost out. The biggest lever they have is Moore's Law. Moore's Law allows them to take half their costs out every generation of technology and they can't get off of that cycle.

But it doesn't come with a dilemma, and this is what our customers are facing right now. They say "Okay, Moore's Law, I do that, I take cost out." But it's getting more and more difficult to follow Moore's Law. The complexity of technology, adding of layers and lithography steps, all that adds is complexity, and complexity is another term for cost increases, costs. It comes right back down on the affordability of Moore's Law. Are we getting the costs our customers need out of Moore's Law? They can and they will. But they have to shift on how they are doing their business. Our customers are changing the dynamics of how that are spending and what they are spending on.

Let's talk a bit about these dynamics because it's key to understand these to define what equipment companies like Novellus need to do to be positioned for these changes to win in this marketplace. The first thing is changing investment patterns by our customers. There is CapEx consolidation. There's a shift to memory-dominated spending from Logic. As you see, there's technology alliances popping up all over the place as our customers look for ways to get affordable technology.

So this first chart shows the consolidation dimension I just spoke about. You go to the early part of 2000/2002 and we see that the top 10 spenders in that year represented 50% of the total amount of dollars spent. Fast forward to 2008, the top 10 spenders represent 70% to 75% of the spending. This is the consolidation; this is the economy of scale that this industry is looking for.

The second thing is we look at who's spending. In the late '90s, it was about the era of the microprocessor. Everybody was looking to get connected to the Internet, PCs were fueling this growth and microprocessors dominated the spending. Two thirds of the spending was for micro, one thirds were for memory.

We come to turn the millennium and we get well into 2007, 2010, it's reversing. Not that logic spending is less but (inaudible) application enablers is driving the growth. It's driving the growth because of the advent of digital media. So we've gone from 2/3 logic to 1/3 memory in the late '90s and we switched to 2/3 memory 1/3 logic in spending.

So what does that mean? It means there's a divergence taking place in what the solutions equipment companies need to have to satisfy their customers. So as how memory has gone after the marketplace is different from logic, and their requirements are diverging. The key to that is the divergence or the creation of the megafab trends in memory, but that's not happening in logic. What's driving, fundamentally back to the equipment suppliers is they need to recognize this divergence and specialize their equipment for these solutions at these customers from a memory to a logic maker.

Let's look a little bit at that. This is a chart that shows what average capacity or peak capacity that was going on for semiconductor companies starting in 2003, and you can see the largest fab, whether it was logic or memory, put on somewhere around 25,000 wafer starts a day, per fab. That was their output -- not a day, 25,000 a month, I'm sorry.

Fast forward to 2800 and the logic guys, they've grown their capacity to get some economies of scale, but fundamentally they can't grow too high in one fab because they have a (inaudible) number of mix, many customers, many applications, and the best economics for them is not to grow to these megafab. Conversely, the memory guys have a small number of (inaudible) and they could drive tremendous efficiencies by leveraging large-scale fabs, take one fixed cost and spread it against a total output and they don't have to worry about the churn of all these different products coming through their lines, and they can optimize unit cost (inaudible) step-by-step in the fab for the maximum output.

As you see here, the logic guys grew to maybe 40,000 to 50,000 wafer starts a month type of capacity they've put on at any given fab, but the memory guys went to 140,000, 160,000 wafer starts a month, so leverages economies of scale.

The fact of the matter is one tool can't do both of those. Maybe one platform can, but it needs to be specialized to meeting these diverging needs. I point to the Vector platform that we have for PE CVD because it's the best example I could show you. We had the Express platform for both our memory and logic customers initially, and now we've augmented with an Extreme version where we meet these diverging needs of a mass-producing memory megafab customer with the Extreme and give the flexibility that the Express offers to our customer.

The last trend that is happening, and it's happening faster and accelerating, is that memory is transitioning from aluminum and copper. Everybody talks about they need it for their function. They don't need it for the function, they need it for the cost reductions, because if they stayed in aluminum, they would add complexity, that very complexity I talked about before they add costs. By transitioning to copper, at a minimum, our customers will keep the costs the same as they go down Moore's Law, but the people that integrate it the most savvy way will actually find copper interconnect is cheaper than aluminum connects, and maybe even a way to take cost out of the interconnects in the back end of the line.

So here's what happening -- the copper transition began a little over ten years ago in logic, and by 2011, 80% of the equipment that's spent, 80% of it will be for copper backend enabled. It's very exciting for Novellus because, if I talk about the opportunity, the market opportunity for us, when DRAM alone switched from an aluminum interconnect to copper, that's 14 new applications we could go compete in leveraging our strong position in logic today as copper transitions or memory transitions to copper.

So what does this all lead to? Our customers are changing who is spending or how much they are spending, and how they are spending. In the Novellus play, taking advantage of these market dynamics is what our customers are doing to drive their profitability and to drive their business.

So what's our play? It starts with a product; it's always about the product. First and foremost, you need the technology superiority and extendibility. If you can't play in Moore's Law, you don't have the table stakes at this game. We need to continue to drive the capability of our tools, enable our customers to drive Moore's Law.

But that in itself is not enough. Lowest manufacturing costs -- we can't just make costs comparable generation to generation. We have to show them paths to take cost out, and we're doing that in our toolset with these application-specific platforms and solutions.

It's about the customer. We are focusing on improving our customer response. We started a program -- Rick launched it 2.5 years ago where everybody in this enterprise knows what the customer wants, everything is about responsiveness, everything we do in our day to day lives. In fact, our Extreme platform was in direct response to a key customer and us listening to what they wanted us to provide for them.

There is a measure that we are seeing some momentum on this responsiveness. The (inaudible) survey just came out again; it comes out every year this time. In 2006, we were here; we were fifth on that list and had started to slide down. We started this program, focused on it. Last year, we gained momentum. This year, we just came out; we are number two. We've had the largest gain in this Customer Satisfaction Index as measured by [OSI] than any other country over the last few years. We are number two and gaining fast on number one.

It's important for us to have the highest reliability and on-wafer performance. We could talk all we want about our tools and how they do in the lab. If we don't bring it to the customer's site, they don't see it. And we are going to have a maniacal focus on making sure that happens.

Then lastly, I spoke about it before. This industry is changing. Memory is transitioning to copper from aluminum and we are going to take advantage of that and leverage our positioning.

It ends with the environment. As we stand here today, we are in a downturn. Nobody wants to be in a downturn. But I will tell you, if you want to win market share, you need the downturn. When our customers are ramping capacity fast, if you have a new offering, you've missed the window. You're too busy buying equipment, installing equipment, getting the return on that investment they just made to get output. They are not interested in looking at better and cheaper ways to do it as much as they are in a downturn, when they've slowed down their capital spending.

It couldn't come at a better time, even though nobody wants it, for Novellus because our position of our products has never been stronger. We've taken advantage of this downturn to win the market shift.

We are also providing products that meet the environmental need of lower energy consumption at the cost dimension, less emissions, less use of chemicals, not only to take cost out but it meets our customers goals as the green focus continues to intensify in our industry.

So with that, let me talk a little bit about these products at a high level. As Rick stated earlier, Tim archer Is going to come up and talk about Vector. But Vector is a perfect example. We have the specialized platform we've created. It's a patented, sequential deposition technology. The beauty of it is films get thinner with every generation of technology. This architecture becomes better and better and more and more differentiated. We had the Vector Express for our larger customers; we announced Express the first quarter '07 and within the first year, we had 100 of them in the field.

We created Vector Extreme and Vector Extreme Ashable Hard Mask that we are announcing this week at the show with a megafab, large throughput for our customers. Last year this time or the end of June, we shipped our first tool ever to the field, a beta tool. In September '07, we shipped our second one, and as I stand here today, we have over ten of them in high-volume manufacturing fabs, memory fabs, these megafabs, around the world. This is tremendous market acceptance and there's a reason for it. When you are giving a 30% value proposition to your customer, lowering their cost of ownership, lowering their capital for wafers out, it doesn't take very much for them to go hot and heavy when you are doing the right job for them.

SPEED Max -- (inaudible) right up to me on what we've done here in our high density plasma CVD tool. Again, we have differentiated technology. We've configured it for logic and memory where we are giving a 50% throughput over the competition. This is a cost reduction. It's enabled to 32 nm. It required 28% less floor space so our customers not only save on capital dollars, they save on the cost of the floor space to put more tools in that same factory to get more output. We're well on our way to shipping 100 modules through the world by the end of this year. I can tell you, because as we stand here today, we have more than 50 deployed in the field, and we just launched our first shipment during the fourth quarter '07.

Our tungsten platform, ALTUS, it's a tungsten CVD tool. We've had market share leadership over numerous technologies for both memory and logic. In fact, in logic, we have over 500 of these P&L -enabled modules throughout the world. Over the last 30 days, we just announced the OfficeMax offering, again specific for the DRAM or NAND megafabs in memory, because it gives, pound for pound, the greatest throughput per tool, 60% higher productivity. And Is how we are helping our customers take the costs out of their ability to manufacture.

The last tool set I will talk about is our GAMMA, what we call surface integrity group. It's a (inaudible) tool. It's, again, a multi-stage and sequential processing so it allows our customers to optimize what they are looking for. We recently announced a specialization of this platform. We came out with the GXT for our logic customers where it goes after minimizing silicon loss, it goes after the ability to take high density implants, the crud left behind in that process off in the most friendliest way with low defectivity.

Then, for the memory guys where high density implants is not as important, silicon loss is really not an issue, we have the G400 which is all about 0 to 100 speed, it's all about 400 wafer starts a day; it's wafers per hour of productivity, leading productivity in the industry and taking the costs out. It does high-density implants for the memory guys at 250 (inaudible) per hour. Again, specialization segmentation of our product lines to meet the needs of these customers.

So, how do you know we'll win? How do we know we are winning? It's very hard to show it in the top line when you're in a downturn like we are right now, but there are leading edge indicators. We call this play and creating our products specialized to these customers towards the end of '06 and started developing these tools for '07 (inaudible) launch them. And so we take bookings as a leading edge indicator of future business that you are going to get, relative to your competitors. You can see some interesting trends.

How do we create this chart? We said "Okay, let's take the second half '07 total bookings for Novellus, total bookings for our competitors, and normalize that and say, if -- how did we do relative to that level of bookings?" The normalization, and anytime we are above 1, it means we are out booking for future growth. Any time we are pulling this normalized 1 level, we are losing share or losing position.

You can see, in the first three months of '07, it's kind of a little up and down, no real movement here. But starting in the fourth quarter of '07 and starting to get out with Extreme, Vector Express or Ashable Hard Mask, started the ship our first HDP modules to the field, we started to gain relatively out-booking our competition. You can see it's continued for three quarters now. I will be the first one to tell you some of this is because of customer concentration spending patterns, the mix of our customers; it's not all the same. But it's clear you can't have this kind of relative booking index if that's all it was.

The fact of the matter is, where we know we've won share is in applications and tools with our customers. We had zero position entering 2007, and the fact of the matter is that we have a significant share and we've grown in those areas is another element that demonstrates to us -- gives us the confidence we are winning with these products in the marketplace.

So let's see what it means, this market share growth story for Novellus. What does it mean to our top line?

So I will take a little bit of time to go through this chart. Let's start with 2007 and the yellow bar. The yellow bar represents what [DQ] would say is available market we serve with our products we have out there today, roughly $6.2 billion.

In 2007, Dataquest would say "Hey, Novellus, you did $1.2 billion of systems revenues." Now, as a company you know we reported $1.6 billion because we also have our Investor Applications Group, we also have our sales and services business.

If we fast-forward to 2012, [DQ] will say, (inaudible) is not growing. In fact, it is contracting a little bit. Well, what kind of growth story is that?" So the growth story is in how you are going to play and where you are going to win market share.

So here's what our market share goals are for our products. There's no reason, with we have in PE CVD, we can't grow our share in all of those applications at 45% to 55% of the market. In HDP, a subset of the (inaudible) market that's in this (inaudible) of $6.2 billion, are we going to go after part of the market called HDP, there's nothing no reason we can't get 50% to 60% in that focused area.

In (inaudible) tungsten, which today we already enjoy leadership market share position, there's no reason to believe we won't maintain that through the member transition to copper and take advantage of the growth there.

In PVD, while it's a huge (inaudible) in that $6 billion, we are going to focus only in copper barrier [speeds] at a much smaller segment and grow that 50% to 60%. in CMP, while it's a huge market again focused only on copper barrier speed markets (inaudible) 50% to 60% and in stripped, leverage this specialization play in our hardware configuration for both memory and logic, take that to 45% to 55%. When we are done, from a Dataquest perspective, we'd say our systems growth is $2.2 billion or so; that is that green bar. And our company growth will be beyond $3 billion over five years or 15% compounded annual growth rate. That's assuming that our services business scales with our system business. The more tools we have out, the more spares we sell. And then just (inaudible) applications growth continue this growth story and get to $0.5 billion. So this is what the market share play means to Novellus because this is where our growth opportunity lies.

So with that, let me summarize. The electronics and semiconductor industries continue to grow even in this industry. Now, maybe it will moderate a little bit, but fundamentally electronics are pervasive, electronics are changing the way we do work; they are changing the quality of life. There's emerging nations that want the electronics, and we firmly believe the 10% compounded growth rate will continue. For this to happen, digital products are the driver, ASPs need to decline, and therefore Moore's Law is a requirement for our customers to maintain their business models.

The industry has a dilemma with that. We have to find a way to do Moore's Law and not let the costs creep back in, and that's where we are playing. We are playing with technology that is extendable, that allows our customers to drive Moore's Law, but also at the same time take costs out. We are doing that by specializing our platforms to meet these diverging needs of our customers. We are going to leverage the fact that copper, that memory migrated from aluminum to copper playing to our strength and leverage our strong position we have in logic. We are going to take advantage of this downturn to continue to build product momentum and drive marketshare, so when this thing turns around, we enter it growing more than we did -- we exit it growing more than we entered this market.

We have the products, the ones we announced over the last 30 days, the two we announced at this show plus the ones we will continue to go. We are going after this theme to go win this marketshare. We are very excited about being in this industry; we are very excited about our ability to be successful in this industry. We feel we have the momentum with our customers and our products.

So with that, let me give myself a break here and invite Kaihan up to talk about the exciting things we have going on in our SPEED Max HDP. Thank you.

(APPLAUSE)

KAIHAN ASHTIANI, GENERAL MANAGER OF GAP FILL BUSINESS UNIT, NOVELLUS SYSTEMS, INC.: Okay, thank you, Tom. I'd like to thank everyone who has attended this meeting. My name is Kaihan Ashtiani. I'm the Vice President and General Manager of the HDP business group, (inaudible) business group. I'm introducing the SPEED Max HDP CVD. You have this module on the floor of the theatre, the Novellus Theatre, and I believe the reception is after this meeting, so you get an opportunity to look at it. We are very excited about this tool. We have good momentum for this product I'd like to give you a quick introduction to that.

So let me start by looking at the HDP dielectric market size. So this is a chart that shows the market size from 2002 through 2012. So we are sitting at 2008 right now. It's pretty interesting. Looking at the first part of the chart, you see there's a growth story there going from a $500 million, $600 million market up to over $800 million in HDP in 2006 and 2007.

Then you'll see, from 2008 through 2012, flat to slight growth in this market, still (inaudible) $500 million to $600 million market. So looking at this, Tom talked about this a little bit. You know, what is causing this trend?

For the first part of the chart, as you can see -- and it sort of relates to the megafabs and the use of HDP DRAM -- especially in 2006 and 2007, with the advance of megafabs, a lot of capacity added to the HDP. Therefore, the market is over $800 million.

Now you see, after that, in 2008 and 2009, the market goes down. There's a couple of trends here despite the economic conditions. One is that the memory is transitioning through to copper, so with that, one layer of HDP is eliminated where our (inaudible) CVD and other tools in the Novellus portfolio will be used for that application.

The other trend that's happening is that the adoption of other technologies for STI applications that has affected the HDP market.

But overall, you look at this market and you know, going forward the next five years, $500 million to $600 million, by any account, that's not an insignificant amount of market, so very significant to participate in. We had a product in the HDP and that's why we put the focus and developed our SPEED Max platform -- a good market to play in for the next five years.

With that, let's look at the layers of opportunity with the HDP. So starting from the logic, we talked about it. There is a trend in the logic to move in other technologies, especially for the STI. Not everybody has moved in that direction, but there is certainly a trend.

But if you look at it overall from the fixed (inaudible) geometry to 5X to 4X, the number of layers in logic is two layers. Basically, it's STI and CMP, and that has not changed over the years. So there's two (inaudible) of the HDP tool in that segment.

Now, in contrast, you look at DRAM and as DRAM makers go to smaller geometries, continued with the aluminum, the number of layers in the HDP passes from six to nine for the [private] geometry, and then it goes back down to the six partly because of the advent of copper, transition to copper and a reduction of some of the complexities in the HDP. But it's still, you look at it compared to logic, three times the number of layers, a significant opportunity DRAM for HDP.

The same story with Flash -- you compare that to logic, starting with six (inaudible) geometry, five layers, five passes for HDP. It goes up to six with the aluminum interconnect, then goes back to four layers with the advent of copper and (inaudible) four passes.

So overall looking at the numeral [4X] geometry, despite the transition to copper, we see two layers from logic as opposed to ten layers, ten passes through HDP in memory. Therefore, the focus that we've had on memory, especially with the HDP, to address the needs of customers regarding those products. HDP does stay a key building block of memory devices, and that will continue throughout the five years and beyond that I've shown.

So, given that, when you look at this, this is an interesting chart as well. We talked about the number of layers of the logic versus memory. What you see out of this, this is a snapshot of 2007 HDP market. What you see is the logic foundry, 32% of that market HDP goes to logic and foundry. In contrast, memory, which is DRAM and Flash, is about 70% of that market, so at the end, you know, it refers back to the number of layers that we discusses on DRAM and Flash.

Even more interesting, you know, sort of plays into this story -- if you look at the top two makers of the memory devices, combined, those two spend more money on HDP than logic and foundry together. So it's a very, very important fact to pay attention to. Again, 70% of this market for HDP is driven by the memory makers.

Coming back to what these customers require from an HDP standpoint, our wafer (inaudible) is excellent. This is not unique to HDP and this is not unique to Novellus. We've spent years developing processes. Certainly, the SPEED Max, we've achieved a level of excellence that we are ahead of our competitors, and I will talk about that a little bit.

In terms of technology and extendibility, this goes back to the cost reduction and ability to extend the life of the tool. The customers would like to buy a tool today; they would like to use it for the next few generations if possible, or beyond.

Finally, coming back again to the highly productive tools, you want to get the maximum benefit from the footprint that you are using in your fab, to basically yield on your devices.

SPEED Max -- we started this with select customers in early Q4 of 2007, so it's not so long ago that we started putting this tool in the field. This is the formal launch today of SPEED Max. There was an announcement; there was a press release today on this. So in those areas that I talked about in terms of process excellence, (inaudible) SPEED Max we've achieved very good uniformity, very good uniformity of (inaudible) and we've shown some incentive to it that you can achieve very good performance on our customers' wafers.

In terms of technology, we've shown actually both for logic and memory that we can extend the HDP to 32 nm.

Finally, in terms of productivity, we've shown that we have better than 50% improvement in throughput compared to one of our competitors. So in all of those areas that I talked about, in terms of the weather, the requirements of memory (inaudible), we have made significant achievements in terms of the performance of this tool. Since this introduction in early Q4 2007, we've had significant wins and we've had wide customer acceptance, especially memory makers, and it's been a good story for us.

Here are just some of the benefits. Some of you may be familiar with the HDP process. It's the deposition process, but it's a (inaudible). What it does is it deposits the film; you take partially that film out to be able to fill the gap completely.

So what we've spent time in terms of uniformity looking at both steps of the process in terms of deposition and edge and be able to show excellent uniformity on the wafer. Because of that, we have a large process window and that large process window translates into the ability to tune the process in terms of (inaudible) and shown superior performance in terms of (inaudible) the wafer. What you want is on the wafer to be able from, center to edge, fill these gaps uniformly such that the guys that are sitting at the edge perform the same as the guys sitting at the center of the wafer.

This picture, STM picture, shows the center and edge of the device. This is a 40 nm spacing, pretty aggressive, 5.5 aspect ratio, some pretty much you are looking at leading edge and you've been able to fill these gaps with SPEED Max. It's very impressive performance.

Effectivity -- as part of (inaudible) we've integrated what we call defect improvement package. As people go to smaller geometries, it becomes more and more important to pay attention to particle levels, contamination in the tools because as these devices get smaller and smaller, you just -- there's very little particles, a tiny particle can kill the device, can kill the guy. So here really the end metric is yield and for our customers ability to add more dies out of a wafer.

What we've shown, you know, this is an example of industry average in terms of yield for a Flash device, and what we've shown with Max is the significant improvement in yield because of the defectivity improvement. So again, a very good metric to take to our customers and show them the benefits and value of this tool.

As I mentioned, we introduced SPEED Max in early Q4 2007, and we've had very good success with it. Some of those are shown in terms of, again, the end metrics of our customers in this chart. In terms of throughput, I talked about this, 65% improvement compared to our competitors, in terms of capital productivity, 26% improvement and finally in terms of footprint productivity, 29% improvement compared to our competitors -- a very good story with Max, and we have good momentum.

So I put examples together, hypothetical examples. You have a DRAM manufacturer. They are ramping the facility for 50K additional capacity, our closest competitor, 16 systems to address the needs of that capacity. The total floor space is shown there.

If I do a direct comparison, given what I talked about in terms of throughput improvements, capital productivity, 12 systems are SPEED Max, a savings of 4 tools, significant cost -- capital cost savings in addition to 28% floor space savings. So again, when we take these to our customers, these are values that we offer with SPEED Max. These have been the reasons that we've been very successful.

Here's a chart that shows, you know, in terms of process excellence where we were with -- before we introduced SPEED Max and all the layers that I talked about -- DRAM, and Flash; you have STI; you have ILD; you have IND; you have (inaudible) -- all of those layers. This is the status that we had. We had a couple of greens, maybe four greens. Two greens were Flash; two greens were DRAM, a lot of the processes that we are working on. Since the introduction of Max, we've been able to qualify almost all of the layers, and now we are working on STI. That is in progress to qualify those SPEED Max for that layer as well.

As Tom mentioned, we just shipped our 50th module in Q2 and we expect to double this number by the end of the year -- very good momentum for SPEED Max.

Geographically, this shows where we are in terms of our success and where we will be. A lot of concentration and focus in Korea as you can see them and China that goes with it, a Flash maker in North America, very significant presence with SPEED Max, very good momentum for us despite the short time that we've been in the market with this tool. Again, as I mentioned, our 50th tool was shipped. We are leading in terms of technology and productivity with this product. That's one of the reasons for wide acceptance.

So, I'd like to summarize this. HDP does stay a significant market for us. It's a $500 million to $600 million market. Tom talked about gaining market share as we grow our market share. That's significant revenue that we are going to add to Novellus. With SPEED Max, we've delivered leading edge productivity. I talked about some of those in terms of benefits to our customers -- process excellence, throughput and capital productivity, capital expenditure benefit to our customers, and we have qualified this tool on multiple layers for multiple devices. Finally, we've shown the extendibility to 32 nm.

As I'm standing here, as I said, I'm very excited about this product. It's truly an industry benchmark, and we are well positioned to gain further market share with this product. Thank you very much.

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TIM ARCHER, SVP PECVD BUSINESS UNIT, NOVELLUS SYSTEMS, INC.: Good afternoon. My name is Tim Archer. I'm the Senior Vice President and General Manager of Novellus' PE CVD business unit. Today, I would like to provide you an update on the new products that Novellus is bringing to the market to address the growing need for PE CVD equipment now and in the future.

The PE CVD market is growing. If we look at the time span between 2002 and 2012, the PE CVD market is growing at a compound annual growth rate of 7.1%. By 2011, the PE CVD market will represent for Novellus an opportunity in excess of $1.5 billion. Given the market goals that Tom talked about in his presentation of achieving between 45% and 55% market share for PE CVD, in 2012, our PE CVD business can be in excess of $700 million.

There are two primary drivers for why the PE CVD market growth rate is higher than the overall wafer fab equipment market. The first is in logic. As advanced logic transitions from 45 nm to 32 nm, we will see increased numbers of metal layers required in the back-end interconnect to deal with circuit complexity. More importantly, there will be new applications for PE CVD. Because of PE CVD's lower thermal budget and improved cycle times, relative to competing technologies such as furnaces, we are seeing and expecting more than 20% increase in the front end of line layer opportunities for PE CVD in this 32 nm transition.

But a far bigger opportunity for PE CVD growth over the next several years comes with this transition of memory from aluminum metallization to copper. If we look at the PE CVD layers used in aluminum memory device and compare that to a copper memory device, we can see that PE CVD layers will increase by more than 30% in this transition. In fact, many of these layers are layers where Novellus equipment, because of our productivity advantages at thin film were particularly strong, films like the fusion barriers for copper.

So with this growth opportunity in front of us, about two years ago, Novellus embarked on a new product development strategy to meet these unique needs of the logic and memory trends. In the first half of 2007, we saw the introduction of the Vector Express. The Vector Express delivered to our customers greater than 30% productivity improvement for thin film. And the market acceptance of the Vector Express has been overwhelming. As you heard Tom talked about, within one year of the launch of this system, we were able to announce 100 Vector Express shipments. We continue to see rapid proliferation of Vector Express throughout our customer base.

In the second half of 2007, in fact at Semicon West last year, we launched in the Vector Extreme. The Vector Extreme is a multi-module PE CVD platform that set its mark last year as the industry's fastest PE CVD tool. Again, the customers' adoption of this tool has been rapid. In Q2 of 2008, we installed our tenth Vector Extreme and by the end of 2008, we expect to have more than 30 Vector Extreme systems installed and running in memory megafabs worldwide.

The reason the memory megafabs are choosing the Vector Extreme is pretty simple. There is no other tool available on the market that can match the Vector Extreme for wafer output.

This chart shows the daily wafer output for a Vector Extreme running in a memory megafab in the month of June 2008. The average daily wafer output through this tool was 3,800 wafer passes per day. The Vector Extreme sets the PE CVD productivity benchmark for the industry, greater than 100,000 wafer passes per month, per tool. This is precisely the type of high output system that the memory megafabs need.

We achieved this high output from the Vector Extreme without compromising the on-wafer results that our customers have come to expect from our previous-generation Vector systems. What you're looking at here is thickness repeatability data within wafer thickness range uniformity, and particle data for Vector Extreme. All of these parameters are industry-leading results.

So with the success of Vector Extreme for core memory films, we have turned our attention for Vector Extreme towards what is the fastest-growing segment of the PE CVD market, the Ashable Hard Mask market. Ashable Hard Mask Process between the years 2006 and 2012 is expected to grow at a compound annual growth rate of 16%, comparing that back again to the overall PE CVD market at 7%. The majority of this growth within the AHM market will be in these leading memory megafabs.

So here at Semicon West 2008, in fact just across the way here you will get to actually see this tool, we are launching the Vector Extreme AHM. This is a multi-module PE CVD system specifically designed for the Ashable Hard Mask application. This multi-module PE CVD tool incorporates Novellus' specialized AHM process hardware, which uses a special plasma confinement kit to deliver high plasma density within the desired pressure regime, which allows us to provide our customers with AHM films that have nearly 2X the (inaudible) of competing films. Because of our unique choice of gas chemistry, we are able to deliver AHM films that have depth coverage nearly 2X greater than competitive offerings.

The Vector Extreme system, Vector Extreme AHM, is also the first PE CVD tool to incorporate Novellus' unique post-deposition double-edge module onto the deposition tool itself. What this means for the memory megafabs is not only do they get the removal of the edge film which eases integration of AHM films, but they get that on the deposition tool which saves them over 2X the cost of integrating the same step on a standalone EVR tool and saves them cycle time.

So it is the incorporation of these unique features within the process module specialized for Ashable Hard Mask and the incorporation and integration on-board of post-deposition double-edge capability that allows the Vector Extreme AHM to deliver the highest quality, lowest-cost film for our customers. It's this cost aspect particularly that has made this tool extremely attractive for the memory megafabs. Compared to our competition, the Vector Extreme AHM system is able to deliver throughputs that are nearly 40% higher than competitors' tools, which means for a megafab outfitting their capacity to 150,000 wafer starts a month, they can reduce their capital investment by choosing the Vector Extreme AHM by nearly $40 million and they can save approximately 80 m² of floor space.

So it's because of these cost and performance metrics we can pretty confidently say that Vector Extreme AHM is the most cost-effective choice for the memory megafabs. We are seeing this value statement in our market momentum in AHM.

In the second quarter of 2007, Novellus had nearly 0 market positions within Ashable Hard Mask. As we stand here today looking forward to the end of 2008, based on the productivity strength of Vector Express and now Vector Extreme AHM, we fully expect to capture 25% of the AHM market by the end of this year.

So in summary for PE CVD, the PE CVD opportunity is growing faster than the overall market. We expect it to exceed $1.5 billion within just the next several years.

We've launched new products to specifically address the unique requirements of logic and memory. Over 100 Vector Express systems were shipped within the first year of tool introduction and we continue to see that grow. The Vector Extreme has set this name benchmark of being capable of running over 100,000 wafer passes per month, per system, in memory megafabs.

The Ashable Hard Mask is the fastest-growing segment of the PE CVD market. Here at this show, we are launching the new Vector Extreme AHM specifically to deliver the most cost-effective solution for Ashable Hard Mask for the memory megafabs.

Thanks very much. Now, I will bring up Rick Hill.

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RICK HILL: Well, we believe that there's not an end to the electronic business. We are not out chasing different businesses; we are focused on the semiconductor business. We didn't talk today about the industrial business, which we also think has a dynamic growth opportunity. But we believe that not only do we have the technology that everybody needs to continue Moore's Law, we believe we have the cost structure, we have the operational excellence and we have the quality. So today when you join us over in the building next door, I'd like you to take a look at the quality of the products that we have on the floor.

Now, this is my 15th SEMICON. Make no mistake about it, this industry has continued to change. It's very competitive. But there's no industry where the barriers to entry and the ability to differentiate yourself exist as much as it does in this business. With that, there are opportunities for profit, there's opportunities for growth, and there's opportunity for long-term potential for employees and our shareholders and our suppliers as well.

We are strong believers in the semiconductor industry. We are focused on making our technology extendable and, with continued cost reduction, to make sure that our customers receive the optimum value in their products.

We have a unique opportunity in the strength of our copper business in the logic arena and to leverage that -- but not only the copper piece, but as Tim spoke about, the dielectric piece as well -- in the memory market with blanket film.

We also have the opportunity to take advantage of a downturn. Nobody likes a downturn, but I think you can see, from one of Tom's slides, is during this downturn, we are positioning ourselves with companies that are finding it difficult to compete because they haven't been Novellus customers before -- that by focusing on productivity, focusing on technology, you can compete in this business. That's why we believe we will be the most successful capital equipment company over the next five years.

Now, with that, I'd like to invite up Tom, Tim and Kaihan so you can fire away with questions. We may not have all of the answers, but we can have a discussion. You've got some concerns or anything you want to raise, we will try to be as open as we can relative to anything. We just had our announcement, so we can normally give a little bit more frank answers than we can in between nowadays. So with that, Q&A positions. Thank you.

UNIDENTIFIED AUDIENCE MEMBER: (Inaudible question -- microphone unavailable) Is there some trend among some of the big memory makers to move away from that in fact and kind of get back into adding capacity in small increments? You know, it seems like maybe amongst some of the biggest memory makers, that they are maybe changing how they might (inaudible) actually move away (inaudible). Do you think that that's actually happening and if so, why?

RICK HILL: Do you want to comment on it?

TOM CAULFIELD: Yes. I don't know if they are getting away from the megafabs. In fact, I believe they are growing more there but you are right. They are trying to put small increments of capacity on so they don't outstrip capacity to demand. But the fact of the matter is they may put a little bit more modularized capacity, it doesn't mean they're not going to stick to the full-scale, highly, you know, the huge fixed cost megafab to take costs out ultimately.

I think those are two different things. I think the megafab is still there. Modulating capacity to meet the demand and not outstrip the demand is just how you fill that megafab out.

UNIDENTIFIED AUDIENCE MEMBER: (Inaudible question -- microphone unavailable)

RICK HILL: Tim, just to add to Tom's comments, I think the concept of a megafab is one where you are trying to maximize the wafer output per month. We see fabs today, we see one very large fab in Korea that, frankly, when I visited it, I was actually blown away -- 200 m long, 80 m wide, and the output of this fab is scheduled to be 300,000 300 mm wafers per month. I mean, it's incredible and it's two floors, two separate floors, 150,000 each floor, exactly duplicated. It's trying to leverage that infrastructure and be able to cram as much in a space as you possibly can. It's absolutely overwhelming. But they are not going to fill it in one fell swoop. It's about $8 billion of equipment to fill it.

Go ahead, Tim. I'm sorry.

UNIDENTIFIED AUDIENCE MEMBER: Well, just on that point, do you think that, as they (Inaudible question -- microphone unavailable) move to adding supply in a little bit smaller increments, do you think there's a period, maybe six months or even nine months where there's some sort of rationalization of the growth rate of the industry, or of the order expectations as you don't have one or two big customers placing these big, huge orders that kind of hold things up every single quarter and then you kind of get back on the same cadence where if you had -- where you have foundries ordering a little bit every quarter and then, over the longer term, that has implications to kind of how fast the industry grows?

RICK HILL: Well, we've talked about that before, the increments of capacity. By making them smaller and having more customers, you in essence get them staggered somewhat, which makes the deployment of capital more rational.

The reality is you have seen a rationalization in the DRAM market. Capacity has clearly come down.

I think the thing I fundamentally believe is, when you look at a NAND flash and you look at a DRAM, the cost to make them, for all intents and purposes, shouldn't be any different. But yet there's still quite a disparity between a NAND Flash price and a DRAM price.

So from the standpoint of what the potential is for NAND Flash, I think it's to be ubiquitous in every single product that we have. So I think NAND Flash opportunity is the big one going forward, and I think you are going to start to see that with the new iPhone that's coming out. You've heard some of those indications of a substantial amount of Flash being tied up through those. I do believe solid-state disk is right at the cusp of taking off and I think that will be another major one. But it won't be the last, and it won't be the only. So I think they are positive, but I don't think, given the capital situation, the markets -- and you guys should know that better than anybody, right now. I'm sure every day when you go to the office, you are looking for an e-mail. But the reality is that capital markets have not been favorable to highly capital-intensive businesses because the banks that have a few bucks are trying to keep it for themselves right now as opposed to lending it out to subprime loans of some sort. So I think that's a situation we have to deal with as well. But it's a good question.

Thanks. The next question?

UNIDENTIFIED AUDIENCE MEMBER: Most of the companies that presented today (Inaudible - microphone unavailable) the memory market seem to be incrementally more pessimistic over the next just month or so in terms of supply/demand imbalance, capital spending, etc. Would you generally agree or disagree with that overall assessment?

RICK HILL: Well, I will let Tom go first and then each of the guys go and then I will follow up.

TOM CAULFIELD: Yes, I think the fact of the matter is, because we have a higher position in logic, we haven't suffered as much in this downturn. But the fact of the matter is, as Rick pointed to, memory is going to be a driver in this industry; NAND is going to be a driver. Getting the position now is getting us ready for when it starts to pick up again.

So logic has held its own, especially with the largest microprocessor companies. They are continuing to drive their 45 nm ramp (inaudible) microprocessor (inaudible) division. But I don't think you are seeing anything different. What we are saying is that we are less dependent on it right now but as we grow market share and it comes back, we will have more opportunity for growth.

TIM ARCHER: Yes, I think that, from a PE CD perspective, you know, it's always nice to see a lot of capacity being put on but some of the films that we talked about today, Ashable Hard Mask, copper diffusion barriers, those are really technology enabling films and clearly memory customers trying to drive their costs down and move their technology forward are continuing to put those (inaudible) from a Vector Extreme standpoint and our position with the memory fab (inaudible).

RICK HILL: Kaihan, do you have anything to say about that?

KAIHAN ASHTIANI: Just the same comments as what Tim said, is that the technology [buys] are there, so where the technology is, also there's opportunity.

RICK HILL: Well, let me sort of summarize everything and give a perspective from an overall market standpoint. I think, in general, there's nobody that can argue that memory is not under pressure right now. But one of the things is our exposure is particularly good, okay? Where are our strength is, is with the players right now who have used us historically, are taking advantage of their knowledge of our capability and productivity, technology, particle performance, and they are using that to pile on right now, frankly. They want to win market share.

Now, we've seen a little bit of a benefit because other people are saying, "Look, if they have such a low cost, there must be something in the tool that Novellus is saying." So we are getting a little bump up of people coming in and saying, hey, bringing your tool in here, let's see how competitive it is."

We have very recent data where we've gone in to memory companies outside of the Korean Peninsula, where they didn't have us before, and we've greatly increased their productivity where I think they're stepping up and taking notice.

Now, if the market doesn't come back strong, these players could potentially fail. But I believe the market will come back strong. When they come back strong, because of this situation, they will realize the importance of productivity and we will have a position in them. That's the reason I'm a little bit more optimistic.

Do I think this is the greatest market in the world? Hell, no, I need Maalox every morning when I get up. I mean, holy mackerel! The first thing I'd do is I log on, I look at all that red on the screen, and I'm thinking that I have a hangover from the night before, I see so much red! I mean, it's a tough deal.

But make no mistake. Electronics is not going away, and semi conductors are critical to them. Hey, we are in a business to compete.

The real big question is how have we positioned ourselves to compete? You've seen a little bit of that today. You are going to get go over, look at a little bit of the quality of the product. You've seen some data; you've seen [VLSI] research come out. You know, it's been a little while since we've been on that customer satisfaction list, up on the top of it. Next year, I plan on being on the top of that, and I think it's an early indicator of what our customers are seeing. I know they do appreciate it and I know that's what you need to do to win.

UNIDENTIFIED PARTICIPANT: So if you (inaudible) Maalox, that's typically when I get the call!

RICK HILL: That's right, you get the call! (LAUGHTER)

Yes?

UNIDENTIFIED AUDIENCE MEMBER: Thanks for the presentation. A couple of questions about competitive dynamics, particularly against this slide and then one on CMP. So at this meeting last year, one of the hot topics of conversation was, well, are you going to get into the solar business? I thought you kind of articulately described why you didn't want to do that at this time.

Do you see any incremental competitive opportunities to maybe apply (inaudible) focused on solar or they still kind of have their eye on the ball in semi equipment? Then kind of part and parcel with that, one of the problems that has exacerbated industry downturns in the past is their very competitive pricing, and then you've said in the past that you kind of need to respond based on what they are doing, in part, although technology can help differentiate pricing. Then finally and then I'll hand the mic back over, CMP didn't get as much discussion. It was mentioned but not as much discussion in neither the call or meeting, so maybe if you could give us a little update there? Thanks.

RICK HILL: Jim, I'm glad to see you are here. I commented on some of your (inaudible) I expected you to be in restraints with the market the way it is right now! (LAUGHTER) But you know, the reality of the situation, I think, is Applied you can never take for granted; they are a very, very competitive company. But I hope they go gangbusters over there in solar; I really, really do. I would just love to see them go in the solar market because, do I want 100% of the semiconductor market? You bet I do. Do you think they are going to give it up without a fight? Absolutely not. But they are going to have to work to maintain market share because we are not playing around anymore, okay? We dabbled. We are not dabbling; we are focused. You'll see some of that focus in the product. You've heard about it. I talked about the specifics of the product on a conference call today. This is my 15th SEMICON. I am happy with where the products are.

I didn't talk about CMP because I think it's a detractor. Everybody wants to take a look and talk about CMP. Trust me, it's a wild card. It's nothing but upside. It isn't hurting the P&L.

You talk about the operating expenses. Everybody would say and there's no way you can get your operating expenses to $110 million going out of the second quarter. We just did that; we are going to do better, okay? We know what we are doing in this business. We did lose the recipe for a while. We've got it back, okay? We generated $158 million of cash, okay? We've got to get profits to keep those kind of levels up, so we need a selling industry, but we've still got room to work on the balance sheet to continue to generate cash. I like being at over $700 million of cash; I like the competitiveness of the product. I would like to have my major competitor focusing on solar.

Am I going into solar? Absolutely not going into solar.

UNIDENTIFIED AUDIENCE MEMBER: I have two questions. The first question is on Taiwan DRAM, how has your market share improved?

RICK HILL: I'm sorry?

UNIDENTIFIED AUDIENCE MEMBER: In Taiwan DRAM, how has your market share improved, if at all?

RICK HILL: Well, we don't comment on individual, regional market shares. I gave you a little tidbit that -- and I've said this before -- when we didn't go up a year ago -- because we didn't come to the party at all. I can tell you today it's much better than it was a year ago. That doesn't do me any good unless they put in production capacity, it doesn't do anybody any good. So, that's the reality.

UNIDENTIFIED AUDIENCE MEMBER: (inaudible) but what about copper PVD? You did not talk about that either.

RICK HILL: I did talk about PVD in the conference call earlier today, and the progress in PVD is terrific. In fact, I highlighted the fact that we've demonstrated the ability to be able to put down barriers to either 45 nm and extend it beyond that where we are a design tool of record. I think that's a strong product line with strong potential. One of the reasons is it's an enabler of technology.

You see many, many new technologies come in and they sort of thwarted the ability to continue to extend the technology because the customer doesn't want to change, not been successful. Kaihan talked a little bit about STI. But with PVD, clearly we have a differential advantage, a differentiated machine, and I know that Fusen and his group are focused on that business. I think you'll see some strong results over the next six months in PVD. But I didn't shy away from it, but we did focus on CVD this SEMICON, because we've focused on it in the past. But no attempt to shy away from it. I'm sure you can call Fusen and get his opinion when we are over in the exhibition hall.

Yes?

UNIDENTIFIED AUDIENCE MEMBER: Rick, you know, a lot of the growth forecast is predicated on gaining market share, as you showed in the slides, up to roughly around 50% in a lot of those segments. So I'm wondering if you can share with us, of the wins you've had so far with new customers and what-not, where you think your wins would place you in market share at this point, and therefore how much more you would need to go to get to those kind of overall market shares.

RICK HILL: I will let Tom comment on that, and Tim and Kaihan.

TOM CAULFIELD: So let's first start. If you look at where we said we were with the Dataquest numbers, you could argue that's about a 20% share (inaudible) $6 billion share. So where you saw aggressive targets of 50% on average kind of market share, they were in subsets of that total spend. Like I said, it wasn't full (inaudible); it was the (inaudible) portion. It wasn't the full span of CMP in all of the different layers; it was focused on copper. The same thing with PVD. At the end of the day, in five years, we will go from roughly Dataquest's, let's say 19% 20% market share to 30%. So you can kind of scale how we are getting market share positioned based on that. It will be more I think front-end loaded than back-end loaded. But that's kind of how we are going to do it.

I didn't want to leave here with (inaudible) capture 60% of that total spend. We are going to gain about 30% of that total spend by focusing in subsegments of that spend (inaudible).

UNIDENTIFIED AUDIENCE MEMBER: So, Tim, you're in PE CVD. (inaudible) okay. What do you think about your competitiveness for market share gains? And have you gained any market share?

TIM ARCHER: (LAUGHTER) Well, I think it's clearly our belief that we have gained market share already. We've also improved significantly our position for market share growth in the future.

If I look -- I think it's okay to say this, but if I look at those top four customers that we talk about, the guys who really are putting capital expenditure on line, we exceed the market share target already at two of those customers. We have work to do at the other two. We have gone and we have executed on new product development strategies specifically to meet the needs of those other leaders and grow our market share. So, fundamentally, if we can execute on Vector Extreme and Vector Extreme AHM, we are already off to a good start there. If (inaudible) continues to follow through, we will see market share gains over the next two to three years.

UNIDENTIFIED AUDIENCE MEMBER: So Kaihan, how about HDP when you and Fusen took that over? Where do you think you are today versus where you were nine months ago?

KAIHAN ASHTIANI: Right, so I second that with interest. We spent quite a bit of time in terms of addressing the needs of memory makers and we've been able to address those. I mean, it's not a secret; we had issues with HDP and we missed some of the activity that was going on in 2006 and 2007. We have recovered that from a product standpoint. In terms of position, we are very well positioned to (inaudible) within those customers to continue (inaudible).

UNIDENTIFIED AUDIENCE MEMBER: Two question I have. First is regarding [copper into] memory. Historically, you have had less exposure in the Taiwanese DRAM makers, or the tier 2 DRAM makers in the world, as you said, your high exposure on the logic side. Do you think [offering] that memory will enable you to be more of a historical (inaudible) -- I'm sorry to industrial mix, or do you think that (inaudible) and how are you positioned in those Taiwanese (inaudible) makers, by the way?

RICK HILL: Well, I would be careful to ever call the Taiwanese a tier two maker. They've had tier two equipment up until now, but now they are starting to move to tier 1 equipment, so that's how I see the marketplace. But anyway, go ahead and comment, Tom.

TOM CAULFIELD: Well, it's just kind of the major theme here. It's not about memory transition interconnect from aluminum to copper. It's also about leveraging that position with everybody in the memory where we've had traditionally less share, taking advantage of this transition. That includes the memory producers around the globe, not just in Korea. So, it is a key element of our strategy. We do have a differentiated product and it's not just the copper piece. The actual proper place (inaudible) dielectrics, as Tim showed the application levels that come in dielectrics, the copper barrier speeds. There's a whole host of applications we generated around this copper interconnect. We have high-value propositions for our customer. It makes no difference where they decide to manufacture and at what tier you call them. If they come to copper, we believe we have the value proposition for them. It's a key element of our growth strategy.

UNIDENTIFIED AUDIENCE MEMBER: One follow-up question on AHM -- so you announced Vector Extreme today, right? And you have announced Vector Express last year. (inaudible) you said you expect to achieve 25% of the market by the fourth quarter of this year. Can I ask why would a customer buy a Vector Express product if you already have a new product that is more productivity, supposedly you have higher productivity and a better product? And if, like you said, most of the customers are using (inaudible) memory anyway (inaudible) Express is the product for the memory sector, why is very unique for a Vector Extreme product?

TIM ARCHER: Well, I think, like anything, it depends on the customer's timeframe during which they qualified versus what products were available. So you are correct to point out that, last year, we introduced the Vector Express AHM system. That system allowed customers to experience for themselves the benefits of Novellus AHM technology on a smaller scale. Small footprint systems still delivered at least a 30% productivity advantage relative to the film and tools they had available to them at that time.

That system integrated the Novellus post-deposition double-edge technology, so in a smaller, more compact fashion, that tool demonstrated everything that we wanted to show to the customer. Many of those customers now have been quite happy with the results. They've ramped and they will continue to ramp those fabs with that tool.

What we've done with the Vector Extreme is essentially scale up that technology. We go from one post deposition double-edge module to two. We go from one deposition chamber to two. It's really designed because, in these megafabs, the customer does not want to install such a large number of systems. It presents tool management issues, tool (inaudible) issues, and also presents some additional cycle time issues. So the Vector Extreme for megafabs I fully believe will be the tool of choice going forward. But already today, with Vector Express AHM, they won't look backwards. They qualified it; they will still stick with that tool until such time as they move forward and qualify Extreme AHM. Extreme AHM is process-transparent to Express, so we will see the migration here now that this tool is available in the market.

UNIDENTIFIED AUDIENCE MEMBER: Rick, I've been coming to these for a long time and I'm really impressed with the number of products you have and that sort of thing (inaudible) particular session. The other thing, the stark contrast to some of the other ones is that, number one, is in the other ones, you know, a few years ago, you were hiring a lot of designated hitters from that tier two supplier that you were talking about. And this year, it seems like you've kind of gone back to the home team, and you are focused on activity more than you've been in past years. I was wondering what is the thinking behind that and what kind of business performance that you're seeing (inaudible) your management team, that sort of thing, if you could comment on it.

RICK HILL: Well, I, you know, to be very honest, we went through a transition as a company. You know, I joke oftentimes about Applied. I actually count a lot of the people there as friends, not as enemies. You know, we compete, but I don't look at them as enemies in any way, shape or form.

You know, we brought (inaudible) brought in some great ideas and some great people into the Company. In fact, Tom St. Dennis made a stop at Novellus before going back to Applied Materials, and I don't begrudge him at all. You know, we are in business. We are fierce competitors, but we are not enemies.

I think, though, that what happened to us is we've always been a smaller company because we started later. I mean, you know it better than anyone. You knew Bob Graham very, very well, you knew Brad Mattson. You know, the reality is we came from a much lesser company. 15 years ago, we were $60 million, okay? The reality of the situation is we got some good ideas, we brought in some good people, but with anything, there are all -- sometimes you can do things one way if you are a large market share position. For example, you can go and put [e-valves] everywhere, okay, and then send an army to support those [e-valves]. But back at the factory, you don't have engineers executing on everything, the guys out there in the field get slaughtered, and that's a function of math.

So historically, that was never our approach. We tried it for a while. You saw our operating expenses balloon up. It wasn't necessarily a wrong approach or a follow approach. It was for us, but it was a good approach for them. You can't argue that they weren't a successful company, and I think that, over the period of time where we had brought people in from the outside, some have stuck and do very, very well and are big a asset to the company. Fusen Chen is one of them sitting here in the front row. I don't look at him as somebody from the other side. They are part of Novellus, and we've gone back to sort of a fundamental approach to the way we've done it before but with some enhancements that were brought into the organization. You know, I'm good friends with (inaudible); I converse with him regularly. He's an idea machine for the Company. But you know, culturally, you have a math, and you've got to basically take the business you have and run it to get a return for the shareholders the way that sized business needs to be run and what the nature of the industry is at the time. I think we are back at that point. We are better in our execution today. I think that we've got people in place who, over this five-year period of time where we brought in [Saf], we brought in Tom St. Dennis, guys like Tim, guys like Kaihan who have been in the Company for a long period of time, five years ago weren't as developed as they are today with the capability to take the roles they are taking. So it served a purpose. We've got a lot of good things. I think we are better today. We are not the same Novellus we were ten years ago. I think we are better. When I look at the products, I look at how far we've come in such a short period of time. Our execution has obviously improved in the engineering function. I give a lot of credit to [Saf] for that, okay?

So I try not to keep looking back and say "Oh my, oh my, it's going forward, and I do believe we can compete and succeed." I will tell you right now, when I look at the product portfolio, I think we can and I think we will. But good question.

Yes?

UNIDENTIFIED AUDIENCE MEMBER: Am I jumping ahead? I apologize. So, I had two questions. Number one, I wanted to ask about PE CVD. As I recall, back in 2000 when you first launched the Vector, the pitch back then was that you had a fast small footprint tool, high productivity, addressing -- very focused to thin film, and yet that strategy has really not panned out in terms of market share over the long run.

When you've looked at some of the other films in PE CVD where it's longer process times and more complex film [stacks], those markets seem like they drive market share. So I was wondering. You guys have dabbled in low (inaudible), some of the more complex film stacks. What makes you think that, going forward, addressing the thin-film with higher productivity tools is going to lead you to the market share aspirations that you have today?

RICK HILL: Go ahead, Tim (multiple speakers) this conversation! You know the answer! (LAUGHTER)

TIM ARCHER: I know the answer, yes. So, as you said, we introduced the Vector as a small footprint, a highly productive tool. Maybe one of the things that has changed -- there are several dynamics that have changed over the years. First of all, we did gain significant market share with the Vector in a certain segment of the market, and I won't go into breaking it down too much for you but most of you are very familiar with Novellus' position within certain companies, certain segments of the market. We've always been very, very strong within the logic and foundry world.

Where we were not so strong were in areas where, as you say, the films were thicker, the films were more commoditized, the deposition times were longer. If you look at -- and that tends to be the characteristic that you find when you look at memory films and thick kiosk films, for instance. And what you find is the Vector Extreme now being able to put 8 deposition stations or in fact customize the option to put up to 12 deposition stations around a single handler. That tool can now handle that range of thin to thick films better than just about any other tool, better than any other tool in the market today.

So I think what we've recognized over the years is that the memory requirement as those fabs got larger and they focus very much on throughput and productivity for thicker films, required a unique tool set compared to the success we were having for thin-film copper back in the [interconnect] on the logic and foundry side. So I think now today, with the product line-up we have, we are fully committed to Vector Express and that going forward for a certain segment of the market and Vector Extreme and that going forward for the other segment of the market. We expect that to allow us to gain market share.

RICK HILL: I think there's one other point that I want to bring up. We made a strategic error in 2000 from a standpoint of not focusing on [kiosk], okay? I will take full responsibility for that, in that we felt [kiosk] was too expensive a film and that it would be replaced by (inaudible). The reality is that was wrong. We've since adapted both the Express and the Extreme to have unparalleled productivity and film quality for [kiosk] -- and the acceptance of the customer is huge, because we can greatly shrink that [kiosk] market for us -- thick [kiosk], make it bigger, okay? But we are going to make the guys that are in there not like that market.

The strength of the Vector is still there. Look at the number of parts; it's much less. Because of that, we can have a cost advantage, shrink that market, bring value to the customer, and go after that market we should have gone after a long time ago -- and do it the right way. We've done that.

UNIDENTIFIED AUDIENCE MEMBER: A couple of questions -- in the middle. A couple of questions -- on this whole modular orders from some of these big memory customers and how that could affect your orders and all of that, if I look at your September order guidance, it is down 50% from peak and in the last two years your industrial group has probably done flat or up (inaudible) down as much.

Is this whole hoopla about orders coming down because of modular -- is this something that happened a couple of quarters ago and it's already reflected in your June and September orders, or is this something incremental that will further affect your orders as we go past September? That is one question.

On the competitive front, it sounds like you're coming out of higher productivity products, you have some very ambitious market-share targets in market segments which historically you can't really shift it too far in one direction without worrying somewhat about pricing. What's the risk that (inaudible) get desperate and starts significantly cutting prices?

TOM CAULFIELD: I will take the second one first. You know, when you're talking about productivity improvements of 30%, 40%, you can't price your way to hold that market. So if we were talking incremental improvement, small amounts of value we were providing, we could be priced out of that marketplace. But we are talking about huge jumps (inaudible).

I also believe competition has that pressure from everywhere. In the edge market, that's a very competitive section. There's a lot of areas that you can't (inaudible) price everywhere because you need return as well.

I think the reason why -- not that pricing isn't always a (inaudible), not that it's not something we need to fight for our value every day, with the kinds of levels of value we are providing our customers, price is the second discussion, not the first. Tim showed, you know, in a fab with 50,000 wafer starts a day and Vector Express or Vector Extreme Ashable Hard Mask, you save $40 million less than what you're going to spend to create that application. That's not something you are going to go (inaudible).

I'm not sure if I heard the first part of your question (inaudible). I was interested in the first part of your question.

UNIDENTIFIED AUDIENCE MEMBER: (Inaudible question -- microphone unavailable)

RICK HILL: I think we talked about that during the call, okay? From the standpoint of I think we are down 40%, roughly, from our peak -- is the number. But I don't have it exactly in mind. I don't believe it's quite 50%.

Relative to -- we gave a range of up 5 to down 15, and I commented that was largely driven by some concerns relative to the memory market, okay? But having said that, I think, if it goes, it will tend to be a net positive for us and in the worst case, it's pushing out as opposed to going away. But I commented to that before.

Does that answer your question, or am I not answering the right question?

UNIDENTIFIED AUDIENCE MEMBER: (Inaudible question -- microphone unavailable)

RICK HILL: Can you use the mic because this is webcast and I don't want (multiple speakers) --

UNIDENTIFIED AUDIENCE MEMBER: It does make sense. I guess -- has something happened in Korea, for example, in the last two months, that's caused a change in the philosophy of sending (inaudible) companies that as you look out into your September orders or December orders, there's going to be a further decline? Or has this thing really happened two quarters ago and it's already in your numbers and that's (multiple speakers)?

RICK HILL: I see, I see. Well, I think what's changed in Korea over the last several -- nothing has changed specifically in Korea that wasn't here six months ago, okay. You've got two large manufacturers. One has gone through a pretty tumultuous time, relative to the management and a change in the management, so that takes some time to settle out. The other one who has literally done a phenomenal job in coming back from a near-death experience is now a little bit plagued by the financial markets and where they are and are somewhat limited from that but are managing the business very responsible and are still very competitive.

I think the fact is the companies that are having the hardest time have the best opportunity with us because we give them the most value. The people that want to stay in this business have to take a hard look. They can't say "Gee, I'm just going to buy another one of the other guys because that's easy." I think they are under the same stress. The value equation that we have, I believe the tougher the market gets, the better that value equation we have looks. You say is Applied going to be desperate? Well, they've got a lot of businesses, and they've got to fund those businesses, okay? So they've got to manage a business just like we do; they've got to be balanced. You can't be totally irrational. I don't believe they are totally irrational.

There are -- we compete on a smaller level with some companies that aren't Applied in very specific segments. There, I see irrational behavior. Now, how long they can last, I don't know, but they are not going to be getting debt financing anymore. But we are prepared. We've got over $700 million on the balance sheet. We believe we can dominate those markets. So overall, we saw what we have.

Yes, who's next? Bob?

UNIDENTIFIED AUDIENCE MEMBER: Okay, just to open up sort of another can of worms, but I'd like to get your opinion about 450 mm. The Big Three have thrown their weight behind it. They seem to be more serious than they have been in the past. It would seem, given the timetables I've heard about, that you have to start developing tools in relatively short order. That obviously is going to create a consolidation on your customer side and may create consolidation on the supplier side, which I would assume would be good for you. But do you have enough runway currently in the 300 mm market to get back to a more robust market, or are we going to get back to a robust market only to go into a dislocation as the market transitions to 450 as we saw during the transition to 300, which hurt the industry? Just your thoughts.

RICK HILL: Well, there's a real dilemma with 450 mm. So, can this industry go to three players only? I doubt it. Okay? If three players go to 450 mm, could any of the equipment companies go to 450 mm and ever get their money back? I doubt it. It's a conundrum, as Tom says, with that issue, okay?

I think, when we went to 300 mm, the equipment businesses finance that. To a company, we all look at that and say that was a net loser for the equipment business. There's nobody that doesn't believe it, and you know, I'm not talking out of school. We are in business to support our customers. We want them to make the right economic decision. We believe that the right economic decision, the amount of value we can give the 300 mm, is huge with much less investment potential, okay? So we sell against 450 mm. I mean, you know, a lot of times, a couple of the big guys cringe when I say -- you know, have to bring out my little badge with no 450 on it.

You know, can one equipment company go to 450 and that be any good for the semiconductor industry? I don't think so.

UNIDENTIFIED AUDIENCE MEMBER: So is your answer "just say no" and as a follow-on to that (multiple speakers) --

RICK HILL: Just say no? That's sort of worked, I guess. You know, we are not going to make the industry. We have to follow, okay? But we believe that the 300 mm business is robust and the people that really want to optimize 300 mm can be much, much more cost-effective and we've got to be very careful. You know, Stan, you are in the room; you represent semi. I think there's a pretty united front on the equipment side that suggest that 450 doesn't make economic sense. There's going to be a big presentation right here. Is it in this room for the 450, on Thursday? You can hear that debate. Come on.

UNIDENTIFIED AUDIENCE MEMBER: So can I assume that you are not going to build any 450 mm tools?

RICK HILL: I would assume that. I would assume that, yes.

Who's next? (inaudible)

UNIDENTIFIED AUDIENCE MEMBER: Rick, over here. Just a competitor made an unsuccessful bid to acquire another competitor in the CVD area. I just want to get your comments on what you think was going on there and what is in Novellus' best interest and do you think you guys could be interested in that party, or --?

RICK HILL: You know, if I told you that, then I would have to shoot you before you got out the door (LAUGHTER). You know, obviously, in order to be acquired, somebody's got to want to be acquired. Obviously, that's not the case with that company.

I think that having Applied make acquisitions of those kind of businesses, I think, from an antitrust standpoint, would be very, very difficult. That would be like killing the business more so than acquiring the business because I just can't see that being allowed. If we get a new administration, it will be even less likely that would be allowed.

So you know, when you go and make an acquisition, there's only two things you can acquire. You can acquire a cash flow from the existing operations, and you can look at across all the public commodities and you know what the answer to that equation is. Then the next thing you have to evaluate is what the technology portfolio is worth. Those are the only two things that have any value in those companies.

I think, clearly, when you look at a company like Applied, it's got a lot of value. You look at KLA, it's got a lot of value. You look at [Lamme], it's got a lot about you. You look at Novellus, it's got a lot of value. You look at Varien, it's got a lot of value. You look at the TEL, it's got a lot of value. It's got it both from a cash flow standpoint. All of those companies including Novellus have it both from a cash flow standpoint and a technology standpoint.

I think, once you get through that list of characters, and I'm ignoring the test business because I don't think anybody has positive cash flow in the test business, do they? You know, the bottom line is, there's not a lot of attractive properties out there. So the question is, is there any intrinsic technology and could you put an imprint on them of a different management style, a different -- you know, cut out the infrastructures and make it successful? I think those are the only opportunities that are left.

It's going to be very trying times for I think small companies that are burning cash right now. I don't care if that's Korea or if that's in the United States. I think it's a good time to be prepared, if you can find some technology and find some ability to rationalize, to potentially take advantage of it. It isn't something that's going to happen overnight. But I think, for the small-equipment companies, I think it's going to be a very, very difficult time. As such, there could be some desperate sales that could be opportunities. That's how I look at it.

The one you that are talking about, though, I think has intrinsic values of whether or not they could ever be sold because of the situation.

UNIDENTIFIED AUDIENCE MEMBER: Rick, I have a few questions. The first one is that you focused so long on the back end of line applications. My question is, as you go to 45 and 32 nm, there's a lot of action happening at the transfer (inaudible) level. Is Novellus going to be participating in particularly the high gate and the middle gate applications going forward?

RICK HILL: I will let Tim answer that.

TIM ARCHER: Well, you know, as I spoke in my presentation, from PE CVD perspective, we are actually participating in the (inaudible) line application. We see a lot of opportunities not only at 45 nm but it's even growing to 32 nm for the front end of line spacers -- oxides, nitrides, and such that are used, you know, that are critical to the formation of the transistor. At this point, from my product line perspective, we are not considering the [high-K] arena.

RICK HILL: I think the problem with [high-K], you know, we've spoken about this a lot of times -- if you have a chamber that you can just use and add a single film into it, a very viable market but a very thin film, one step, that's all you've got. But to the extent you have to develop a whole new platform and a whole new chamber, all new materials for that one application, it doesn't make a lot of sense. You've got to get a return. So there may be some markets we selectively don't go after. But the markets we do go after, we want to be the best. The best means best technologic performance and best productivity and cost of ownership.

Okay, I think -- is everybody done with any questions? I could take one more at a max, if you want. Okay, one more.

UNIDENTIFIED AUDIENCE MEMBER: Compared to the objectives of 2012, you mentioned the different segments. Could you rank them in terms of where you are today and how much market share you would have to gain compared to today, like which one would you have to be in the most market share and which one are you almost there?

RICK HILL: Well, I think it's pretty easy to know that the area we have to change (inaudible) the most market share in is PVD, and the one that's up there in CMP. I mean, CMP, we are starting from a pretty darn low level. But we've talked about it before. Some of them were over the market share objective. You know, we talked about it before when we talk about tungsten and we talk about our Electrofill. We are a dominant market share player in those particular areas. That is about as deep as we are going to go in that equation but I think growth opportunity, Tim highlighted it. In 2012, PE CVD can be a $750 million business. I think, when you see the quality of the products that we are introducing and you look at the simplicity and the elegance of the design, you will see how we are able to do it.

So anyway, thank you very much. Please join us for the reception next door and thank you for your attention over the last hour and a half. Thank you very much.

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