MKS INSTRUMENTS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-23621
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MKS INSTRUMENTS, INC.
(Exact Name of Registrant as Specified in Its Charter)

MASSACHUSETTS 04-2277512
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

SIX SHATTUCK ROAD, ANDOVER, MASSACHUSETTS 01810
(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(978) 975-2350
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). Yes [X] No [ ]

Aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant as of June 28, 2002 based on the closing price
of the registrant's Common Stock on such date as reported by the NASDAQ National
Market: $488,736,351; Number of shares outstanding of the issuer's Common Stock,
no par value, as of March 17, 2003: 51,359,857.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for MKS' Annual Meeting of
Stockholders to be held on May 14, 2003 are incorporated by reference into Part
III of this Form 10-K.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

MKS believes that this Annual Report on Form 10-K contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. When used herein, the words "believes," "anticipates," "plans,"
"expects," "estimates" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements reflect
management's current opinions and are subject to certain risks and uncertainties
that could cause actual results to differ materially from those stated or
implied. MKS assumes no obligation to update this information. Risks and
uncertainties include, but are not limited to, those discussed in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors that May Affect Future Results."

PART I

ITEM 1. BUSINESS

MKS Instruments, Inc. (the "Company" or "MKS"), was founded in 1961 and
became a publicly held company in 1999. Today MKS is a leading worldwide
provider of instruments, components and subsystems that measure, control, power
and monitor critical parameters of semiconductor and other advanced
manufacturing process environments.

MKS' objective is to enable its customers to improve their manufacturing
process productivity and yields. The Company's strategy is to develop and
provide sensor and data management instruments, components and subsystems that
control critical parameters of the process environment in which advanced
materials are manufactured. MKS is undertaking this strategy by further
developing its core technologies, acquiring complementary technologies,
embedding process expertise into its products, and integrating its products into
process management subsystems that "surround the process chamber."

MKS is organized into three product groups: Instruments and Control
Systems; Power and Reactive Gas Products; and Vacuum Products. The Company's
products are derived from MKS' core competencies in pressure measurement and
control; materials delivery; gas and thin-film composition analysis; control and
information management; power and reactive gas generation; and vacuum
technology.

MKS' products are used in diverse markets and applications including the
manufacture of, among other things:

- semiconductor devices for diverse consumer electronics applications;

- flat panel displays for hand-held devices, laptop computers, desktop
computer monitors and television sets;

- magnetic and optical storage media;

- optical filters and fiber optic cables for data and telecommunications;

- optical coatings for eyeglasses, architectural glass and solar panels;

- magnetic resonance imaging (MRI) medical equipment;

- gas lasers;

- cutting tools; and

- freeze-dried pharmaceuticals.

MKS' internet address is www.mksinst.com. MKS is not including the
information contained in its website as part of, or incorporating it by
reference into, this annual report on Form 10-K. MKS makes available free of
charge through its web site its annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to these reports filed
or furnished pursuant to Section 12(a) or 15(d) of the Securities Exchange Act
of 1934, as amended as soon as reasonably practicable after MKS electronically
files such materials with the Securities and Exchange Commission.

1

MARKETS AND APPLICATIONS

The Company is focused on three market sectors: semiconductor
manufacturing; thin-film manufacturing applications; and other non-semiconductor
manufacturing applications. MKS estimates that approximately 70%, 64% and 76% of
its total sales in 2002, 2001 and 2000, respectively, were made to the
semiconductor industry, including sales to semiconductor equipment manufacturers
and semiconductor device manufacturers. Approximately 8%, 11% and 11% of its
total sales in 2002, 2001 and 2000, respectively, were for thin-film processing
equipment applications, including compact disks, digital video disks (DVDs) and
other digital storage media; flat panel displays for computer and television
screens; and thin-film coatings for architectural glass and optics.
Approximately 22%, 25% and 13% of its total sales in 2002, 2001 and 2000,
respectively, were for other non-semiconductor manufacturing applications. These
include, but are not limited to, industrial manufacturing, magnetic resonance
imaging (MRI) medical equipment, biopharmaceutical manufacturing, and
university, government and industrial research laboratories.

MKS estimates that approximately 64%, 69% and 77% of its net sales in 2002,
2001 and 2000 were sold to customers located in the United States. A significant
portion of MKS' sales are to customers in international markets. International
sales include sales by MKS' foreign subsidiaries, but exclude direct export
sales, which were less than 10% of MKS' total net sales for each of the years
ended December 31, 2002, 2001 and 2000. International sales accounted for
approximately 36% of net sales in 2002, 31% of net sales in 2001 and 23% of net
sales in 2000.

SEMICONDUCTOR MANUFACTURING APPLICATIONS

MKS' products are sold to semiconductor capital equipment manufacturers and
semiconductor device manufacturers. MKS' products are used in the major
semiconductor processing steps such as:

- depositing materials onto substrates

- etching and cleaning circuit patterns

- implanting positively charged atoms into a substrate to alter electrical
characteristics

MKS' products are also used for process facility applications such as gas
distribution, pressure control and vacuum distribution in clean rooms where
semiconductor manufacturing takes place. In addition, MKS provides specialized
instruments that monitor the performance of manufacturing equipment and products
that distribute and manage process control information. MKS anticipates that the
semiconductor manufacturing market will continue to account for a substantial
portion of its sales. While the semiconductor device manufacturing market is
global, major semiconductor capital equipment manufacturers are concentrated in
the United States, Japan and Europe.

THIN-FILM MANUFACTURING APPLICATIONS

Flat Panel Display Manufacturing

MKS' products are used in the manufacture of flat panel displays, which
require the same or similar fabrication processes as semiconductor
manufacturing. Flat panel displays are used in electronic hand-held devices,
laptop computers, desktop computer monitors, and television sets. Computer
monitors and television sets with flat panel display technology are designed to
replace bulkier cathode ray tube (CRT) technology in computer monitors and
television sets. MKS sells products to flat panel equipment manufacturers and to
end-users in the flat panel display market. The transition to larger panel size
and higher definition is driving the need for tighter process controls to reduce
defects. The major manufacturers for flat panel displays and flat panel display
equipment are concentrated in Japan, Korea, Taiwan and the United States.

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Magnetic and Optical Storage Media

MKS' products are used to manufacture:

- magnetic storage media which store and read data magnetically;

- optical storage media which store and read data using laser technology;

- compact disks;

- hard disks;

- data storage devices; and

- digital video or versatile disks (DVDs).

The transition to higher density storage capacity requires manufacturing
processes incorporating tighter process controls. While storage media
manufacturing is global, the major manufacturers are concentrated in Japan and
the Asia Pacific region, and storage media capital equipment manufacturers are
concentrated in the United States, Japan and Europe.

Optical Filters, Optical Fibers and Other Coating

MKS' products are used in optical filter, optical fiber and other optical
thin-film coating processes. MKS' products are sold both to coating equipment
manufacturers and to manufacturers of products made using optical thin-film
coating processes. Optical filters and fibers used for data transmission are
manufactured using processes to deposit chemical vapors which are similar to
those used in semiconductor manufacturing. The requirement for higher data
transmission rates is driving the need for tighter control of optical filters
and fiber coating processes. Optical thin films for eyeglasses, solar panels and
architectural glass are deposited using processes to deposit chemical vapors and
gaseous metals similar to those used in semiconductor manufacturing. Optical
filter, optical fiber and other optical thin-film processing are concentrated in
the United States, Japan and Europe.

Other Coating Markets

MKS' products are also used in processes for the application of thin films
to harden tool bit surfaces, for the application of diamond thin films to
enhance surface hardness and durability and for coatings used for food container
packaging, jewelry and ornaments. The major equipment and process providers are
concentrated in the United States, Japan and Europe.

OTHER NON-SEMICONDUCTOR MANUFACTURING APPLICATIONS

MKS' products are used in plasma processes used to sterilize medical
instruments, in vacuum freeze drying of pharmaceuticals, foods and beverages,
and in vacuum processes involved in light bulb and gas laser manufacturing. MKS'
products are also incorporated into some other end-market products such as MRI
medical equipment, industrial vehicles, and analytical instruments. MKS'
products are also sold to government, university and industrial laboratories for
vacuum applications involving research and development in materials science,
physical chemistry and electronics materials. The major equipment and process
providers and research laboratories are concentrated in the United States, Japan
and Europe.

ACQUISITIONS

The semiconductor industry is undergoing significant consolidation to
support its customers' requirements for fewer, broader based suppliers and to
provide higher value products.

MKS completed four acquisitions in 2000, which were all accounted for under
the purchase method of accounting. On March 10, 2000, MKS acquired Compact
Instrument Technology, LLC ("Compact Instruments"), a company with proprietary
technology in process monitoring for semiconductor manufacturing and other
manufacturing processes. On May 5, 2000, MKS acquired Telvac Engineering, Ltd.
("Telvac"),

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a UK-based, privately held manufacturer of vacuum subsystems. On July 21, 2000,
MKS acquired Spectra International, LLC ("Spectra"), a privately held company
with products and technology in process monitoring. On September 6, 2000, MKS
acquired D.I.P., Inc. ("D.I.P."), a privately held company with products and
technology in digital process control.

MKS completed two acquisitions in 2001. On January 26, 2001, MKS acquired
Applied Science and Technology, Inc. ("ASTeX"), a Wilmington, Massachusetts
based company with products and technology in reactive gas generation and power
delivery. The ASTeX acquisition was accounted for under the pooling of interests
method of accounting. On April 27, 2001, MKS acquired On-Line Technologies, Inc.
("On-Line"), a privately held company that designs and manufactures products
used for gas analysis, wafer metrology and complementary analysis and control
software. The On-Line acquisition was accounted for under the purchase method.

MKS also completed four acquisitions in 2002, which were all accounted for
under the purchase method of accounting. On January 31, 2002, MKS acquired the
ENI division ("ENI"), of Emerson Electric Co. ("Emerson"). ENI is a leading
supplier of solid-state radio frequency (RF) and direct current (DC) plasma
power supplies, matching networks and instrumentation to the semiconductor and
thin-film processing industries. ENI's critical solid-state power conversion
technology complements ASTeX's core capability in plasma management. MKS also
acquired three companies that expanded its position in distributed computer-
based process control and data management. On March 13, 2002, MKS acquired Tenta
Technology, Ltd. ("Tenta"), a privately held company that designs and supplies
modular, computer-based process control systems for 300mm semiconductor process
tool applications. On April 5, 2002, MKS acquired IPC Fab Automation GmbH
("IPC"), a privately held developer and provider of web-based hardware and
software that enables e-diagnostics and advanced process control for advanced
manufacturing applications. On October 1, 2002, MKS acquired EquipNet, Ltd.
("EquipNet"), a privately held company that develops web-based connectivity
equipment for the semiconductor industry.

PRODUCTS

During 2002, the Company consolidated its product groups to accelerate
product development, rationalize manufacturing operations, and reduce operating
costs. This realignment of operations has organized the Company into three
product groups: Instruments and Control Systems; Power and Reactive Gas
Products; and Vacuum Products.

1. INSTRUMENTS AND CONTROL SYSTEMS

PRESSURE MEASUREMENT AND CONTROL PRODUCTS. Each of MKS' Pressure
Measurement and Control product lines consists of products that are designed for
a variety of pressure ranges and accuracies.

Baratron Pressure Measurement Products. MKS' Baratron products are
high-precision pressure measurement instruments. MKS has five Baratron product
families that range from high accuracy digital output instruments to simple
electronic switches. These products are typically used to measure the pressure
of the gases being distributed upstream of the process chambers, to measure
process chamber pressures and to measure pressures between process chambers,
vacuum pumps and exhaust lines. Baratron instruments measure pressures at ranges
from two hundred times atmospheric pressure to one billionth of atmospheric
pressure. MKS believes it offers the widest range of gas pressure measurement
instruments in the semiconductor and advanced thin-film materials processing
industries.

Automatic Pressure and Vacuum Control Products. Automatic pressure control
products consist of analog and digital automatic pressure and vacuum control
electronic instruments and valves. These products enable precise control of
process pressure by electronically actuating valves that control the flow of
gases in and out of the process chamber to minimize the difference between
desired and actual pressure in the chamber. The electronic controllers vary from
simple analog units with precise manual tuning capability to state-of-the-art
self-tuning, digital signal processing controllers. The valve products vary from
small gas inlet valves to large exhaust valves.

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In most cases, Baratron pressure measurement instruments provide the
pressure input to the automatic pressure control device. Together, these
components create an integrated automatic pressure control subsystem. MKS'
pressure control products can also accept inputs from other measurement
instruments, enabling the automatic control of gas input or exhaust based on
parameters other than pressure.

MATERIALS DELIVERY PRODUCTS. Each of MKS' Materials Delivery product lines
consists of products that are designed for a variety of flow ranges and
accuracies.

Flow Measurement and Control Products. Flow measurement products include
gas, vapor and liquid flow measurement products based upon thermal conductivity,
pressure and direct liquid injection technologies. The flow control products
combine the flow measurement device with valve control elements based upon
solenoid, piezo-electric and piston pump technologies. The products measure and
automatically control the mass flow rate of gases and vapors into the process
chamber. MKS' line of thermal-based mass flow controllers, which control gas
flow based on the molecular weight of gases, includes all-metal-sealed designs
and ultra-clean designs for semiconductor applications, as well as
general-purpose controllers for applications where all-metal-sealed construction
is not required. MKS has also developed pressure-based mass flow controllers,
based on Baratron pressure instrument measurement and control technology, which
restrict flow in the gas line to transform pressure control into mass flow
control.

MKS' flow measurement products also include a calibration system which
independently measures mass flow and compares this measurement to that of the
process chamber mass flow controller. The demand for the MKS calibration system
is driven by the increasingly stringent process control needs of the
semiconductor industry and the need to reduce costly downtime resulting from
stopping operations to address mass flow controller problems.

GAS AND THIN-FILM COMPOSITION ANALYSIS PRODUCTS. The technologies used in
these products include mass spectrometry and infrared spectroscopy. Gas and
thin-film composition analysis instruments are sold to a variety of industries
including the semiconductor industry.

Mass Spectrometry-based Gas Composition Analysis Instruments. These
products are based on quadrapole mass spectrometer sensors that separate gases
based on molecular weight. These sensors include built-in electronics and are
provided with software that analyzes the composition of background and process
gases in the process chamber. These instruments are provided both as portable
laboratory systems and as process gas monitoring systems used in the diagnosis
of semiconductor manufacturing process systems.

Fourier Transform Infra-Red (FTIR) Based Gas and Thin-Film Composition
Analysis Products. FTIR-based products provide information about the composition
of gases and thin-films by measuring the absorption of infra-red light as it
passes through the sample being measured. Gas analysis applications include
measuring the compositions of mixtures of reactant gases; measuring the purity
of individual process gases; measuring the composition of process exhaust gas
streams to determine process health; monitoring gases to ensure environmental
health and safety; and monitoring combustion exhausts. These instruments are
provided as portable laboratory systems and as process gas monitoring systems
used in the diagnosis of manufacturing processes.

Mass spectrometry-based and FTIR-based gas monitoring systems can indicate
out-of-bounds conditions -- such as the presence of undesirable contaminant
gases and water vapor or out-of-tolerance amounts of specific gases in the
process -- which alert operators to diagnose and repair faulty equipment.

Leak Detection Products. MKS manufactures a range of mass
spectrometer-based helium leak detection products. Helium leak detection is used
in a variety of industries including semiconductor, HVAC, automotive and
aerospace to ensure the leak integrity of both manufactured products and
manufacturing equipment. MKS believes that its product is the smallest mass
spectrometer-based leak detector currently available.

Optical Monitoring Instruments. MKS manufactures a range of optical
monitoring instruments that are sold primarily for thin-film coating
applications such as the manufacture of optical filters. The optical monitors

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measure the thickness and optical properties of a film being deposited, allowing
the user to better control the process.

CONTROL AND INFORMATION MANAGEMENT PRODUCTS. MKS designs and manufactures
a suite of products that allow customers to better control their processes
through computer-controlled automation. The products include digital control
network products, process chamber and system controllers and connectivity
products. Digital control network products are used to connect sensors,
actuators and subsystems to the chamber and system control computers. They
support a variety of industry-standard connection methods including DeviceNet,
Profibus, ethernet and conventional discrete digital and analog signals. Chamber
and system control computers process these signals in real time and allow the
customer to precisely manage the process conditions. Connectivity products allow
information to flow from the process sensors and subsystems and from the process
tool control computer to the factory network. By enabling this information flow,
customers can better optimize their processes through new techniques known as
Advanced Process Control (APC), and diagnose problems with the equipment and
process from a remote location (e-diagnostics).

2. POWER AND REACTIVE GAS PRODUCTS

In the Power and Reactive Gas Products group, MKS designs and manufactures
a wide variety of power supplies and reactive gas generation modules used in
semiconductor device manufacturing and medical equipment markets.

Power Delivery Products. MKS' power delivery products are used in the
semiconductor, flat panel display, data storage and medical markets. In the
semiconductor, flat panel and data storage markets, MKS' microwave, RF and DC
power supplies are used to provide energy to various etching, stripping and
deposition processes. In the medical market, MKS' power delivery products are
used to provide power for MRI equipment. MKS' power delivery products cover
frequencies ranging from DC to 2.45GHZ (gigahertz) at power levels from tens of
watts to over 100 kilowatts. A range of impedance matching units transfer power
from the power supplies to the customer's process. They are automated with
modern digital control electronics that ensure optimum power transfer and rapid
response to changing process conditions. MKS' MRI power amplifiers are used in
the most advanced MRI systems including the 3T (three Tesla) machines. These
machines provide higher resolution images to medical professionals, allowing
better diagnosis and treatment. MKS' high power and high frequency technology is
particularly well suited to these applications.

Reactive Gas Generation Products. Reactive gases are used in many of the
process steps in chip fabrication. Reactive gases are used to etch, strip and
deposit films on wafers, to clean wafers during processing, and to clean process
chambers to reduce particle contamination. A reactive gas is created when energy
is added to a stable gas to break apart its molecules. The resulting dissociated
gas produces rapid chemical reactions when it comes into contact with other
matter. Reactive gas processes have important advantages relative to other types
of chemical processes. These advantages include: greater precision in etch,
strip and deposition process steps; lower temperatures that protect materials
involved in the process from heat damage; greater efficiency and shorter
reaction times to improve manufacturing yields; and lower cost. Examples of MKS
reactive gas products include ozone generators and subsystems used for
deposition of insulators on to semiconductor devices, ozonated water delivery
systems for advanced semiconductor wafer and flat panel display cleaning, atomic
fluorine generators for process chamber cleaning, and microwave plasma based
products for photo resist removal.

3. VACUUM PRODUCTS

In the Vacuum Products group, MKS designs and manufactures a wide variety
of vacuum technology products, including vacuum gauges, valves and components.

Vacuum Gauging Products. MKS offers a wide range of vacuum instruments
consisting of vacuum measurement sensors and associated power supply and readout
units. These vacuum gauges measure phenomena that are related to the level of
pressure in the process chamber and downstream of the process chamber between
the chamber and the pump. These gauges are used to measure vacuum at pressures
lower than those measurable with a Baratron instrument or to measure vacuum in
the Baratron instrument range

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where less accuracy is required. MKS' indirect pressure gauges use thermal
conductivity and ionization gauge technologies to measure pressure from
atmospheric pressure to one trillionth of atmospheric pressure.

Vacuum Valves and Components. MKS' vacuum valves are used on the gas lines
between the process chamber and the pump downstream of the process chamber. MKS'
vacuum components consist of flanges, fittings, traps and heated lines that are
used downstream from the process chamber to provide leak free connections and to
prevent condensable materials from depositing particles near or back into the
chamber. The manufacture of devices with small circuit patterns cannot tolerate
contamination from atmospheric leaks or particles. MKS' vacuum components are
designed to minimize such contamination and thus increase yields and uptimes.

APPLICATION-SPECIFIC INTEGRATED SUBSYSTEMS

MKS also combines products and technologies to provide application-specific
integrated subsystems. Integrated subsystems are made by each product group,
depending upon the application of the subsystem. MKS' integrated subsystems
represented a high-teens percentage of 2002 revenues.

For example, MKS has a line of integrated flow and pressure control
subsystems that combine two or more MKS products and technologies into products
for specific process applications. MKS has developed a range of Back-Side Wafer
Cooling Subsystems which are needed to control the flow and pressure of the
helium used to effect the cooling of wafers in semiconductor manufacture. By
combining the functions of MKS' Baratron pressure measurement instruments, flow
measurement instruments, control electronics and valves into a range of compact
instruments, this product line addresses the need for smaller components that
save valuable clean room space.

CUSTOMERS

MKS is organized into three product groups. Each product groups' largest
customers are leading semiconductor capital equipment manufacturers such as
Applied Materials, Lam Research, Novellus and Tokyo Electron, and semiconductor
device manufacturers such as IBM and Intel. Sales to MKS' top ten customers
accounted for approximately 49%, 39% and 52% of net sales in 2002, 2001, and
2000, respectively. Applied Materials accounted for approximately 23%, 18% and
30% of MKS' net sales in 2002, 2001 and 2000, respectively. None of MKS'
significant customers has entered into an agreement requiring it to purchase any
minimum quantity of MKS products.

SALES, MARKETING AND SUPPORT

MKS' worldwide sales, marketing and support organization is critical to its
strategy of maintaining close relationships with semiconductor capital equipment
manufacturers and semiconductor device manufacturers. MKS sells its products
primarily through its direct sales force. As of December 31, 2002, MKS had 180
sales employees in 47 offices in France, Germany, Japan, Korea, The Netherlands,
Singapore, Taiwan, the United Kingdom and the United States. Sales
representatives and agents in countries including Canada, China, India, Israel,
and Italy and in select U.S. cities supplement this direct sales force. MKS
maintains a marketing staff that identifies customer requirements, assists in
product planning and specifications, and focuses on future trends in the
semiconductor and other markets.

As semiconductor device manufacturers have become increasingly sensitive to
the significant costs of system downtime, they have required that suppliers
offer comprehensive local repair service and close customer support.
Manufacturers require close support to enable them to repair, modify, upgrade
and retrofit their equipment to improve yields and adapt new materials or
processes. To meet these market requirements, MKS maintains a worldwide sales
and support organization with offices in 47 locations. Technical support is
provided by applications engineers located at offices in Arizona, California,
Colorado, Massachusetts, Oregon and Texas, as well as Canada, France, Germany,
India, Israel, Italy, Japan, Korea, The Netherlands, Singapore, Taiwan and the
United Kingdom. Repair and calibration services are provided at 18 service
depots located worldwide. MKS provides warranties from one to three years,
depending upon the type of product.

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RESEARCH AND DEVELOPMENT

MKS' research and development is focused on developing and improving MKS'
process control instruments, components and subsystems for semiconductor and
advanced thin-film processing applications and on identifying and developing
products for new applications in which gas management plays a critical role. MKS
has undertaken an initiative to involve its marketing, engineering,
manufacturing and sales personnel in the concurrent development of new products
in order to reduce the time to market for new products. MKS employees also work
closely with customers' development personnel. These relationships help MKS
identify and define future technical needs on which to focus research and
development efforts. MKS participates in SEMI (Semiconductor Equipment and
Materials International), a trade group representing semiconductor equipment
suppliers, to assist in product development and standardization of product
technology, and the Company supports research at academic institutions targeted
at advances in materials science and semiconductor process development. MKS'
research and development expense was $46 million, $38 million and $37 million in
2002, 2001 and 2000, respectively. The Company's research and development
efforts include numerous projects that generally have a duration of 18 to 30
months. In addition, the Company acquired in-process technology of $8 million in
2002 and $2 million in 2001.

MANUFACTURING

MKS' manufacturing facilities are located in the United States, the United
Kingdom, Germany, Israel, Japan and China. Manufacturing activities include the
assembly and testing of components and subassemblies, which are integrated into
products. MKS outsources some of its subassembly work. The Company purchases a
wide range of electronic, mechanical and electrical components, some of which
are designed to MKS' specifications. MKS considers its ability to flexibly
respond to customers' significantly fluctuating product demands by using lean
manufacturing techniques to be a distinct competitive advantage.

COMPETITION

The market for MKS' products is highly competitive. Principal competitive
factors include:

- historical customer relationships

- product quality, performance and price

- breadth of product line

- manufacturing capabilities

- customer service and support

Although MKS believes that it competes favorably with respect to these
factors, there can be no assurance that it will continue to do so.

MKS encounters substantial competition in most of its product lines,
although no one competitor competes with MKS across all product lines. Certain
of MKS' competitors may have greater financial and other resources than MKS. In
some cases, competitors are smaller than MKS, but well established in specific
product niches. Mykrolis offers products that compete with MKS' pressure and
materials delivery products. Advanced Energy, Horiba/STEC, and Celerity/Unit
Instruments, each offer materials delivery products that compete with MKS'
product line of mass flow controllers. Nor-Cal Products, Inc. and MDC Vacuum
Products, Inc., each offer products that compete with MKS' vacuum components.
Inficon offers products that compete with MKS' vacuum measurement and gas
analysis products. Helix Technology offers products that compete with MKS'
vacuum gauging products. Advanced Energy offers products that compete with MKS'
power delivery and reactive gas generator products and with certain data
management and information products.

In some cases, particularly with respect to mass flow controllers,
semiconductor device manufacturers may direct semiconductor capital equipment
manufacturers to use a specified supplier's product in their equipment.
Accordingly, MKS' success depends in part on its ability to have semiconductor
device

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manufacturers specify that its products be used at their fabrication facilities.
MKS may encounter difficulties in changing established relationships of
competitors with a large installed base of products at such customers'
fabrication facilities. In addition, MKS' competitors can be expected to
continue to improve the design and performance of their products. There can be
no assurance that competitors will not develop products that offer price or
performance features superior to those of MKS' products.

PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS

MKS relies on a combination of patent, copyright, trademark and trade
secret laws and license agreements to establish and protect its proprietary
rights. As of December 31, 2002, MKS owned 170 U.S. patents and 128 foreign
patents and had 89 pending U.S. patent applications. Foreign counterparts of
certain of these applications have been filed or may be filed at the appropriate
time. Although MKS believes that certain patents may be important for certain
aspects of its business, MKS believes that its success also depends upon close
customer contact, innovation, technological expertise, responsiveness and
worldwide distribution.

MKS requires each of its employees, including its executive officers, to
enter into standard agreements pursuant to which the employee agrees to keep
confidential all of MKS' proprietary information and to assign to MKS all
inventions while they are employed by MKS.

On November 30, 2000, Applied Science and Technology, Inc. ("ASTeX"), which
was acquired by MKS in January 2001, brought suit in federal district court in
Delaware against Advanced Energy Industries, Inc. ("Advanced Energy") for
infringement of ASTeX's patent related to its Astron product. On May 17, 2002, a
jury affirmed the validity of the Company's patent and found that Advanced
Energy infringed the patent. On May 31, 2002, based on the jury's findings, the
Court entered a judgement on the infringement claim in favor of the Company and
against Advanced Energy, and awarded $4,200,000 in damages to compensate the
Company for Advanced Energy's infringing activity. Advanced Energy filed motions
to overturn the verdict. During August of 2002, the Company and Advanced Energy
entered into an agreement whereby Advanced Energy agreed to pay the awarded
damages amount to the Company and withdraw its motions to overturn the verdict.
The Company received the $4,200,000 in September 2002, and recorded the amount
as Income from litigation settlement.

On November 3, 1999, On-Line Technologies, Inc., which was acquired by MKS
in April 2001, brought suit in federal district court in Connecticut against
Perkin-Elmer, Inc. and certain other defendants for infringement of On-Line's
patent related to its FTIR spectrometer product. The suit seeks injunctive
relief and damages for infringement. Perkin-Elmer, Inc. has filed a counterclaim
seeking invalidity of the patent, costs, and attorneys' fees. MKS believes that
the counterclaim is without merit. MKS cannot be certain of the outcome of this
litigation, but does plan to assert its claims and oppose the counterclaims
against it vigorously.

MKS is subject to other legal proceedings and claims, which have arisen in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on MKS'
results of operations, financial condition or cash flows.

EMPLOYEES

As of December 31, 2002, MKS employed 2,040 persons. Management believes
that MKS' ongoing success depends upon its continued ability to attract and
retain highly skilled employees for whom competition is intense. No MKS
employees are represented by a labor union or are party to a collective
bargaining agreement. MKS believes that its employee relations are good.

9

ITEM 2. PROPERTIES

As of December 31, 2002, the following table provides information
concerning MKS' principal and certain other owned and leased facilities:

- ---------------

(1) This facility is owned by MKS.

(2) MKS leases two facilities, one has 39,000 square feet of space and a lease
term which expires October 31, 2004 and the second has 33,000 square feet
of space and a lease term which expires August 31, 2005. MKS also owns a
third and fourth facility with 27,000 and 20,000 square feet of space,
respectively.

(3) MKS leases two facilities, one has 2,000 square feet of space and a lease
term which expires October 5, 2009 and the second has 11,000 square feet of
space and a lease term which expires November 30, 2009.

(4) MKS leases two facilities, one has 4,000 square feet of space and a lease
term which expires February 28, 2003 and the second has 4,000 square feet
and a lease term which expires April 30, 2005. MKS owns another facility
with 5,000 square feet of space.

(5) MKS leases two facilities, one has 14,500 square feet of space and a lease
term which expires April 30, 2003 and the second has 10,500 square feet of
space and a lease term which expires on September 30, 2006. MKS owns a
third facility of 5,000 square feet.

(6) MKS leases one facility with 16,600 square feet of space and a lease term
which expires on February 28, 2005. MKS owns another facility with 24,000
square feet.

(7) MKS leases two facilities, one has 8,000 square feet of space and a lease
term which expires April 30, 2003 and the second has 6,000 square feet of
space and a lease term which expires December 31, 2004.

(8) MKS leases two facilities, one has 10,300 square feet of space and a lease
term which expires November 30, 2003 and the second has 3,400 square feet
of space and a lease term which expires December 30, 2003.

11

In addition to manufacturing and other operations conducted at the
foregoing leased or owned facilities, MKS provides worldwide sales, customer
support and services from various other leased facilities throughout the world
not listed in the table above. See "Business -- Sales, Marketing and Support."

ITEM 3. LEGAL PROCEEDINGS

On November 30, 2000, ASTeX, which was acquired by MKS in January 2001,
brought suit in federal district court in Delaware against Advanced Energy for
infringement of ASTeX's patent related to its Astron product. On May 17, 2002, a
jury affirmed the validity of the Company's patent and found that Advanced
Energy infringed the patent. On May 31, 2002, based on the jury's findings, the
Court entered a judgement on the infringement claim in favor of the Company and
against Advanced Energy, and awarded $4,200,000 in damages to compensate the
Company for Advanced Energy's infringing activity. Advanced Energy filed motions
to overturn the verdict. During August of 2002, the Company and Advanced Energy
entered into an agreement whereby Advanced Energy agreed to pay the awarded
damages amount to the Company and withdraw its motions to overturn the verdict.
The Company received the $4,200,000 in September 2002, and recorded the amount
as Income from litigation settlement.

On November 3, 1999, On-Line Technologies, Inc., which was acquired by MKS
in April 2001, brought suit in federal district court in Connecticut against
Perkin-Elmer, Inc. and certain other defendants for infringement of On-Line's
patent related to its FTIR spectrometer product. The suit seeks injunctive
relief and damages for infringement. Perkin-Elmer, Inc. has filed a counterclaim
seeking invalidity of the patent, costs, and attorneys' fees. MKS believes that
the counterclaim is without merit. MKS cannot be certain of the outcome of this
litigation, but does plan to assert its claims and oppose the counterclaims
against it vigorously.

MKS is subject to other legal proceedings and claims, which have arisen in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on MKS'
results of operations, financial condition or cash flows.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 2002 through the solicitation of proxies or otherwise.

PART II

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

PRICE RANGE OF COMMON STOCK

The Common Stock of MKS is traded on the Nasdaq National Market under the
symbol MKSI. On February 28, 2003, the closing price of the Company's Common
Stock, as reported on the Nasdaq National Market, was $13.25 per share. The
following table sets forth for the periods indicated the high and low sales
prices per share of the Common Stock as reported by the Nasdaq National Market.

On March 17, 2003, MKS had approximately 224 stockholders of record.

12

DIVIDEND POLICY

During each of the years ended December 31, 2002 and 2001, MKS did not
declare or pay any cash dividends. MKS currently intends to retain earnings, if
any, to support its growth strategy and does not anticipate paying cash
dividends in the foreseeable future. Payment of future dividends, if any, will
be at the discretion of the MKS board of directors after taking into account
various factors, including MKS' financial condition, operating results, current
and anticipated cash needs, plans for expansion, and changes in tax and
regulatory rulings.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

- ---------------

(1) Amounts have been restated to reflect the acquisition of Applied Science and
Technology, Inc. ("ASTeX") in a pooling of interests transaction effective
January 26, 2001.

(2) Gross profit for the year ended December 31, 2001 includes significant
charges for excess and obsolete inventory of $16.6 million. These charges
were primarily caused by a significant reduction in demand, including
reduced demand for older technology products.

(3) Income (loss) from operations for the year ended December 31, 2002 includes
restructuring and asset impairment charges of $2.7 million.

13

(4) The historical net income (loss) per share data of MKS does not include
provisions for federal income taxes prior to its initial public offering in
1999, because MKS was treated as an S corporation for federal income tax
purposes. The pro forma statement of income data presents net income and net
income per share data as if MKS had been subject to federal income taxes as
a C corporation during the periods presented. No pro forma presentation is
necessary for the fiscal years ended December 31, 2002, 2001 and 2000
because MKS was subject to income taxes as a C corporation for these
periods. Management believes this pro forma presentation is useful because
it provides for consistent federal income tax treatment for all years
presented.

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

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

OVERVIEW

MKS Instruments, Inc. was founded in 1961. MKS Instruments, Inc. is a
leading worldwide provider of instruments, components and subsystems that
measure, control, power and monitor critical parameters of semiconductor and
other advanced manufacturing process environments.

MKS completed four acquisitions in 2000, which were all accounted for under
the purchase method of accounting. On March 10, 2000, MKS acquired Compact
Instrument Technology, LLC ("Compact Instruments"), a company with proprietary
technology in process monitoring for semiconductor manufacturing and other
manufacturing processes. On May 5, 2000, MKS acquired Telvac Engineering, Ltd.
("Telvac"), a UK-based, privately held manufacturer of vacuum subsystems. On
July 21, 2000, MKS acquired Spectra International, LLC ("Spectra"), a privately
held company with products and technology in process monitoring. On September 6,
2000, MKS acquired D.I.P., Inc. ("D.I.P."), a privately held company with
products and technology in digital process control.

MKS completed two acquisitions in 2001. On January 26, 2001, MKS acquired
Applied Science and Technology, Inc. ("ASTeX"), a Wilmington, Massachusetts
based company with products and technology in reactive gas generation and power
delivery. The ASTeX acquisition was accounted for under the pooling of interests
method of accounting, and accordingly, the consolidated financial statements
reflect the combined financial position and results of operations and cash flows
of MKS Instruments, Inc. and ASTeX (together, the "Company" or "MKS"), for all
periods presented. This presentation combines the historical financial
statements of MKS Instruments, Inc. for the year ended December 31, 2000 with
the historical financial statements of ASTeX for the fiscal year ended July 1,
2000. On April 27, 2001, MKS acquired On-Line Technologies, Inc. ("On-Line"), a
privately held company that designs and manufactures products used for gas
analysis, wafer metrology and complementary analysis and control software. The
On-Line acquisition was accounted for under the purchase method.

On January 31, 2002, MKS acquired the ENI Business of Emerson Electric Co.
("ENI"), a supplier of solid-state RF and DC plasma power supplies, matching
networks and instrumentation to the semiconductor and thin-film processing
industries. The reasons for the acquisition of ENI were based upon the ability
to offer higher value and more integrated application solutions by combining
ENI's solid-state power conversion technology with the Company's core competency
in plasma and reactive gas solutions. The acquisition has been accounted for
under the purchase method of accounting. The purchase price was approximately
$266,530,000 and consisted of approximately 12,000,000 shares of MKS common
stock valued at approximately $261,264,000 and transaction expenses of
approximately $5,266,000. The value of MKS common stock was approximately
$21.7720 per share based on the average closing price of MKS' common stock for
the five-day period including the date of the announcement of the signing of the
merger agreement and the two days preceding and succeeding such date. The
purchase price was allocated to the assets acquired based upon their estimated
fair values and resulted in an allocation of approximately $197,123,000 to
goodwill. The results of operations are included in the Company's consolidated
statement of income as of and since the date of the purchase.

14

In 2002, MKS also acquired three companies that expanded its position in
distributed computer-based process control and data management. On March 13,
2002, MKS acquired Tenta Technology, Ltd. ("Tenta"), a privately held company
that designs and supplies modular, computer-based process control systems for
300mm semiconductor process tool applications. On April 5, 2002, MKS acquired
IPC Fab Automation GmbH ("IPC"), a privately held developer and provider of
web-based hardware and software that enables e-diagnostics and advanced process
control for advanced manufacturing applications. On October 1, 2002, MKS
acquired EquipNet, Ltd. ("EquipNet"), a privately held company that develops
web-based connectivity equipment for the semiconductor industry.

The Company's customers include semiconductor capital equipment
manufacturers, semiconductor device manufacturers, industrial manufacturing
companies and university, government and industrial research laboratories.
During 2002, 2001 and 2000, MKS estimates that approximately 70%, 64% and 76% of
its net sales, respectively, were to semiconductor capital equipment
manufacturers and semiconductor device manufacturers. MKS expects that sales to
such customers will continue to account for a substantial majority of its sales.
In 2002, 2001 and 2000, sales to MKS' top ten customers accounted for
approximately 49%, 39% and 52%, respectively, of MKS' net sales. During 2002,
2001 and 2000, Applied Materials, Inc. accounted for approximately 23%, 18% and
30% of MKS' net sales, respectively.

A significant portion of MKS' sales are to operations in international
markets. International sales include sales by MKS' foreign subsidiaries, but
exclude direct export sales, which were less than 10% of MKS' total net sales
for each of the years ended December 31, 2002, 2001 and 2000. International
sales accounted for approximately 36% of net sales in 2002, 31% of net sales in
2001 and 23% of net sales in 2000. Sales by MKS' Japan subsidiary comprised 14%,
12% and 11% of net sales in 2002, 2001 and 2000, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses MKS' consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, inventory,
intangible assets, goodwill and other long-lived assets, in-process research and
development, merger expenses, income taxes and investments. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:

Revenue recognition. Revenue from product sales is recorded upon transfer
of title and risk of loss to the customer provided that there is evidence of an
arrangement, the sales price is fixed or determinable, and collection of the
related receivable is reasonably assured. The Company has no obligations to
customers after the date products are shipped other than pursuant to warranty
obligations. The Company provides for the estimated costs to fulfill customer
warranty obligations upon the recognition of the related revenue. Shipping and
handling fees, if any, billed to customers are recognized as revenue. The
related shipping and handling costs are recognized in cost of sales. The Company
monitors and tracks the amount of product returns, provides for accounts
receivable allowances and reduces revenue at the time of shipment for the
estimated amount of such future returns, based on historical experience. While
product returns and warranty costs have historically been within the Company's
expectations and the provisions established, there is no assurance that the
Company will continue to experience the same return rates and warranty repair
costs that it has in the past. Any significant increase in product return rates
or a significant increase in the cost to repair the Company's products could
have a material adverse impact on our operating results for the period or
periods in

15

which such returns or increased costs materialize. The Company makes estimates
evaluating its accounts receivable allowance for doubtful accounts. The Company
continuously monitors collections and payments from its customers and maintains
a provision for estimated credit losses based upon the Company's historical
experience and any specific customer collection issues that the Company has
identified. While such credit losses have historically been within the Company's
expectations and the provisions established, there is no assurance that the
Company will continue to experience the same credit loss rates that it has in
the past. A significant change in the liquidity or financial position of the
Company's customers could have a material adverse impact on the collectability
of accounts receivable and the Company's future operating results.

Inventory. The Company values its inventory at the lower of cost
(first-in, first-out method) or market . The Company regularly reviews inventory
quantities on hand and records a provision to write down excess and obsolete
inventory to its estimated net realizable value, if less than cost, based
primarily on its estimated forecast of product demand. As demonstrated during
2002 and 2001, demand for the Company's products can fluctuate significantly.
The Company recorded significant charges for excess and obsolete inventory of
$16.6 million in 2001. The charges were primarily caused by a significant
reduction in demand including reduced demand for older technology products. A
significant increase in the demand for the Company's product could result in an
increase or decrease in the cost of inventory purchases while a significant
decrease in demand could result in an increase in the charges for excess
inventory quantities on hand. In addition, the Company's industry is subject to
technological change, new product development, and product technological
obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. Therefore, any significant unanticipated changes
in demand or technological developments could have a significant impact on the
value of the Company's inventory and its reported operating results.

Intangible assets, goodwill and other long-lived assets. The Company
reviews intangible assets and other long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. Factors the Company consider important which
could indicate an impairment include significant under performance relative to
expected historical or projected future operating results, significant changes
in the manner of the Company's use of the asset or the strategy for the
Company's overall business and significant and negative industry or economic
trends. When the Company determines that the carrying value of the asset may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, the Company compares the undiscounted cash flows to the carrying
value of the asset. If an impairment is indicated, the asset is written down to
its estimated fair value. Intangible assets, such as purchased technology, are
generally recorded in connection with a business acquisition. The value assigned
to intangible assets is determined based on estimates and judgment regarding
expectations for the success and life cycle of products and technology acquired.
If actual product acceptance differs significantly from the estimates, the
Company may be required to record an impairment charge to write down the asset
to its net realizable value. The Company assesses goodwill for impairment at
least annually, or more frequently when events and circumstances occur
indicating that the recorded goodwill may be impaired. If the book value of a
reporting unit exceeds its fair value, the implied fair value of goodwill is
compared with the carrying amount of goodwill. If the carrying amount of
goodwill exceeds the implied fair value, an impairment loss is recorded in an
amount equal to that excess. The fair value of a reporting unit is estimated
using the discounted cash flow approach, and is dependent on estimates and
judgments related to future cash flows and discount rates.

In-process research and development. The Company values tangible and
intangible assets acquired through our business acquisitions at fair value
including in-process research and development ("IPR&D"). The Company determines
IPR&D through established valuation techniques for various projects for the
development of new products and technologies and expenses IPR&D when technical
feasibility is not reached. The value of IPR&D is determined using the income
approach, which discounts expected future cash flows from projects under
development to their net present value. Each project is analyzed and estimates
and judgments are made to determine the technological innovations included; the
utilization of core technology; the complexity, cost and time to complete
development; any alternative future use or current technological feasibility;
and the stage of completion. During 2002 and 2001, the Company expensed
approximately $8.4 million and $2.3 million, respectively, in IPR&D charges
primarily related to the ENI acquisition and the

16

On-Line acquisition because the technological feasibility of certain products
under development had not been established and no future alternative uses
existed. If MKS acquires other companies with IPR&D in the future, the Company
will value the IPR&D through established valuation techniques and incur future
IPR&D charges if those products under development have not reached technical
feasibility.

Income taxes. The Company evaluates the realizability of its net deferred
tax assets and assesses the need for a valuation allowance on a quarterly basis.
The future benefit to be derived from its deferred tax assets is dependent upon
its ability to generate sufficient future taxable income to realize the assets.
The Company records a valuation allowance to reduce its net deferred tax assets
to the amount that may be more likely than not to be realized. To the extent the
Company establishes a valuation allowance, an expense will be recorded within
the provision for income taxes line on the statement of income. During the year
ended December 31, 2002, the Company established a full valuation allowance for
its net deferred tax assets. In periods subsequent to establishing a valuation
allowance, if the Company were to determine that it would be able to realize its
net deferred tax assets in excess of their net recorded amount, an adjustment to
the valuation allowance would be recorded as a reduction to income tax expense
in the period such determination was made. Also in future periods, if the
Company were to determine that it would not be able to realize the recorded
amount of its remaining net deferred tax assets, an adjustment to the valuation
allowance would be recorded as an increase to income tax expense in the period
such determination was made.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
total net sales of certain line items included in MKS' consolidated statement of
income data:

YEAR ENDED 2002 COMPARED TO 2001

Net Sales. Net sales increased 9.8% to $314.8 million for the year ended
December 31, 2002 from $286.8 million for the year ended December 31, 2001.
International net sales were approximately $114.6 million for the year ended
December 31, 2002 or 36.4% of net sales and $90.0 million for the year ended
December 31, 2001 or 31.4% of net sales. The increase in worldwide net sales in
2002 is from the incremental partial year revenues of $58.5 million from ENI,
Tenta and IPC, companies which were acquired during the year. This increase was
offset by a decline of $30.5 million or 10.6%, due to the worldwide slowdown in

17

demand for the Company's products from the Company's semiconductor capital
equipment manufacturer and semiconductor device manufacturer customers, which
began in the first quarter of 2001 and continued through 2002. The semiconductor
capital equipment industry has been cyclical, and the Company cannot determine
how long the downturn will last. In the absence of significant improvement, net
sales could continue to decline or remain low, and the amount of goodwill, other
long-lived assets, and inventory considered realizable could be significantly
reduced.

Gross Profit. Gross profit as a percentage of net sales increased to 33.6%
for the year ended December 31, 2002 from 29.8% for the year ended December 31,
2001. The increase in gross margin was primarily due to lower provisions for
excess and obsolete inventory in 2002 compared to 2001. In 2001, the Company
recorded significant charges for excess and obsolete inventory of $16.6 million,
or 5.8% of net sales. These charges were primarily caused by a significant
reduction in demand, including demand for older technology products. During
2002, the Company realized a benefit of $1.4 million in cost of sales, or 0.4%
of net sales, from sales of inventory which were included as part of the excess
and obsolete inventory charges in 2001. The lower excess and obsolete inventory
charges in 2002 were offset by the addition of manufacturing overhead costs from
the companies acquired in 2002, which resulted in a decrease in gross margin of
approximately 2%.

Research and Development. MKS' research and development efforts are
directed toward developing and improving MKS process control instruments,
components and subsystems for semiconductor and advanced thin-film processing
applications and identifying and developing products for new applications for
which gas management plays a critical role. Research and development expense
increased 21.2% to $46.0 million or 14.6% of net sales for the year ended
December 31, 2002 from $38.0 million or 13.2% of net sales for the year ended
December 31, 2001. Compensation expense increased by $2.7 million during 2002,
which was comprised of an increase of $6.5 million from the companies acquired
during the year, offset by a $3.8 million decrease resulting from cost saving
programs including workforce reductions, salary reductions, and furloughs. Also,
expenses for project materials increased $3.5 million during 2002, primarily
from the companies acquired during the year. The Company's research and
development efforts include numerous projects which generally have a duration of
18 to 30 months.

Selling, General and Administrative. Selling, general and administrative
expenses increased 10.9% to $77.8 million or 24.7% of net sales for the year
ended December 31, 2002 from $70.2 million or 24.5% of net sales for the year
ended December 31, 2001. The increase was due to increased compensation expense
of $4.8 million primarily from the companies acquired during the year, increased
professional fees of $1.1 million and other selling, general and administrative
expenses.

Amortization of Goodwill and Acquired Intangible Assets. Amortization
expense of $13.9 million for the year ended December 31, 2002, represents the
amortization of the identifiable intangibles resulting from the acquisitions
completed by MKS. In accordance with SFAS No. 142, the Company ceased amortizing
goodwill on January 1, 2002. Amortization of goodwill and acquired intangible
assets of $11.0 million for the year ended December 31, 2001, represents the
amortization of goodwill and other intangibles resulting from the acquisitions
completed by the Company, of which $5.2 million relates to acquired intangibles
and $5.8 million relates to goodwill.

Merger Costs. On January 26, 2001 MKS completed its acquisition of ASTeX
in a transaction accounted for under the pooling of interests method of
accounting. Under the pooling of interests method of accounting, fees and
expenses related to the merger are expensed in the period of the merger. During
the year ended December 31, 2001, MKS expensed approximately $7.7 million of
merger related expenses, consisting of $6.9 million of investment banking,
legal, accounting, printing and other professional fees, and $0.8 million of
regulatory and other costs. In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS
141"), "Business Combinations." SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling of interests method. Merger expenses associated with any
future business combination will be accounted for under the purchase method of
accounting and included as part of the purchase price.

18

Purchase of In-process Technology. In-process research and development of
$8.4 million and $2.3 million for the years ended December 31, 2002 and 2001
arose from the acquisitions the Company made in 2002 and 2001, respectively.

In January 2002, the Company acquired ENI in a transaction accounted for
under the purchase method. The purchase price was allocated to the assets
acquired, including intangible assets, based on their estimated fair values. The
intangible assets include approximately $7.5 million for acquired in-process
technology for projects, generally expected to have durations of 12 months, that
did not have future alternative uses. The value of the purchased in-process
technology was determined using the income approach, which discounts expected
future cash flows from projects under development to their net present value.
Each project was analyzed to determine the technological innovations included;
the utilization of core technology; the complexity, cost and time to complete
development; any alternative future use or current technological feasibility;
and the stage of completion. The cash flows derived from the in-process
technology projects were discounted at rates ranging from 25% to 30%. The
Company believes these rates were appropriate given the risks associated with
the technologies for which commercial feasibility had not been established. The
percentage of completion for each in-process project was determined by
identifying the cost incurred to date of the project as a ratio of the total
cost required to bring the project to technical and commercial feasibility. The
percentage completion for in-process projects acquired ranged from 65% to 80%
complete, based on management's estimates of tasks completed and the tasks to be
completed to bring the projects to technological and commercial feasibility. At
the date of the acquisition, the development of these projects had not yet
reached technological feasibility, and the technology in progress had no
alternative future uses. Accordingly, these costs were expensed in 2002.

In April 2001, the Company acquired On-Line in a transaction accounted for
under the purchase method. The purchase price was allocated to the assets
acquired, including intangible assets, based on their estimated fair values. The
intangible assets include approximately $2.3 million for acquired in-process
technology for various projects, generally expected to have durations of 24 to
48 months, that did not have future alternative uses. The value of the purchased
in-process technology was determined using the income approach, which discounts
expected future cash flows from projects under development to their net present
value. Each project was analyzed to determine the technological innovations
included; the utilization of core technology; the complexity, cost and time to
complete development; any alternative future use or current technological
feasibility; and the stage of completion. The cash flows derived from the
in-process technology projects were discounted at a rate of 25%. The Company
believes this rate was appropriate given the risks associated with the
technologies for which commercial feasibility had not been established. The
percentage of completion for each in-process project was determined by
identifying the elapsed time invested in the project as a ratio of the total
time required to bring the project to technical and commercial feasibility. The
percentage of completion for in-process projects acquired ranged from 55% to
65%, based on management's estimates of tasks completed and the tasks to be
completed to bring the projects to technological and commercial feasibility. At
the date of the acquisition, the development of these projects had not yet
reached technological feasibility, and the technology in progress had no
alternative future uses. Accordingly, these costs were expensed in 2001.

Restructuring and Asset Impairment Charges. During 2002 the Company
implemented a consolidation of recent acquisitions to accelerate product
development, rationalize manufacturing operations, and reduce operating costs.
As a result of these actions, the Company recorded restructuring and asset
impairment charges of $2.7 million in 2002. The charges consisted of $0.6
million of severance costs related to a workforce reduction, $1.2 million
related to consolidation of leased facilities, and an asset impairment charge of
$0.9 million primarily related to the impairment of an intangible asset from the
discontinuance of certain product development activities. The fair value of the
impaired intangible asset was determined using the expected present value of
future cash flows. The workforce reduction was across all functional groups and
consisted of 225 employees, with 179 terminated during 2002. Severance costs of
$0.3 million were paid during 2002. The remaining severance costs of $0.3
million are expected to be paid by the end of the first quarter of 2004. The
facilities consolidation charges will be paid over the respective lease terms,
the latest of which ends in 2007. The accrual for severance costs and lease
payments is recorded in Other accrued expenses and Other liabilities.

19

A summary of the restructuring charges and related asset impairments during
2002 is outlined as follows (in thousands):

As a result of the restructuring program, the Company expects to reduce
cost of sales, research and development expenses, and selling, general, and
administrative expenses. The restructuring program, once fully implemented, is
expected to reduce costs by approximately $10.0 million per year. The Company
began to realize a portion of the benefits in the fourth quarter of 2002.

When the Company acquired the Shamrock product line, it was expected that
sales of the existing system design and development of new system designs would
generate future revenues. The Company had provided potential customers with
purchase quotations for Shamrock systems, including a significant quotation to a
potential customer in January 2001 for the sale of several systems. The
potential customer did not purchase the systems, and the quotation expired in
March 2001. The Company was unsuccessful in selling any systems of the product
line after the acquisition and, with the expiration of the significant quote in
March 2001, the Company evaluated the recoverability of the long-lived assets,
primarily goodwill. As a result, based on discounted cash flow analysis, the
Company recorded an impairment charge for the carrying value of the related
goodwill of approximately $3.7 million in the quarter ended March 31, 2001.

Interest Income (Expense), Net. During the year ended December 31, 2002,
the Company generated net interest income of $1.5 million, primarily from
interest on its invested cash and investments, offset by interest expense of
$1.2 million on outstanding debt. Interest income declined $2.5 million to $2.7
million for the year ended December 31, 2002 from $5.2 million for the year
ended December 31, 2001. The decrease was due to lower interest rate yields on
investments during 2002 compared to 2001.

Income from Litigation Settlement. On November 30, 2000, ASTeX, which was
acquired by MKS in January 2001, brought suit in federal district court in
Delaware against Advanced Energy Industries, Inc. ("Advanced Energy") for
infringement of ASTeX's patent related to its Astron product. On May 17, 2002, a
jury affirmed the validity of the Company's patent and found that Advanced
Energy infringed the patent. On May 31, 2002, based on the jury's findings, the
Court entered a judgement on the infringement claim in favor of the Company and
against Advanced Energy, and awarded $4.2 million in damages to compensate the
Company for Advanced Energy's infringing activity. Advanced Energy filed motions
to overturn the verdict. During August of 2002, the Company and Advanced Energy
entered into an agreement whereby Advanced Energy agreed to pay the awarded
damages amount to the Company and withdraw its motions to overturn the verdict.
The Company received the $4.2 million in September 2002, and recorded the amount
as Income from litigation settlement.

Other Expense, Net. During 2001, MKS recorded a loss on the sale of an
investment in a company of $1.1 million, which was recorded as other expense.
Also during 2001, MKS sold certain assets for proceeds of approximately $9.0
million, including a note receivable of approximately $3.9 million and warrants
of $0.2 million. The loss on the transaction was $1.2 million and was recorded
as other expense in 2001. During 2002, due to the downturn in the semiconductor
industry and its result on the acquirer's operations, and the acquirer's
inability to raise financing, the Company considered the value of the note and
warrants to be impaired. Accordingly, during 2002, MKS recorded a charge of $4.1
million to other expense for the Company's estimate of the impairment on the
note receivable and warrants.

Benefit for Income Taxes. The Company recorded a benefit for income taxes
of $2.0 million for the year ended December 31, 2002, for an effective tax rate
of 4.8%. The Company recorded a benefit for income taxes of $15.0 million for
the year ended December 31, 2001, for an effective tax rate of 32.6% in 2001.
The change in the Company's effective tax rate from 2001 to 2002 was primarily
due to the recording of a valuation

20

allowance against its net deferred tax assets in 2002. As a result of incurring
significant operating losses during 2001 and 2002, and the continuing
uncertainty in the semiconductor industry, management determined that it is more
likely than not that the Company's deferred tax assets may not be realized and,
accordingly, recorded a charge of $13.4 million to establish a full valuation
allowance for its deferred tax assets in the fourth quarter of 2002. The benefit
for income taxes of $2.0 million for the year ended December 31, 2002 is
primarily comprised of an estimated current tax benefit of $3.8 million from
2002 United States net operating losses which the Company may carryback against
previously taxed income offset by $1.6 million of tax expense from foreign
operations and state taxes.

YEAR ENDED 2001 COMPARED TO 2000

Net Sales. Net sales decreased 38.6% to $286.8 million for the year ended
December 31, 2001 from $466.9 million for the year ended December 31, 2000.
International net sales were approximately $90.0 million for the year ended
December 31, 2001 or 31.4% of net sales and $108.1 million for the year ended
December 31, 2000 or 23.1% of net sales. The decrease in net sales is due to a
worldwide slowdown in demand for semiconductors during 2001 which resulted in a
decline in demand for the Company's products from the Company's semiconductor
capital equipment manufacturers and semiconductor device manufacturer customers,
offset by an increase in net sales of approximately $15.4 million from the
companies acquired in 2001 and 2000.

Gross Profit. Gross profit as a percentage of net sales decreased to 29.8%
for the year ended December 31, 2001 from 44.0% for the year ended December 31,
2000. Gross margin was negatively effected by significant charges for excess and
obsolete inventory of $16.6 million in 2001. These charges were primarily caused
by a significant reduction in demand, including reduced demand for older
technology products. Additionally, gross margin was negatively effected due to
lower absorption of manufacturing overhead costs.

Research and Development. MKS' research and development efforts are
directed toward developing and improving MKS process control instruments,
components and subsystems for semiconductor and advanced thin-film processing
applications and identifying and developing products for new applications for
which gas management plays a critical role. Research and development expense
increased 1.7% to $38.0 million or 13.2% of net sales for the year ended
December 31, 2001 from $37.3 million or 8.0% of net sales for the year ended
December 31, 2000. The increase was primarily due to increased compensation
expense resulting from the companies acquired in 2001 and 2000. The Company's
research and development efforts include numerous projects which generally have
a duration of 18 to 30 months.

Selling, General and Administrative. Selling, general and administrative
expenses decreased 1.4% to $70.2 million or 24.5% of net sales for the year
ended December 31, 2001 from $71.2 million or 15.2% of net sales for the year
ended December 31, 2000. The decrease was primarily due to decreased salaries
and wages and incentive compensation expense of $5.7 million, offset by
increased professional fees of $4.3 million primarily related to costs
associated with defending certain of the Company's patents.

Amortization of Goodwill and Acquired Intangible Assets. Amortization of
goodwill and acquired intangible assets of $11.0 million for the year ended
December 31, 2001, represents the amortization of goodwill and other intangibles
resulting from the acquisitions completed by the Company, of which $5.2 million
relates to acquired intangibles and $5.8 million relates to goodwill. Effective
with the January 1, 2002 adoption of SFAS 142, the Company will cease to
amortize approximately $40.3 million of goodwill.

Restructuring and Asset Impairment Charges. When the Company acquired the
Shamrock product line, it was expected that sales of the existing system design
and development of new system designs would generate future revenues. Since the
acquisition, the Company has provided potential customers with purchase
quotations for Shamrock systems, including a significant quotation to a
potential customer in January 2001 for the sale of several systems. The
potential customer did not purchase the systems, and the quotation expired in
March 2001. The Company has been unsuccessful in selling any systems of the
product line since the acquisition and, with the expiration of the significant
quote in March 2001, the Company evaluated the recoverability of the long-lived
assets, primarily goodwill. As a result, based on a discounted cash flow
analysis,

21

the Company recorded an impairment charge for the carrying value of the related
goodwill of approximately $3.7 million in the quarter ended March 31, 2001.

Merger Costs. On January 26, 2001 MKS completed its acquisition of ASTeX
in a transaction accounted for under the pooling of interests method of
accounting. Under the pooling of interests method of accounting, fees and
expenses related to the merger are expensed in the period of the merger. During
the year ended December 31, 2001, MKS expensed approximately $7.7 million of
merger related expenses, consisting of $6.9 million of investment banking,
legal, accounting, printing and other professional fees, and $0.8 million of
regulatory and other costs.

Purchase of In-process Technology. In April 2001, the Company acquired
On-Line in a transaction accounted for as a purchase. The purchase price was
allocated to the assets acquired, including intangible assets, based on their
estimated fair values. The intangible assets include approximately $2.3 million
for acquired in-process technology for various projects, generally expected to
have durations of 24 to 48 months, that did not have future alternative uses.
The value of the purchased in-process technology was determined using the income
approach, which discounts expected future cash flows from projects under
development to their net present value. Each project was analyzed to determine
the technological innovations included; the utilization of core technology; the
complexity, cost and time to complete development; any alternative future use or
current technological feasibility; and the stage of completion. The cash flows
derived from the in-process technology projects were discounted at a rate of
25%. The Company believes this rate was appropriate given the risks associated
with the technologies for which commercial feasibility had not been established.
The percentage of completion for each in-process project was determined by
identifying the elapsed time invested in the project as a ratio of the total
time required to bring the project to technical and commercial feasibility. The
percentage of completion for in-process projects acquired ranged from 55% to
65%, based on management's estimates of tasks completed and the tasks to be
completed to bring the projects to technological and commercial feasibility. At
the date of the acquisition, the development of these projects had not yet
reached technological feasibility, and the technology in progress had no
alternative future uses. Accordingly, these costs were expensed.

Interest Income (Expense), Net. During the years ended December 31, 2001
and 2000, the Company generated net interest income of $3.7 million and $4.8
million, respectively, primarily from the invested net proceeds of its common
stock offerings, offset by interest expense on outstanding debt. Interest income
decreased by $1.0 million for the year ended December 31, 2001 from $6.2 million
for the year ended December 31, 2000. The decrease was due to lower interest
rate yields on investments during 2001.

Other Expense, Net. Other expense of $2.4 million for the year ended
December 31, 2001 represents a loss on sale of assets of $1.2 million and a loss
on the sale of an investment in a company of $1.1 million. Other expense of $0.2
million in the year ended December 31, 2000 represents expenses related to the
preparation of the registration statement for the Company's follow-on public
stock offering. The Company decided not to proceed with the follow-on offering,
and converted the registration statement to a shelf registration statement.

Provision (Benefit) for Income Taxes. The effective tax rates for the
years ended December 31, 2001 and 2000 were 32.6% and 37.3%, respectively,
resulting in an income tax benefit of $15.0 million and provision for income
taxes of $35.9 million, respectively. The reduction in the effective tax rate
and the resulting income tax benefit for the year ended December 31, 2001 as
compared to the effective tax rate for the year ended December 31, 2000 was
primarily due to non-deductible charges associated with acquisitions made in
2001.

LIQUIDITY AND CAPITAL RESOURCES

MKS has financed its operations and capital requirements through a
combination of cash provided by operations, long-term real estate financing,
capital lease financing and short-term lines of credit.

On April 5, 1999, the Company completed the initial public offering of its
Common Stock. In connection with this offering and the exercise of an
over-allotment option by the underwriters, the Company sold 6,375,000 shares of
Common Stock at a price of $14.00 per share. The net proceeds to the Company
were approximately $82.0 million and were received in the second quarter of
1999. Underwriting discounts and

22

commissions were approximately $6.2 million, and other offering costs were
approximately $1.0 million. On April 5, 1999 MKS distributed $40.0 million,
which was the estimated amount of its undistributed S Corporation earnings as of
the day prior to the closing of the offering.

On March 30, 2000, ASTeX completed the registration and sale of 1,917,250
shares of common stock at $40.42 per share. The net proceeds from the offering
were approximately $73.2 million.

On March 5, 1999, ASTeX completed the registration and sale of 1,533,800
shares of common stock at $14.34 per share. On April 6, 1999, the underwriters
exercised their over-allotment option to purchase an additional 230,070 shares
of common stock. The net proceeds from the offering were approximately $23.8
million.

Operations provided cash of $13.8 million in 2002 compared to $20.1 million
in 2001 and $40.0 million in 2000. The cash flow from operations in 2002 was
impacted by the net loss of $39.5 million, offset by non-cash charges included
in the net loss for depreciation and amortization of $28.7 million, purchases of
in-process technology of $8.4 million, and asset impairment charges of $5.0
million. Additionally, changes in operating assets and liabilities contributed
$9.6 million to cash flow from operations. The changes in operating assets and
liabilities were primarily related to a reduction in other current assets of
$12.3 million from receipt of income tax refunds in 2002, and a decrease in
inventory of $6.6 million, offset by decreases in accrued expenses of $7.3
million. The cash flow from operations in 2001 was impacted by the net loss of
$31.0 million and a non-cash deferred tax benefit of $11.5 million, offset by
non-cash charges included in the net loss of $26.7 million for depreciation and
amortization. Additionally, changes in operating assets and liabilities
contributed $31.1 million to cash flow from operations in 2001. The changes in
operating assets and liabilities were primarily related to decreases in accounts
receivable and inventory of $58.9 million and $16.2 million, respectively,
offset by an increase in other current assets of $9.6 million, and decreases in
accrued expenses of $12.2 million, accounts payable of $14.3 million, and taxes
payable of $8.0 million.

Investing activities utilized cash of $51.9 million in 2002, compared to
$18.1 million in 2001 and $64.8 million in 2000. The cash used in investing
activities in 2002 increased $33.8 million as compared to 2001, primarily from
an increase of $27.2 million for purchases of available-for-sale investments. In
addition, cash used to acquire businesses increased $10.6 million in 2002
compared to 2001. This increase was offset by a $6.7 million decrease in cash
used to purchase equipment in 2002 compared to 2001. Investing activities
utilized cash of $18.1 million for 2001 as compared to $64.8 million for 2000.
The decrease of $46.7 million was primarily due to a $17.5 million decrease in
purchases of property and equipment and a $16.8 million decrease in cash used to
acquire businesses.

Financing activities provided cash of $5.5 million in 2002, as compared to
utilizing cash of $1.1 million in 2001 and providing cash of $81.1 million in
2000. The change in cash provided by investing activities in 2002 was primarily
related to increased proceeds of $2.5 million from employees exercising stock
options and participating in the Company's Employee Stock Purchase Plan.
Additionally, net payments on short-term and long-term borrowings declined to
$3.0 million in 2002, as compared to $6.8 million in 2001. Financing activities
utilized cash of $1.1 million in 2001 and provided cash of $81.1 million in
2000. Net cash provided by financing activities in 2000 was primarily from the
sale of 1,917,250 shares of common stock for $73.2 million.

Working capital was $192.0 million as of December 31, 2002, a decrease of
$24.8 million from December 31, 2001. MKS has a combined $40.0 million unsecured
line of credit with two large domestic banks, expiring July 31, 2003. There were
no borrowings under the line of credit as of December 31, 2002. The terms of the
line of credit contain, among other provisions, requirements for maintaining
certain levels of tangible net worth and other financial ratios. The agreements
also contain restrictions with respect to acquisitions. Under the most
restrictive covenant, the Company's consolidated tangible net worth may not be
below an amount as defined in the agreement. In the event of default of these
covenants or restrictions, any obligation then outstanding under the line of
credit shall become payable upon demand by the banks. The Company was in
compliance with all debt covenants as of December 31, 2002.

23

Future payments due under debt, lease and inventory purchase commitment
obligations as of December 31, 2002 (in thousands) are as follows:

MKS believes that its working capital, together with the cash anticipated
to be generated from operations and funds available from existing credit
facilities, will be sufficient to satisfy its estimated working capital and
planned capital expenditure requirements through at least the next 12 months.

Prior to its initial public offering, the Company entered into a Tax
Indemnification and S Corporation Distribution Agreement with its then existing
stockholders (the "Pre-IPO stockholders"). The agreement includes provisions for
the payment, with interest, by the Pre-IPO stockholders or MKS, as the case may
be, for the difference between the $40.0 million distributed as an estimate of
the amount of the accumulated adjustments account as of April 4, 1999, which is
the date the Company's S Corporation status was terminated, and the actual
amount of the accumulated adjustments account on that day. The actual amount of
the accumulated adjustments account was $41.4 million. Accordingly, the Company
made an additional distribution of $1.4 million, plus interest of $0.2 million,
to the Pre-IPO stockholders during the three months ended September 30, 2000.
The amount of the additional distribution payable had been estimated to be $3.3
million. This estimated amount was charged directly to retained earnings during
1999 and had no impact on net income or earnings per share. The difference of
$1.9 million between the actual additional distribution and the estimated
additional distribution was credited directly to retained earnings during the
three months ended September 30, 2000 and had no impact on net income or
earnings per share. The amount of the accumulated adjustments account can be
affected by future income tax audits of MKS. If any audit increases or decreases
the accumulated adjustments account, MKS or the Pre-IPO stockholders, as the
case may be, will also be required to make a payment, with interest, of such
difference to the other party. No shareholders, other than the Pre-IPO
stockholders, are parties to the Tax Indemnification and S Corporation
Distribution Agreement.

To the extent permitted by Massachusetts law, the Company's Restated
Articles of Organization, as amended, requires the Company to indemnify any
current or former officer or director of the Company or any person who has
served or is serving in any capacity with respect to any employee benefit plan
of the Company. Because no claim for indemnification has been made by any person
covered by the relevant provisions of the Company's Restated Articles of
Organization, the Company believes that its estimated exposure for these
indemnification obligations is currently minimal. Accordingly, the Company has
no liabilities recorded for these requirements as of December 31, 2002.

The Company enters into standard indemnification agreements in the ordinary
course of business. Pursuant to these agreements, the Company indemnifies, holds
harmless and agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally the Company's customers, in
connection with any patent, or any other intellectual property infringement
claim by any third party with respect to the Company's products. The term of
these indemnification agreements is generally perpetual any time after execution
of the agreement. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is, in some
instances, unlimited. The Company has never incurred costs to defend lawsuits or
settle claims related to these indemnification agreements. As a result, the
Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements as of
December 31, 2002.

24

When as part of an acquisition, the Company acquires all of the stock or
all of the assets and liabilities of another company, the Company assumes
liability for certain events or occurrences that took place prior to the date of
acquisition. The maximum potential amount of future payments the company could
be required to make for such obligations is undeterminable at this time. Other
than obligations recorded as liabilities at the time of the acquisitions,
historically the Company has not made significant payments for these
indemnifications. Accordingly, no liabilities have been recorded for these
obligations.

In conjunction with certain asset sales, the Company may provide routine
indemnifications whose terms range in duration and often are not explicitly
defined. Where appropriate, an obligation for such indemnifications is recorded
as a liability. Because the amount of liability under these types of
indemnifications are not explicitly stated, the overall maximum amount of the
obligation under such indemnifications cannot be reasonably estimated. Other
than obligations recorded as liabilities at the time of the asset sale,
historically the Company has not made significant payments for these
indemnifications.

DERIVATIVES

The Company conducts its operations globally. Consequently the results of
our operations are exposed to movements in foreign currency exchange rates. The
Company hedges a portion of its forecasted foreign currency denominated
intercompany sales of inventory, over a maximum period of fifteen months, using
forward exchange contracts and currency options primarily related to Japanese
and European currencies. These derivatives are designated as cash-flow hedges,
and changes in their fair value are carried in accumulated other comprehensive
income until the hedged transaction affects earnings. When the hedged
transaction affects earnings, the appropriate gain or loss from the derivative
designated as a hedge of the transaction is reclassified from accumulated other
comprehensive income to cost of sales. As of December 31, 2002 the amount that
will be reclassified from accumulated other comprehensive income to earnings
over the next twelve months is an unrealized loss of $0.4 million, net of taxes.
The ineffective portion of the derivatives is primarily related to option
premiums, is recorded in cost of sales, and was immaterial in 2002, 2001, and
2000.

The Company hedges certain intercompany and other payables with foreign
exchange contracts and currency options. Since these derivatives hedge existing
amounts that are denominated in foreign currencies, the derivatives do not
qualify for hedge accounting. The foreign exchange gain on these derivatives was
not material in 2002, 2001 and 2000.

Realized and unrealized gains and losses on forward exchange contracts and
local currency purchased option contracts that do not qualify for hedge
accounting are recognized immediately in earnings. The cash flows resulting from
forward exchange contracts and local currency purchased options that qualify for
hedge accounting are classified in the statement of cash flows as part of cash
flows from operating activities. Cash flows resulting from forward exchange
contracts and local currency purchased options that do not qualify for hedge
accounting are classified in the statement of cash flows as investing
activities. The Company does not hold or issue derivative financial instruments
for trading purposes.

There were forward exchange contracts with notional amounts totaling $23.3
million outstanding at December 31, 2002. Of such forward exchange contracts,
$17.2 million were outstanding to exchange Japanese yen for US dollars. There
were no forward exchange contracts outstanding at December 31, 2001. Forward
exchange contracts with notional amounts totaling $1.5 million to exchange
Japanese yen for U.S. dollars were outstanding at December 31, 2000. Local
currency purchased options with notional amounts totaling $5.1 million, $11.3
million and $25.4 million to exchange foreign currencies for U.S. dollars were
outstanding at December 31, 2002, 2001 and 2000, respectively.

Foreign exchange gains and losses on forward exchange contracts and
currency options which did not qualify for hedge accounting were immaterial
during 2002 and 2000. There were no foreign exchange gains or losses on forward
exchange contracts which did not qualify for hedge accounting in 2001. Gains and
losses on forward exchange contracts and local currency purchased options that
qualify for hedge accounting are classified in cost of goods sold and totaled a
gain of $0.5 million and $0.2 million for the years ended December 31, 2002 and
2001, respectively, and was immaterial in 2000.
25

The fair values of local currency purchased options at December 31, 2002
and 2001, which were obtained through dealer quotes were immaterial.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets" ("SFAS 143"). The objective
of SFAS 143 is to provide accounting guidance for legal obligations associated
with the retirement of long-lived assets. The retirement obligations included
within the scope of this pronouncement are those that an entity cannot avoid as
a result of either the acquisition, construction or normal operation of a
long-lived asset. Components of larger systems also fall under this
pronouncement, as well as tangible long-lived assets with indeterminable lives.
The provisions of SFAS 143 are effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company is currently evaluating
the expected impact of the adoption of SFAS 143 on the Company's financial
condition, cash flows and results of operations. The Company will adopt the
standard in the first quarter of fiscal 2003.

In June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146")
was issued. This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The Company is currently reviewing the provisions
of SFAS 146 to determine the standard's impact upon adoption. The Company will
adopt the standard in the first quarter of fiscal 2003.

In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN No. 45 are applicable for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the disclosure provisions of FIN No. 45 in the fourth
quarter of fiscal year 2002.

In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" ("SFAS 148"). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123 "Accounting for Stock-Based Compensation".
Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosure in both the annual and interim financial statements about
the method of accounting for stock-based compensation and the effect of the
method used on reported results. The transitional requirements of SFAS 148 are
effective for all financial statements for fiscal years ending after December
15, 2002. The Company adopted the disclosure provisions of this statement as of
December 31, 2002. The application of this standard did not have a material
impact on the Company's consolidated financial position or results of
operations.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities." In general, a variable interest entity is a
corporation, partnership, trust or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other property.
Variable interest entities have been commonly referred to as special-purpose
entities or off-balance sheet structures. This Interpretation requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a

26

majority of the entity's residual returns or both. The Company does not expect
that this Interpretation will have a material impact on its financial position
or results of operations.

In November 2002, the EITF reached a consensus on issue 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF 00-21 addresses revenue
recognition on arrangements encompassing multiple elements that are delivered at
different points in time, defining criteria that must be met for elements to be
considered to be a separate unit of accounting. If an element is determined to
be a separate unit of accounting, the revenue for the element is recognized at
the time of delivery. EITF 00-21 is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company does not
expect that the pronouncement will have a material impact on its financial
position or results of operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

MKS' BUSINESS DEPENDS SUBSTANTIALLY ON CAPITAL SPENDING IN THE SEMICONDUCTOR
INDUSTRY WHICH IS CHARACTERIZED BY PERIODIC FLUCTUATIONS THAT MAY CAUSE A
REDUCTION IN DEMAND FOR MKS' PRODUCTS.

MKS estimates that approximately 70% of its sales during 2002, 64% of its
sales during 2001, and 76% of its sales during 2000 were to semiconductor
capital equipment manufacturers and semiconductor device manufacturers, and it
expects that sales to such customers will continue to account for a substantial
majority of its sales. MKS' business depends upon the capital expenditures of
semiconductor device manufacturers, which in turn depend upon the demand for
semiconductors. Periodic reductions in demand for the products manufactured by
semiconductor capital equipment manufacturers and semiconductor device
manufacturers may adversely affect MKS' business, financial condition and
results of operations. Historically, the semiconductor market has been highly
cyclical and has experienced periods of overcapacity, resulting in significantly
reduced demand for capital equipment. For example, in 1996 and 1998, the
semiconductor capital equipment industry experienced significant declines, which
caused a number of MKS' customers to reduce their orders. More recently, in 2001
and 2002, MKS has experienced a significant reduction in demand from OEM
customers, and lower gross margins due to reduced absorption of manufacturing
overhead. MKS incurred significant charges for excess and obsolete inventory of
$16.6 million in 2001. The charges were primarily caused by a significant
reduction in demand including reduced demand for older technology products. In
addition, many semiconductor manufacturers have operations and customers in
Asia, a region which in recent years has experienced serious economic problems
including currency devaluations, debt defaults, lack of liquidity and
recessions. MKS cannot be certain that semiconductor downturns will not recur. A
decline in the level of orders as a result of any future downturn or slowdown in
the semiconductor capital equipment industry could have a material adverse
effect on MKS' business, financial condition and results of operations.

MKS' QUARTERLY OPERATING RESULTS HAVE VARIED, AND ARE LIKELY TO CONTINUE TO VARY
SIGNIFICANTLY. THIS MAY RESULT IN VOLATILITY IN THE MARKET PRICE FOR MKS'
SHARES.

A substantial portion of MKS' shipments occur shortly after an order is
received and therefore MKS operates with a low level of backlog. As a result, a
decrease in demand for MKS' products from one or more customers could occur with
limited advance notice and could have a material adverse effect on MKS' results
of operations in any particular period. A significant percentage of MKS'
expenses are relatively fixed and based in part on expectations of future net
sales. The inability to adjust spending quickly enough to compensate for any
shortfall would magnify the adverse impact of a shortfall in net sales on MKS'
results of operations. Factors that could cause fluctuations in MKS' net sales
include:

- the timing of the receipt of orders from major customers;

- shipment delays;

- disruption in sources of supply;

- seasonal variations of capital spending by customers;

- production capacity constraints; and

- specific features requested by customers.

27

For example, MKS was in the process of increasing its production capacity
when the semiconductor capital equipment market began to experience a
significant downturn in 1996. This downturn had a material adverse effect on
MKS' operating results in the second half of 1996 and the first half of 1997.
After an increase in business in the latter half of 1997, the market experienced
another downturn in 1998, which had a material adverse effect on MKS' 1998 and
first quarter 1999 operating results. More recently, the semiconductor capital
equipment market experienced a significant downturn during 2001 and 2002. As a
result, MKS has experienced a reduction in demand from OEM customers, which has
had a material adverse effect on MKS' operating results. During 2001 gross
margins were negatively affected by significant charges for excess and obsolete
inventory of $16.6 million in 2001. The charges were primarily caused by a
significant reduction in demand including reduced demand for older technology
products. As a result of the factors discussed above, it is likely that MKS will
in the future experience quarterly or annual fluctuations and that, in one or
more future quarters, its operating results will fall below the expectations of
public market analysts or investors. In any such event, the price of MKS' common
stock could decline significantly.

THE LOSS OF NET SALES TO ANY ONE OF MKS' MAJOR CUSTOMERS WOULD LIKELY HAVE A
MATERIAL ADVERSE EFFECT ON MKS.

MKS' top ten customers accounted for approximately 49% of its net sales in
2002, 39% of its net sales in 2001 and 52% of its net sales in 2000. The loss of
a major customer or any reduction in orders by these customers, including
reductions due to market or competitive conditions, would likely have a material
adverse effect on MKS' business, financial condition and results of operations.
During 2002, 2001 and 2000, one customer, Applied Materials, accounted for
approximately 23%, 18% and 30%, respectively, of MKS' net sales. None of MKS'
significant customers, including Applied Materials, has entered into an
agreement requiring it to purchase any minimum quantity of MKS' products. The
demand for MKS' products from its semiconductor capital equipment customers
depends in part on orders received by them from their semiconductor device
manufacturer customers.

Attempts to lessen the adverse effect of any loss or reduction through the
rapid addition of new customers could be difficult because prospective customers
typically require lengthy qualification periods prior to placing volume orders
with a new supplier. MKS' future success will continue to depend upon:

- its ability to maintain relationships with existing key customers;

- its ability to attract new customers; and

- the success of its customers in creating demand for their capital
equipment products which incorporate MKS' products.

AS PART OF MKS' BUSINESS STRATEGY, MKS HAS ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT
TO INTEGRATE, DISRUPT ITS BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION.

MKS acquired Compact Instrument Technology, LLC ("Compact Instrument") in
March 2000, Telvac Engineering, Ltd. ("Telvac") in May 2000, Spectra
Instruments, LLC ("Spectra") in July 2000, D.I.P., Inc. ("D.I.P.") in September
2000, Applied Science and Technology, Inc. ("ASTeX") in January 2001, On-Line
Technologies, Inc. ("On-Line") in April 2001, the ENI Business ("ENI") of
Emerson Electric Co. in January 2002, Tenta Technologies Ltd. ("Tenta") in March
2002, IPC Fab Automation GmbH ("IPC") in April 2002 and EquipNet, Ltd.
("EquipNet") in October 2002. As a part of its business strategy, MKS may enter
into additional business combinations and acquisitions. Acquisitions are
typically accompanied by a number of risks, including the difficulty of
integrating the operations and personnel of the acquired companies, the
potential disruption of MKS' ongoing business and distraction of management,
expenses related to the acquisition and potential unknown liabilities associated
with acquired businesses.

As a result of its recent acquisitions, the Company has added several
different decentralized accounting systems, resulting in a complex reporting
environment. The Company expects that it will need to continue to

28

modify its accounting policies, internal controls, procedures and compliance
programs to provide consistency across all its operations.

If MKS is not successful in completing acquisitions that it may pursue in
the future, it may be required to reevaluate its growth strategy, and MKS may
have incurred substantial expenses and devoted significant management time and
resources in seeking to complete proposed acquisitions that will not generate
benefits for it.

In addition, with future acquisitions, MKS could use substantial portions
of its available cash as all or a portion of the purchase price. MKS could also
issue additional securities as consideration for these acquisitions, which could
cause significant stockholder dilution. MKS' acquisitions of Compact Instrument,
Telvac, Spectra, D.I.P., ASTeX, On-Line, ENI, Tenta, IPC, and EquipNet and any
future acquisitions may not ultimately help MKS achieve its strategic goals and
may pose other risks to MKS.

AN INABILITY TO CONVINCE SEMICONDUCTOR DEVICE MANUFACTURERS TO SPECIFY THE USE
OF MKS' PRODUCTS TO MKS' CUSTOMERS, WHO ARE SEMICONDUCTOR CAPITAL EQUIPMENT
MANUFACTURERS, WOULD WEAKEN MKS' COMPETITIVE POSITION.

The markets for MKS' products are highly competitive. Its competitive
success often depends upon factors outside of its control. For example, in some
cases, particularly with respect to mass flow controllers, semiconductor device
manufacturers may direct semiconductor capital equipment manufacturers to use a
specified supplier's product in their equipment. Accordingly, for such products,
MKS' success will depend in part on its ability to have semiconductor device
manufacturers specify that MKS' products be used at their semiconductor
fabrication facilities. In addition, MKS may encounter difficulties in changing
established relationships of competitors that already have a large installed
base of products within such semiconductor fabrication facilities.

IF MKS' PRODUCTS ARE NOT DESIGNED INTO SUCCESSIVE NEW GENERATIONS OF ITS
CUSTOMERS' PRODUCTS, MKS WILL LOSE SIGNIFICANT NET SALES DURING THE LIFESPAN OF
THOSE PRODUCTS.

New products designed by semiconductor capital equipment manufacturers
typically have a lifespan of five to ten years. MKS' success depends on its
products being designed into new generations of equipment for the semiconductor
industry. MKS must develop products that are technologically current so that
they are positioned to be chosen for use in each successive new generation of
semiconductor capital equipment. If MKS products are not chosen by its
customers, MKS' net sales may be reduced during the lifespan of its customers'
products. In addition, MKS must make a significant capital investment to develop
products for its customers well before its products are introduced and before it
can be sure that it will recover its capital investment through sales to the
customers in significant volume. MKS is thus also at risk during the development
phase that its products may fail to meet its customers' technical or cost
requirements and may be replaced by a competitive product or alternative
technology solution. If that happens, MKS may be unable to recover MKS'
development costs.

THE SEMICONDUCTOR INDUSTRY IS SUBJECT TO RAPID DEMAND SHIFTS WHICH ARE DIFFICULT
TO PREDICT. AS A RESULT, MKS' INABILITY TO EXPAND ITS MANUFACTURING CAPACITY IN
RESPONSE TO THESE RAPID SHIFTS MAY CAUSE A REDUCTION IN ITS MARKET SHARE.

MKS' ability to increase sales of certain products depends in part upon its
ability to expand its manufacturing capacity for such products in a timely
manner. If MKS is unable to expand its manufacturing capacity on a timely basis
or to manage such expansion effectively, its customers could implement its
competitors' products and, as a result, its market share could be reduced.
Because the semiconductor industry is subject to rapid demand shifts which are
difficult to foresee, MKS may not be able to increase capacity quickly enough to
respond to a rapid increase in demand in the semiconductor industry.
Additionally, capacity expansion could increase MKS' fixed operating expenses
and if sales levels do not increase to offset the additional expense levels
associated with any such expansion, its business, financial condition and
results of operations could be materially adversely affected.

29

SALES TO FOREIGN MARKETS CONSTITUTE A SUBSTANTIAL PORTION OF MKS' NET SALES;
THEREFORE, MKS' NET SALES AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED
BY DOWNTURNS IN ECONOMIC CONDITIONS IN COUNTRIES OUTSIDE OF THE UNITED STATES.

International sales include sales by MKS' foreign subsidiaries, but exclude
direct export sales, which were less than 10% of MKS' total net sales for each
of the years ended December 31, 2002, 2001 and 2000. International sales
accounted for approximately 36% of net sales in 2002, 31% of net sales in 2001
and 23% of net sales in 2000.

MKS anticipates that international sales will continue to account for a
significant portion of MKS' net sales. In addition, certain of MKS' key domestic
customers derive a significant portion of their revenues from sales in
international markets. Therefore, MKS' sales and results of operations could be
adversely affected by economic slowdowns and other risks associated with
international sales.

RISKS RELATING TO MKS' INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT MKS'
OPERATING RESULTS.

MKS has substantial international sales, service and manufacturing
operations in Europe and Asia, which exposes MKS to foreign operational and
political risks that may harm MKS' business. MKS' international operations are
subject to inherent risks, which may adversely affect MKS, including:

- political and economic instability in countries where MKS has sales,
service and manufacturing operations, particularly in Asia;

- fluctuations in the value of currencies and high levels of inflation,
particularly in Asia and Europe;

- changes in labor conditions and difficulties in staffing and managing
foreign operations, including, but not limited to, labor unions;

- greater difficulty in collecting accounts receivable and longer payment
cycles;

- burdens and costs of compliance with a variety of foreign laws;

- increases in duties and taxation;

- imposition of restrictions on currency conversion or the transfer of
funds;

- changes in export duties and limitations on imports or exports;

- expropriation of private enterprises; and

- unexpected changes in foreign regulations.

If any of these risks materialize, MKS' operating results may be adversely
affected.

UNFAVORABLE CURRENCY EXCHANGE RATE FLUCTUATIONS MAY LEAD TO LOWER GROSS MARGINS,
OR MAY CAUSE MKS TO RAISE PRICES WHICH COULD RESULT IN REDUCED SALES.

Currency exchange rate fluctuations could have an adverse effect on MKS'
net sales and results of operations and MKS could experience losses with respect
to its hedging activities. Unfavorable currency fluctuations could require MKS
to increase prices to foreign customers which could result in lower net sales by
MKS to such customers. Alternatively, if MKS does not adjust the prices for its
products in response to unfavorable currency fluctuations, its results of
operations could be adversely affected. In addition, sales made by MKS' foreign
subsidiaries are denominated in the currency of the country in which these
products are sold and the currency it receives in payment for such sales could
be less valuable at the time of receipt as a result of exchange rate
fluctuations. MKS enters into forward exchange contracts and local currency
purchased options to reduce currency exposure arising from intercompany sales of
inventory. However, MKS cannot be certain that its efforts will be adequate to
protect it against significant currency fluctuations or that such efforts will
not expose it to additional exchange rate risks.

30

KEY PERSONNEL MAY BE DIFFICULT TO ATTRACT AND RETAIN.

MKS' success depends to a large extent upon the efforts and abilities of a
number of key employees and officers, particularly those with expertise in the
semiconductor manufacturing and similar industrial manufacturing industries. The
loss of key employees or officers could have a material adverse effect on MKS'
business, financial condition and results of operations. MKS believes that its
future success will depend in part on its ability to attract and retain highly
skilled technical, financial, managerial and marketing personnel. MKS cannot be
certain that it will be successful in attracting and retaining such personnel.

MKS' PROPRIETARY TECHNOLOGY IS IMPORTANT TO THE CONTINUED SUCCESS OF ITS
BUSINESS. MKS' FAILURE TO PROTECT THIS PROPRIETARY TECHNOLOGY MAY SIGNIFICANTLY
IMPAIR MKS' COMPETITIVE POSITION.

As of December 31, 2002, MKS owned 170 U.S. patents and 128 foreign patents
and had 89 pending U.S. patent applications and 286 pending foreign patent
applications. Although MKS seeks to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it cannot be
certain that:

- MKS will be able to protect its technology adequately;

- competitors will not be able to develop similar technology independently;

- any of MKS' pending patent applications will be issued;

- intellectual property laws will protect MKS' intellectual property
rights; or

- third parties will not assert that MKS' products infringe patent,
copyright or trade secrets of such parties.

PROTECTION OF MKS' INTELLECTUAL PROPERTY RIGHTS MAY RESULT IN COSTLY LITIGATION.

Litigation may be necessary in order to enforce MKS' patents, copyrights or
other intellectual property rights, to protect its trade secrets, to determine
the validity and scope of the proprietary rights of others or to defend against
claims of infringement. For example, on November 3, 1999, On-Line Technologies
Inc., which was acquired by MKS in April 2001, brought suit in federal district
court in Connecticut against Perkin-Elmer, Inc. and certain other defendants for
infringement of On-Line's patent related to its FTIR spectrometer product. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on MKS' business, financial condition and
results of operations.

THE MARKET PRICE OF MKS' COMMON STOCK HAS FLUCTUATED AND MAY CONTINUE TO
FLUCTUATE FOR REASONS OVER WHICH MKS HAS NO CONTROL.

The stock market has from time to time experienced, and is likely to
continue to experience, extreme price and volume fluctuations. Recently, prices
of securities of technology companies have been especially volatile and have
often fluctuated for reasons that are unrelated to the operating performance of
the companies. The market price of shares of MKS' common stock has fluctuated
greatly since its initial public offering and could continue to fluctuate due to
a variety of factors. In the past, companies that have experienced volatility in
the market price of their stock have been the objects of securities class action
litigation. If MKS were the object of securities class action litigation, it
could result in substantial costs and a diversion of MKS' management's attention
and resources.

31

MKS' DEPENDENCE ON SOLE, LIMITED SOURCE SUPPLIERS, AND INTERNATIONAL SUPPLIERS,
COULD AFFECT ITS ABILITY TO MANUFACTURE PRODUCTS AND SYSTEMS.

MKS relies on sole, limited source suppliers, and international suppliers,
for a few of its components and subassemblies that are critical to the
manufacturing of MKS' products. This reliance involves several risks, including
the following:

- the potential inability to obtain an adequate supply of required
components;

- reduced control over pricing and timing of delivery of components; and

- the potential inability of its suppliers to develop technologically
advanced products to support MKS' growth and development of new systems.

MKS believes that in time MKS could obtain and qualify alternative sources
for most sole, limited source and international supplier parts. Seeking
alternative sources of the parts could require MKS to redesign its systems,
resulting in increased costs and likely shipping delays. MKS may be unable to
redesign its systems, which could result in further costs and shipping delays.
These increased costs would decrease MKS' profit margins if it could not pass
the costs to its customers. Further, shipping delays could damage MKS'
relationships with current and potential customers and have a material adverse
effect on MKS' business and results of operations.

MKS IS SUBJECT TO GOVERNMENTAL REGULATIONS.

MKS is subject to federal, state, local and foreign regulations, including
environmental regulations and regulations relating to the design and operation
of MKS' power supply products. MKS must ensure that these systems meet certain
safety standards, many of which vary across the countries in which MKS' systems
are used. For example, the European Union has published directives specifically
relating to power supplies. MKS must comply with these directives in order to
ship MKS' systems into countries that are members of the European Union. MKS
believes it is in compliance with current applicable regulations, directives and
standards and has obtained all necessary permits, approvals, and authorizations
to conduct MKS' business. However, compliance with future regulations,
directives and standards could require it to modify or redesign certain systems,
make capital expenditures or incur substantial costs. If MKS does not comply
with current or future regulations, directives and standards:

- MKS could be subject to fines;

- MKS' production could be suspended; or

- MKS could be prohibited from offering particular systems in specified
markets.

CERTAIN STOCKHOLDERS HAVE A SUBSTANTIAL INTEREST IN MKS AND MAY BE ABLE TO EXERT
SUBSTANTIAL INFLUENCE OVER MKS' ACTIONS.

As of January 31, 2003, John R. Bertucci, president, chairman and chief
executive officer of MKS, and certain members of his family, in the aggregate,
beneficially owned approximately 22.7% of MKS' outstanding common stock. As a
result, these stockholders, acting together, are able to exert substantial
influence over the actions of MKS. Pursuant to the acquisition of the ENI
Business of Emerson Electric Co. ("Emerson"), MKS issued approximately
12,000,000 shares of common stock to Emerson. As of January 31, 2003, Emerson
beneficially owned approximately 23.4% of MKS' outstanding common stock, and
accordingly, Emerson is able to exert substantial influence over MKS' actions.

SOME PROVISIONS OF MKS' RESTATED ARTICLES OF ORGANIZATION, AS AMENDED, MKS'
AMENDED AND RESTATED BY-LAWS AND MASSACHUSETTS LAW COULD DISCOURAGE POTENTIAL
ACQUISITION PROPOSALS AND COULD DELAY OR PREVENT A CHANGE IN CONTROL OF MKS.

Anti-takeover provisions could diminish the opportunities for stockholders
to participate in tender offers, including tender offers at a price above the
then current market value of the common stock. Such provisions

32

may also inhibit increases in the market price of the common stock that could
result from takeover attempts. For example, while MKS has no present plans to
issue any preferred stock, MKS' board of directors, without further stockholder
approval, may issue preferred stock that could have the effect of delaying,
deterring or preventing a change in control of MKS. The issuance of preferred
stock could adversely affect the voting power of the holders of MKS' common
stock, including the loss of voting control to others. In addition, MKS' amended
and restated by-laws provide for a classified board of directors consisting of
three classes. The classified board could also have the effect of delaying,
deterring or preventing a change in control of MKS.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK AND SENSITIVITY ANALYSIS

FOREIGN EXCHANGE RATE RISK

MKS enters into local currency purchased options and forward exchange
contracts to reduce currency exposure arising from intercompany sales of
inventory. The potential fair value loss for a hypothetical 10% adverse change
in currency exchange rates on MKS' local currency purchased options at December
31, 2002 would be immaterial, and would be approximately $628,000 at December
31, 2001. The potential loss in 2002 and 2001 was estimated by calculating the
fair value of the local currency purchased options at December 31, 2002 and 2001
and comparing that with those calculated using the hypothetical currency
exchange rates.

There were forward exchange contracts with notional amounts totaling
$23,287,000 outstanding at December 31, 2002. Of such forward exchange
contracts, $17,213,000 were outstanding to exchange Japanese yen for US dollars.
There were no forward exchange contracts outstanding at December 31, 2001. The
potential fair value loss for a hypothetical 10% adverse change in the forward
currency exchange rate on MKS' forward exchange contracts at December 31, 2002
would be $2,661,000. The potential loss in 2002 was estimated by calculating the
fair value of the forward exchange contracts at December 31, 2002 and comparing
that with those calculated using the hypothetical forward currency exchange
rates.

At December 31, 2002, MKS had $13,877,000 related to short-term borrowings
denominated in Japanese yen. The carrying value of these short-term borrowings
approximates fair value due to their short period to maturity. Assuming a
hypothetical 10% adverse change in the Japanese yen to U.S. dollar year end
exchange rate, the fair value of these short-term borrowings would increase by
$1,542,000. The potential increase in fair value was estimated by calculating
the fair value of the short-term borrowings at December 31, 2002 and comparing
that with the fair value using the hypothetical year end exchange rate.

At December 31, 2001, MKS had $9,238,000 related to short-term borrowings
denominated in Japanese yen. The carrying value of these short-term borrowings
approximates fair value due to their short period to maturity. Assuming a
hypothetical 10% adverse change in the Japanese yen to U.S. dollar year end
exchange rate, the fair value of these short-term borrowings would increase by
$1,026,000. The potential increase in fair value was estimated by calculating
the fair value of the short-term borrowings at December 31, 2001 and comparing
that with the fair value using the hypothetical year end exchange rate.

INTEREST RATE RISK

Due to its short-term duration, the fair value of the Company's cash and
investment portfolio at December 31, 2002 and 2001 approximated its carrying
value. Interest rate risk was estimated as the potential decrease in fair value
resulting from a hypothetical 10% increase in interest rates for securities
contained in the investment portfolio. The resulting hypothetical fair value was
not materially different from the year-end carrying values.

33

ITEM 8. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
MKS Instruments, Inc.:

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of MKS
Instruments, Inc. and its subsidiaries at December 31, 2002 and 2001 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
based on our audits and the report of other auditors, the financial statement
schedule listed in the index appearing under Item 15(a)(2) presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. The
consolidated financial statements give retroactive effect to the merger of
Applied Science and Technology, Inc. on January 26, 2001 in a transaction
accounted for as a pooling of interests, as described in Note 2 to the
consolidated financial statements. We did not audit the financial statements and
financial statement schedule of Applied Science and Technology, Inc., which
statements reflect net sales of 30 percent of the related consolidated net sales
for the year ended December 31, 2000. Those statements and schedule were audited
by other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Applied
Science and Technology, Inc., is based solely on the report of the other
auditors. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.

As discussed in Note 15 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets upon adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" on January 1, 2002.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 3, 2003

34

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Applied Science and Technology, Inc.:

We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Applied Science and Technology, Inc. and subsidiaries
for the year ended July 1, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Applied Science and Technology, Inc. and subsidiaries for the year
ended July 1, 2000, in conformity with accounting principles generally accepted
in the United States of America.

/s/ KPMG LLP

Boston, Massachusetts
July 31, 2000

35

MKS INSTRUMENTS, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial
statements.

36

MKS INSTRUMENTS, INC.

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of the consolidated financial
statements.
37

MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of the consolidated financial
statements.
38

MKS INSTRUMENTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the consolidated financial
statements.
39

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1) DESCRIPTION OF BUSINESS

MKS Instruments, Inc. was founded in 1961. MKS Instruments, Inc. is a
leading worldwide provider of instruments, components and subsystems that
measure, control, power and monitor critical parameters of semiconductor and
other advanced manufacturing process environments.

2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

All significant intercompany accounts and transactions have been eliminated
in consolidation. On January 26, 2001, MKS Instruments, Inc. completed its
acquisition of Applied Science and Technology, Inc. ("ASTeX") in a transaction
accounted for under the pooling of interests method of accounting and,
accordingly, the consolidated financial statements reflect the combined
financial position, results of operations and cash flows of MKS Instruments,
Inc., ASTeX and their subsidiaries (together, the "Company" or "MKS"), for all
periods presented. These consolidated financial statements combine the
historical consolidated financial statements of the Company for all periods
presented and the ASTeX share information has been converted to the MKS share
equivalent.

The fiscal year of MKS ends on December 31. The fiscal year of ASTeX for
the period prior to the acquisition ended on July 1, 2000.

The historical periods combined giving effect to the merger are the fiscal
year ended December 31, 2000 for MKS, and the fiscal year ended July 1, 2000 for
ASTeX.

As a result of conforming dissimilar fiscal year-ends, the ASTeX results of
operations for the six month period ended December 31, 2000 are excluded from
these consolidated financial statements. The following is information related to
the ASTeX financial results for the six-month period ended December 31, 2000:

Net sales................................................... $89,193
Net income.................................................. 5,968
Decrease in cash and cash equivalents....................... (3,142)

The excluded net income and excluded decrease in cash and cash equivalents
of $5,968,000 and $3,142,000 have been recorded as adjustments to retained
earnings and statement of cash flows for the year ended December 31, 2001,
respectively.

The following table shows the separate historical results of MKS and ASTeX
for the period prior to the consummation of the merger of the two entities,
included in the reported results for the year ended December 31, 2000.

All fees and expenses related to the merger and the integration of the
combined companies were expensed as required under the pooling of interests
accounting method. For the year ended December 31,

40

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2001, the Company expensed approximately $7.7 million of merger related
expenses, consisting of $6.9 million of investment banking, legal, accounting,
printing and other professional fees, and $0.8 million of regulatory and other
costs.

NET INCOME PER SHARE

Basic earnings per share is based on the weighted average number of common
shares outstanding, and diluted earnings per share is based on the weighted
average number of common shares outstanding and all dilutive potential common
equivalent shares outstanding. The dilutive effect of options is determined
under the treasury stock method using the average market price for the period.
Common equivalent shares are included in the per share calculations when the
effect of their inclusion would be dilutive.

The following is a reconciliation of basic to diluted net income per share:

For purposes of computing diluted earnings per share, weighted average
common share equivalents do not include stock options with an exercise price
greater than the average market price of the common shares during the period.
Options to purchase 474,000 shares of common stock were outstanding during 2000,
but were not included in the calculation of diluted net income per common share
because the option price was greater than the average market price of the common
shares during the period. Options outstanding during the years ended December
31, 2002 of 8,284,693 and 2001 of 5,958,735 are excluded from the calculation of
diluted net loss per common share because their inclusion would be
anti-dilutive.

STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no accounting
recognition is given to stock options granted at fair market value until they
are exercised. Upon exercise, net proceeds, including tax benefits realized, are
credited to stockholders' equity.

In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which sets forth a fair-value-based method of
recognizing stock-based compensation expense. As permitted by SFAS No. 123, the
Company has elected to continue to apply APB No. 25 to account for its
stock-based compensation plans. Had compensation cost for awards granted after
1994 under the Company's stock-based compensation plans

41

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

been determined based on the fair value at the grant dates consistent with the
method set forth under SFAS No. 123, the effect on certain financial information
of the Company would have been as follows:

There is no tax benefit included in the stock-based employee compensation
expense determined under the fair-value-based method for the year ended December
31, 2002, as the Company established a full valuation allowance for its net
deferred tax assets during 2002.

The weighted average fair value of options at the date of grant was
estimated using the Black-Scholes model and was $14.22 with the following
assumptions in 2002: expected life of 5 years, weighted average interest rate of
3.91%, expected volatility of 81%, and no dividend yield. In 2001, the weighted
average fair value of options at the date of grant was $14.65, with the
following assumptions: expected life of 5 years, weighted average interest rate
of 4.27%, expected volatility of 83%, and no dividend yield. In 2000, the
weighted average fair value of MKS options at the date of grant was $22.74, with
the following assumptions: expected life of 5 years, weighted average interest
rate of 6.37%, expected volatility of 88%, and no dividend yield.

The fair value of purchase rights granted in 2002, 2001 and 2000 under the
Purchase Plan was $9.35, $7.19 and $7.64, respectively. The fair value of the
employees' purchase rights was estimated using the Black-Scholes model with the
following assumptions in 2002: expected life of 6 months, interest rate of
1.88%, expected volatility of 81%, and no dividend yield. In 2001, the following
assumptions were made: expected life of 6 months, interest rate of 5.03%,
expected volatility of 83%, and no dividend yield. In 2000, the following
assumptions were made: expected life of 6 months, interest rate of 5.57%,
expected volatility of 88%, and no dividend yield.

The weighted average fair value of ASTeX options granted during fiscal 2000
was $18.53. The fair value of each ASTeX option grant was estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants issued in fiscal 2000: no dividend
yield; expected volatility of 72%; risk-free interest rate of 5.92%; and
expected life of 4 years.

FOREIGN EXCHANGE

The functional currency of the majority of the Company's foreign
subsidiaries is the applicable local currency. For those subsidiaries, assets
and liabilities are translated to U.S. dollars at year-end exchange rates.

42

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Income and expense accounts are translated at the average exchange rates
prevailing for the year. The resulting translation adjustments are included in
accumulated other comprehensive income in consolidated stockholders' equity.
Foreign exchange transaction gains and losses were not material in 2002, 2001
and 2000.

REVENUE RECOGNITION

Revenue from product sales is recorded upon transfer of title and risk of
loss to the customer provided that there is evidence of an arrangement, the
sales price is fixed or determinable, and collection of the related receivable
is reasonably assured. The Company has no obligations to customers after the
date products are shipped other than pursuant to warranty obligations. The
Company provides for the estimated costs to fulfill customer warranty
obligations upon the recognition of the related revenue. Shipping and handling
fees, if any, billed to customers are recognized as revenue. The related
shipping and handling costs are recognized in cost of sales. Accounts receivable
allowances include sales returns and bad debt allowances. The Company monitors
and tracks the amount of product returns and reduces revenue at the time of
shipment for the estimated amount of such future returns, based on historical
experience. The Company makes estimates evaluating its allowance for doubtful
accounts. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon its
historical experience and any specific customer collection issues that it has
identified.

CASH AND CASH EQUIVALENTS AND INVESTMENTS

All highly liquid investments with an original maturity of three months or
less at the date of purchase are considered to be cash equivalents.

Cash and cash equivalents consists of the following:

The fair value of short-term available-for-sale investments maturing within
one year consists of the following:

43

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The fair value of long-term available-for-sale investments with maturities
of 1 to 5 years consists of the following:

The appropriate classification of investments in securities is determined
at the time of purchase. Debt securities that the Company does not have the
intent and ability to hold to maturity are classified as "available-for-sale"
and are carried at fair value. Unrealized gains and losses on securities
classified as available-for-sale are included in accumulated other comprehensive
income in consolidated stockholders' equity. Gross unrealized gains and losses
on available-for-sale investments were not material at December 31, 2002 and
2001. The cost of securities sold is based on the specific identification
method.

The Company has held investments in companies having operations or
technology in areas within or adjacent to its strategic focus, which are in
non-publicly traded companies whose value is difficult to determine. These
investments are accounted for under the cost and equity method of accounting.
Under the equity method of accounting, which generally applies to investments
that represent a 20 to 50 percent ownership of the equity securities of the
investee, the Company's proportionate share of the earnings or losses of the
investee is included in other income and expense. The Company records an
investment impairment charge when it believes an investment has experienced a
decline in value. As of December 31, 2002 there were no investments accounted
for under the equity and cost method. As of December 31, 2001 there were
$2,296,000 of investments accounted for under the equity method. This investment
was sold during 2002. The gain on the transaction was not material.

INVENTORIES

The Company values its inventory at the lower of cost (first-in, first-out
method) or market. The Company regularly reviews inventory quantities on hand
and records a provision to write down excess and obsolete inventory to its
estimated net realizable value, if less than cost, based primarily on its
estimated forecast of product demand.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Equipment acquired under
capital leases is recorded at the present value of the minimum lease payments
required during the lease period. Expenditures for major renewals and
betterments that extend the useful lives of property, plant and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are eliminated from the accounts and any resulting gain
or loss is recognized in earnings.

Depreciation is provided on the straight-line method over the estimated
useful lives of twenty to thirty-one and one-half years for buildings and three
to seven years for machinery and equipment and furniture and fixtures. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the leased asset.

44

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

INTANGIBLE ASSETS

Intangible assets resulting from the acquisitions of entities accounted for
using the purchase method of accounting are estimated by management based on the
fair value of assets received. These include acquired customer lists,
technology, patents, trade name, and covenants not to compete. Intangible assets
are amortized from three to eight years on a straight-line basis which
represents the estimated periods of benefit.

GOODWILL

Goodwill is the amount by which the cost of acquired net assets exceeded
the fair value of those net assets on the date of acquisition. Through December
31, 2001, the Company amortized goodwill on a straight-line basis over its
expected useful life of 5 to 7 years. As of January 1, 2002, the Company ceased
amortizing goodwill in compliance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").

The Company assesses goodwill for impairment at least annually, or more
frequently when events and circumstances occur indicating that the recorded
goodwill may be impaired. If the book value of a reporting unit exceeds its fair
value, the implied fair value of goodwill is compared with the carrying amount
of goodwill. If the carrying amount of goodwill exceeds the implied fair value,
an impairment loss is recorded equal to that excess.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company evaluates the recoverability of its long-lived assets which
include acquired amortizable intangible assets, in accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets. If an
impairment is indicated, the assets are written down to their estimated fair
value.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. The Company's
research and development efforts include numerous projects which generally have
a duration of 18 to 30 months.

IN-PROCESS RESEARCH AND DEVELOPMENT

The Company values tangible and intangible assets acquired through its
business acquisitions at fair value including in-process research and
development ("IPR&D"). The Company determines IPR&D through established
valuation techniques for various projects for the development of new products
and technologies and expenses IPR&D when technical feasibility is not reached.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising costs were not
material in 2002, 2001, and 2000.

INCOME TAXES

The Company records income taxes using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, and operating loss and tax credit carryforwards. The Company
evaluates the realizability of its net deferred tax assets and assesses the need
for a valuation allowance on a quarterly basis. The future benefit to be derived

45

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

from its deferred tax assets is dependent upon its ability to generate
sufficient future taxable income to realize the assets. The Company records a
valuation allowance to reduce its net deferred tax assets to the amount that may
be more likely than not to be realized. To the extent the Company establishes a
valuation allowance, an expense will be recorded within the provision for income
taxes line on the statement of income. During the year ended December 31, 2002
the Company established a full valuation allowance for its net deferred tax
assets. In periods subsequent to establishing a valuation allowance, if the
Company were to determine that it would be able to realize its net deferred tax
assets in excess of their net recorded amount, an adjustment to the valuation
allowance would be recorded as a reduction to income tax expense in the period
such determination was made. Also in future periods, if the Company were to
determine that it would not be able to realize the recorded amount of its net
deferred tax assets, an adjustment to the valuation allowance would be recorded
as an increase to income tax expense in the period such determination was made.

The Company does not provide for a U.S. income tax liability on
undistributed earnings of its foreign subsidiaries. The earnings of non-U.S.
subsidiaries, which reflect full provision for non-U.S. income taxes, are
indefinitely reinvested in non-U.S. operations or will be remitted substantially
free of additional tax.

NEW ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets" ("SFAS 143"). The objective
of SFAS 143 is to provide accounting guidance for legal obligations associated
with the retirement of long-lived assets. The retirement obligations included
within the scope of this pronouncement are those that an entity cannot avoid as
a result of either the acquisition, construction or normal operation of a
long-lived asset. Components of larger systems also fall under this
pronouncement, as well as tangible long-lived assets with indeterminable lives.
The provisions of SFAS 143 are effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company is currently evaluating
the expected impact of the adoption of SFAS 143 on the Company's financial
condition, cash flows and results of operations. The Company will adopt the
standard in the first quarter of fiscal 2003.

In June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146")
was issued. This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The Company is currently reviewing the provisions
of SFAS 146 to determine the standard's impact upon adoption. The Company will
adopt the standard in the first quarter of fiscal 2003.

In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" ("SFAS 148"). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123 "Accounting for Stock-Based Compensation".
Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosure in both the annual and interim financial statements about
the method of accounting for stock-based compensation and the effect of the
method used on reported results. The transitional requirements of SFAS 148 will
be effective for all financial statements for fiscal years ending after December
15, 2002. The disclosure requirements shall be effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002. The Company adopted the provisions of this statement as of
December 31, 2002. The application of this standard did not have a material
impact on the Company's consolidated financial position or results of
operations.

46

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN No. 45 are applicable for
financial statements of interim or annual periods ending after December 15,
2002, and were adopted in the fourth quarter of fiscal year 2002.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities." In general, a variable interest entity is a
corporation, partnership, trust or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other property.
Variable interest entities have been commonly referred to as special-purpose
entities or off-balance sheet structures. This Interpretation requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The Company does not expect that this Interpretation will have a material
impact on its financial position or results of operations.

In November 2002, the EITF reached a consensus on issue 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF 00-21 addresses revenue
recognition on arrangements encompassing multiple elements that are delivered at
different points in time, defining criteria that must be met for elements to be
considered to be a separate unit of accounting. If an element is determined to
be a separate unit of accounting, the revenue for the element is recognized at
the time of delivery. EITF 00-21 is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company does not
expect that the pronouncement will have a material impact on its financial
position or results of operations.

USE OF ESTIMATES

The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to revenue recognition, inventory, intangible assets, goodwill,
and other long-lived assets, in-process research and development, merger
expenses, income taxes and investments. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to be consistent with the
current year classifications.

3) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

FOREIGN EXCHANGE RISK MANAGEMENT

The Company hedges a portion of its forecasted foreign currency denominated
intercompany sales of inventory, over a maximum period of fifteen months, using
forward exchange contracts and currency options

47

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

primarily related to Japanese and European currencies. These derivatives are
designated as cash-flow hedges, and changes in their fair value are carried in
accumulated other comprehensive income until the hedged transaction affects
earnings. When the hedged transaction affects earnings, the appropriate gain or
loss from the derivative designated as a hedge of the transaction is
reclassified from accumulated other comprehensive income to cost of sales. As of
December 31, 2002 the amount that will be reclassified from accumulated other
comprehensive income to earnings over the next twelve months is an unrealized
loss of $407,000, net of taxes. The ineffective portion of the derivatives is
primarily related to option premiums, is recorded in cost of sales, and was
immaterial in 2002, 2001, and 2000.

The Company hedges certain intercompany and other payables with foreign
exchange contracts and currency options. Since these derivatives hedge existing
amounts that are denominated in foreign currencies, the derivatives do not
qualify for hedge accounting under SFAS No. 133. The foreign exchange gain on
these derivatives was not material in 2002, 2001 and 2000.

Realized and unrealized gains and losses on forward exchange contracts and
local currency purchased option contracts that do not qualify for hedge
accounting are recognized immediately in earnings. The cash flows resulting from
forward exchange contracts and local currency purchased options that qualify for
hedge accounting are classified in the statement of cash flows as part of cash
flows from operating activities. Cash flows resulting from forward exchange
contracts and local currency purchased options that do not qualify for hedge
accounting are classified in the statement of cash flows as investing
activities. The Company does not hold or issue derivative financial instruments
for trading purposes.

There were forward exchange contracts with notional amounts totaling
$23,287,000 outstanding at December 31, 2002. Of such forward exchange
contracts, $17,213,000 were outstanding to exchange Japanese yen for US dollars.
There were no forward exchange contracts outstanding at December 31, 2001.
Forward exchange contracts with notional amounts totaling $1,500,000 to exchange
Japanese yen for U.S. dollars were outstanding at December 31, 2000. Local
currency purchased options with notional amounts totaling $5,053,000,
$11,349,000 and $25,390,000 to exchange foreign currencies for U.S. dollars were
outstanding at December 2002, 2001 and 2000, respectively.

Foreign exchange gains on forward exchange contracts which did not qualify
for hedge accounting were immaterial during 2002 and 2000. There were no foreign
exchange gains or losses on forward exchange contracts which did not qualify for
hedge accounting in 2001. Gains and losses on forward exchange contracts and
local currency purchased options that qualify for hedge accounting are
classified in cost of goods sold and totaled a gain of $452,000, $175,000 and
$6,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

The fair values of forward exchange contracts at December 31, 2002,
determined by applying period end currency exchange rates to the notional
contract amounts, amounted to an unrealized loss of $407,000. The fair values of
local currency purchased options at December 31, 2002 and 2001, which were
obtained through dealer quotes were immaterial.

CONCENTRATIONS OF CREDIT RISK

The Company's significant concentrations of credit risk consist principally
of cash and cash equivalents, investments, forward exchange contracts, and trade
accounts receivable. The Company maintains cash and cash equivalents with
financial institutions including the bank it has borrowings with. The Company
maintains investments primarily in U.S. Treasury and government agency
securities and corporate debt securities, rated AA or higher. The Company places
forward currency contracts with high credit-quality financial institutions in
order to minimize credit risk exposure. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of diverse
and geographically dispersed customers. Credit is extended for all customers
based on financial condition and collateral is not required.

48

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the term loans, including the current portion,
approximates its carrying value given its variable rate interest provisions. The
fair value of marketable securities is based on quoted market prices. The fair
value of mortgage notes is based on borrowing rates for similar instruments and
approximates its carrying value. For all other balance sheet financial
instruments, the carrying amount approximates fair value because of the short
period to maturity of these instruments.

4) INVENTORIES

Inventories consist of the following:

5) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

Depreciation and amortization of property, plant and equipment totaled
$14,830,000, $11,905,000 and $9,785,000 for the years ended December 31, 2002,
2001 and 2000, respectively.

6) DEBT

CREDIT AGREEMENTS AND SHORT-TERM BORROWINGS

Effective July 31, 2002, the Company entered into a loan agreement with two
banks, which provides access to a revolving credit facility. The revolving
credit facility provides for borrowings up to $40,000,000, and expires July 31,
2003. Interest on borrowings is payable quarterly at either the banks' base
rate, or the LIBOR Rate, as defined in the agreement. At December 31, 2002,
there were no borrowings outstanding under this agreement.

Additionally, certain of the Company's foreign subsidiaries have lines of
credit and short-term borrowing arrangements with various financial institutions
which provide for aggregate borrowings as of December 31,

49

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2002 of up to $18,220,000, which generally expire and are renewed at six month
intervals. At December 31, 2002 and 2001, total borrowings outstanding under
these arrangements were $13,877,000 and $9,238,000, respectively, at interest
rates ranging from 1.13% to 1.50% and 0.84% to 1.88%, respectively.

LONG-TERM DEBT

Long-term debt consists of the following:

On October 31, 1995, the Company entered into a term loan agreement with a
bank, which provided uncollateralized borrowings of $7,000,000. Principal
payments were payable in equal monthly installments of $83,000 through June 1,
2002, when the remaining principal amount was paid. Interest was payable monthly
at either the bank's base rate or at the LIBOR Rate, as defined in the
agreement, at the Company's option.

In connection with the purchase of On-Line Technologies, Inc., the Company
assumed term loans of $4,728,000. The principal and interest accrued are due in
two installments, the first installment on April 27, 2002, and the second
installment on April 27, 2003. The remaining principal amount due as of December
31, 2002 was $2,485,000. At December 31, 2002 the interest rate was 6.0%.

In connection with the purchase of Telvac Engineering, Ltd., the Company
issued term loans of $752,000. Principal payments of $51,000 are due on an
annual basis through December 1, 2004 with the remaining principal due on May 1,
2005. Interest is payable semi-annually at the UK base rate. The remaining
principal due as of December 31, 2002 was $647,000.

The Company also has an outstanding term loan from a foreign bank, with
principal due on April 2, 2004. The interest rate in effect for this term loan
at December 31, 2002 was 1.19%. The remaining principal balance at December 31,
2002 was $842,000.

At December 31, 2002 and 2001, the interest rates in effect for the
outstanding term loan borrowings ranged from 1.19% to 6.0%.

In connection with the acquisition of ENI, the Company assumed a long-term
debt agreement with the County of Monroe Industrial Development Agency (COMIDA)
for a manufacturing facility located in Rochester, New York. The terms are the
same as that of the underlying Industrial Development Revenue Bond which calls
for payments of interest only through July 1, 2014, at which time the Bond is
repayable in a lump sum of $5,000,000. Interest is reset annually based on bond
remarketing, with an option by the Company to elect a fixed rate, subject to a
maximum rate of 13% per annum. At December 31, 2002 the interest rate was 2.10%.
The bond is collateralized by the building. The net book value of the building
at December 31, 2002 was approximately $10,900,000.

On March 6, 2000, the Company entered into a mortgage note payable with a
bank to borrow $10,000,000 to finance the purchase of land and a building.
Principal and interest of $119,000 is being paid in monthly installments with
final payments due in March 2007. The remaining principal as of December 31,

50

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2002 was $6,071,000. The interest rate at December 31, 2002 was 3.14%. The net
book value of the land and building at December 31, 2002 was approximately
$18,900,000.

The Company has a loan outstanding from a foreign bank in the form of a
mortgage note at an interest rate of 1.88%. Principal and interest are payable
in monthly installments through 2005. The loans are collateralized by mortgages
on certain of the Company's foreign properties. The remaining principal as of
December 31, 2002 was $687,000.

The terms of the revolving credit facility contain, among other provisions,
requirements for maintaining certain levels of tangible net worth and other
financial ratios. The agreements also contain restrictions with respect to
acquisitions. Under the most restrictive covenant, the Company's consolidated
tangible net worth may not be below an amount as defined in the agreement. In
the event of default of these covenants or restrictions, any obligation then
outstanding under the loan agreement shall become payable upon demand by the
bank. The Company was in compliance with all debt covenants as of December 31,
2002.

Aggregate maturities of long-term debt over the next five years are as
follows:

7) COMMITMENTS AND CONTINGENCIES

On November 30, 2000, Applied Science and Technology, Inc. ("ASTeX"), which
was acquired by MKS in January 2001, brought suit in federal district court in
Delaware against Advanced Energy Industries, Inc. ("Advanced Energy") for
infringement of ASTeX's patent related to its Astron product. On May 17, 2002, a
jury affirmed the validity of the Company's patent and found that Advanced
Energy infringed the patent. On May 31, 2002, based on the jury's findings, the
Court entered a judgement on the infringement claim in favor of the Company and
against Advanced Energy, and awarded $4,200,000 in damages to compensate the
Company for Advanced Energy's infringing activity. Advanced Energy filed motions
to overturn the verdict. During August of 2002, the Company and Advanced Energy
entered into an agreement whereby Advanced Energy agreed to pay the awarded
damages amount to the Company and withdraw its motions to overturn the verdict.
The Company received the $4,200,000 in September 2002, and recorded the amount
as Income from litigation settlement.

On November 3, 1999, On-Line Technologies, Inc., which was acquired by the
Company in April 2001, brought suit in federal district court in Connecticut
against Perkin-Elmer, Inc. and certain other defendants for infringement of
On-Line's patent related to its FTIR spectrometer product. The suit seeks
injunctive relief and damages for infringement. Perkin-Elmer, Inc. has filed a
counterclaim seeking invalidity of the patent, costs, and attorneys' fees. The
Company believes that the counterclaim is without merit. The Company cannot be
certain of the outcome of this litigation, but does plan to assert its claims
and oppose the counterclaims against it vigorously.

51

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The Company is subject to other legal proceedings and claims, which have
arisen in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's results of operations, financial condition or cash flows.

The Company leases certain of its facilities and machinery and equipment
under capital and operating leases expiring in various years through 2002 and
thereafter. Generally, the facility leases require the Company to pay
maintenance, insurance and real estate taxes. Rental expense under operating
leases totaled $6,278,000, $5,122,000 and $4,623,000, for the years ended
December 31, 2002, 2001 and 2000, respectively.

Minimum lease payments under operating and capital leases are as follows:

As of December 31, 2002, the Company has entered into non-cancelable
purchase commitments for certain inventory components used in its normal
operations. The purchase commitments covered by these arrangements are for
periods of less than one year and aggregate approximately $27,090,000.

Prior to its initial public offering, the Company entered into a Tax
Indemnification and S Corporation Distribution Agreement with its then existing
stockholders (the "Pre-IPO stockholders"). The agreement includes provisions for
the payment, with interest, by the Pre-IPO stockholders or MKS, as the case may
be, for the difference between the $40,000,000 distributed as an estimate of the
amount of the accumulated adjustments account as of April 4, 1999, which is the
date the Company's S Corporation status was terminated, and the actual amount of
the accumulated adjustments account on that day. The actual amount of the
accumulated adjustments account was $41,416,619. Accordingly, the Company made
an additional distribution of $1,416,619, plus interest of $177,524, to the
Pre-IPO stockholders during the three months ended September 30, 2000. The
amount of the additional distribution payable had been estimated to be
$3,350,000. This estimated amount was charged directly to retained earnings
during 1999 and had no impact on net income or earnings per share. The
difference of $1,933,000 between the actual additional distribution and the
estimated additional distribution was credited directly to retained earnings
during the three months ended September 30, 2000 and had no impact on net income
or earnings per share. The amount of the accumulated adjustments account can be
affected by future income tax audits of MKS. If any audit increases or decreases
the accumulated adjustments account, MKS or the Pre-IPO stockholders, as the
case may be, will also be required to make a payment, with interest, of such
difference to the other party. No shareholders, other than the Pre-IPO
stockholders, are parties to the Tax Indemnification and S Corporation
Distribution Agreement.

To the extent permitted by Massachusetts law, the Company's Restated
Articles of Organization, as amended, requires the Company to indemnify any
current or former officer or director of the Company or any

52

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

person who has served or is serving in any capacity with respect to any employee
benefit plan of the Company. Because no claim for indemnification has been made
by any person covered by the relevant provisions of the Company's Restated
Articles of Organization, the Company believes that its estimated exposure for
these indemnification obligations is currently minimal. Accordingly, the Company
has no liabilities recorded for these requirements as of December 31, 2002.

The Company enters into standard indemnification agreements in the ordinary
course of business. Pursuant to these agreements, the Company indemnifies, holds
harmless and agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally the Company's customers, in
connection with any patent, or any other intellectual property infringement
claim by any third party with respect to the Company's products. The term of
these indemnification agreements is generally perpetual any time after execution
of the agreement. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited.
The Company has never incurred costs to defend lawsuits or settle claims related
to these indemnification agreements. As a result, the Company believes the
estimated fair value of these agreements is minimal. Accordingly, the Company
has no liabilities recorded for these agreements as of December 31, 2002.

When as part of an acquisition, the Company acquires all of the stock or
all of the assets and liabilities of another company, the Company assumes
liability for certain events or occurrences that took place prior to the date of
acquisition. The maximum potential amount of future payments the Company could
be required to make for such obligations is undeterminable at this time. Other
than obligations recorded as liabilities at the time of the acquisition,
historically the Company has not made significant payments for these
indemnifications. Accordingly, no liabilities have been recorded for these
obligations.

In conjunction with certain asset sales, the Company may provide routine
indemnifications whose terms range in duration and often are not explicitly
defined. Where appropriate, an obligation for such indemnifications is recorded
as a liability. Because the amount of liability under these types of
indemnifications are not explicitly stated, the overall maximum amount of the
obligation under such indemnifications cannot be reasonably estimated. Other
than obligations recorded as liabilities at the time of the asset sale,
historically the Company has not made significant payments for these
indemnifications.

8) STOCKHOLDERS' EQUITY

COMMON STOCK

In May 2002, the Company amended its Restated Articles of Organization to
increase the authorized number of shares of Common Stock to 200,000,000 shares
from 75,000,000 shares.

On March 30, 2000, ASTeX completed the registration and sale of 1,917,250
shares of common stock at $40.42 per share. The net proceeds from the offering
were approximately $73,200,000.

On April 5, 1999, the Company closed the initial public offering of its
Common Stock. In connection with this offering and the exercise of an
over-allotment option by the underwriters, the Company sold 6,375,000 shares of
Common Stock at a price of $14.00 per share. The net proceeds to the Company
were approximately $82,000,000. Underwriting discounts and commissions were
approximately $6,200,000 and other offering costs were approximately $1,000,000.

On April 5, 1999 the Company distributed $40,000,000, which was the
estimated amount of the Company's undistributed S corporation earnings as of the
day prior to the closing of the offering.

On March 5, 1999, ASTeX completed the registration and sale of 1,533,800
shares of common stock at $14.34 per share. On April 6, 1999, the underwriters
exercised their over-allotment option to purchase an

53

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

additional 230,070 shares of common stock. The net proceeds from the offering
were approximately $23,800,000.

STOCK PURCHASE PLANS

The Company's 1999 Second Restated Employee Stock Purchase Plan (the
"Purchase Plan") authorizes the issuance of up to an aggregate of 700,000 shares
of Common Stock to participating employees. Offerings under the Purchase Plan
commence on June 1 and December 1 and terminate, respectively, on November 30
and May 31. Under the Purchase Plan, eligible employees may purchase shares of
Common Stock through payroll deductions of up to 10% of their compensation. The
price at which an employee's option is exercised is the lower of (1) 85% of the
closing price of the Common Stock on the NASDAQ National Market on the day that
each offering commences or (2) 85% of the closing price on the day that each
offering terminates. During 2002 and 2001 the Company issued 110,947 and 111,835
shares, respectively, of Common Stock to employees who participated in the
Purchase Plan at exercise prices of $18.33 and $16.18 in 2002, and $13.12 and
$19.06 in 2001. As of December 31, 2002 there were 357,581 shares reserved for
issuance.

The Company's Second Restated International Employee Stock Purchase Plan
(the "Foreign Purchase Plan") authorizes the issuance of up to an aggregate of
75,000 shares of Common Stock to participating employees. Offerings under the
Foreign Purchase Plan commence on June 1 and December 1 and terminate,
respectively, on November 30 and May 31. Under the Foreign Purchase Plan,
eligible employees may purchase shares of Common Stock through payroll
deductions of up to 10% of their compensation. The price at which an employee's
option is exercised is the lower of (1) 85% of the closing price of the Common
Stock on the NASDAQ National Market on the day that each offering commences or
(2) 85% of the closing price on the day that each offering terminates. During
2002 and 2001, the Company issued 18,435 and 13,333 shares of Common Stock to
employees who participated in the Foreign Purchase Plan at exercise prices of
$18.33 and $16.18, and $13.12 and $19.06 per share, respectively. As of December
31, 2002 there were 35,984 shares reserved for issuance.

STOCK OPTION PLANS

In April 2001, the Company's Board of Directors approved an annual increase
in the number of shares that may be granted under the Second Restated 1995 Stock
Incentive Plan of 5% of the total shares of the Company's stock on July 1 of
each year. In March 2002, the Board of Directors approved, and in May 2002, the
stockholders of the Company approved an increase in the number of shares that
may be granted under the Second Restated 1995 Stock Incentive Plan to 15,000,000
shares. The annual increase will occur until such time as the aggregate number
of shares which may be issued under the Plan is 15,000,000 shares, subject to
adjustment for certain changes in MKS' capitalization.

The Company has granted options to employees under the 1995 Stock Incentive
Plan and the 1993 Stock Option Plan and to directors under the 1996 Director
Stock Option Plan and the 1997 Director Stock Option Plan (the "Plans"). The
Plans are administered by the Company's board of directors.

At December 31, 2002, 471,439 options to purchase shares of the Company's
common stock were reserved for issuance under the Plans. Stock options are
granted at 100% of the fair value of the Company's common stock. Generally,
stock options granted to employees under the Plans in 2002, 2001 and 2000 vest
25% after one year and 6.25% per quarter thereafter and expire 10 years after
the grant date. Generally, stock options granted under the Plans prior to 2000
vest 20% after one year and 5% per quarter thereafter, and expire 10 years after
the grant date. Generally, options granted to Directors vest at the earlier of
(1) the next annual meeting, (2) 13 months from date of grant, or (3) the
effective date of an acquisition.

54

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The following table presents the activity for options under the Plans:

The following table summarizes information with respect to options
outstanding and exercisable under the Plans at December 31, 2002:

55

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ACCUMULATED OTHER COMPREHENSIVE INCOME

The balance of accumulated other comprehensive income (loss) was comprised
of the following:

9) INCOME TAXES

A reconciliation of the Company's 2002, 2001 and 2000 effective tax rate to
the U.S. federal statutory rate follows:

56

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The components of income before income taxes and the related provision
(benefit) for income taxes consist of the following:

At December 31, 2002 and 2001 the components of the deferred tax asset and
deferred tax liability were as follows:

During 2002 the Company recorded a valuation allowance of $12,590,000
against all of its United States and foreign net deferred tax assets. A
valuation allowance has been recorded against deferred tax assets because the
Company has determined that it is more likely than not that all of the deferred
tax assets may not be realized. The Company incurred significant operating
losses in 2002 and 2001 and the current outlook indicates that significant
uncertainty will continue into 2003. These cumulative factors resulted in the
Company's decision that it is more likely than not that all of its deferred tax
assets may not be realized. If the Company generates sustained future taxable
income against which these tax attributes may be applied, some

57

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

portion or all of the valuation allowance would be reversed and a corresponding
reduction in income tax expense would be reported in future periods.

At December 31, 2002, MKS had approximately $25,700,000 of federal net
operating losses including approximately $6,800,000 the utilization of which may
be limited by the change in ownership rules under Section 382 of the Internal
Revenue Code. In addition, at December 31, 2002, MKS also had approximately
$41,400,000 of state net operating losses. The federal and state net operating
losses begin to expire in 2009 and 2006, respectively.

The Company does not provide for a U.S. income tax liability on
undistributed earnings of its foreign subsidiaries. The earnings of non-U.S.
subsidiaries, which reflect full provision for non-U.S. incomes taxes, are
indefinitely reinvested in non-U.S. operations or will be remitted substantially
free of additional tax. As of December 31, 2002, the unrecognized deferred tax
liability associated with these unremitted earnings was approximately
$2,500,000.

10) EMPLOYEE BENEFIT PLANS

The Company has a 401(k) profit-sharing plan for U.S. employees meeting
certain requirements in which eligible employees may contribute from 1% up to
12% of their compensation. The Company, at its discretion, may provide a
matching contribution which will generally match up to the first 2% of each
participant's compensation, plus 25% of the next 4% of compensation. At the
discretion of the Board of Directors, the Company may also make additional
contributions for the benefit of all eligible employees. The Company's
contributions were $1,938,000, $1,419,000 and $2,960,000 for 2002, 2001 and
2000, respectively.

The Company maintains a bonus plan which provides cash awards to key
employees, at the discretion of the Compensation Committee of the Board of
Directors, based upon operating results and employee performance. There was no
bonus expense in the years ended December 31, 2002 and 2001. Bonus expense to
key employees was $7,579,000 for the year ended December 31, 2000.

11) SEGMENT AND GEOGRAPHICAL INFORMATION AND SIGNIFICANT CUSTOMER

See Note 1 for a brief description of the Company's business. During 2002,
the Company consolidated its product groups to accelerate product development,
rationalize manufacturing operations, and reduce operating costs. This
realignment of operations has organized the Company into three product groups:
Instruments and Control Systems: Power and Reactive Gas Products; and Vacuum
Products. The Company's products are derived from MKS' core competencies in
pressure measurement and control; materials delivery; gas and thin-film
composition analysis; control and information management; power and reactive gas
generation; and vacuum technology. The Company's operating segments qualify for
aggregation as the products are manufactured and distributed in a similar
manner, have similar long-term margins and are sold to a similar customer base.
Therefore, the Company has one reportable segment and all financial segment and
product line information can be found in the consolidated financial statements.
The segment information for the years ended December 31, 2001 and 2000 has been
reclassified to conform with these internal organizational changes.

The Company had one customer comprising 23%, 18% and 30% of net sales for
the years ended December 31, 2002, 2001 and 2000, respectively.

58

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Net sales to unaffiliated customers are based on the location in which the
sale originated. Transfers between geographic areas are at negotiated transfer
prices and have been eliminated from consolidated net sales. Net sales to
unaffiliated customers and long-lived assets by geographic area were as follows:

Included in the Far East are Japan, Korea, Singapore, Taiwan, China and
Hong Kong. Included in Europe are Germany, France and the United Kingdom. Net
sales to unaffiliated customers from Japan were $43,335,000, $34,816,000 and
$50,187,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Long-lived assets within Japan amounted to $10,875,000, $4,618,000 and
$5,460,000 at December 31, 2002, 2001 and 2000, respectively.

12) ACQUISITIONS

On January 31, 2002, MKS completed its acquisition of the ENI Business of
Emerson Electric Co. ("ENI"), a supplier of solid-state RF and DC plasma power
supplies, matching networks and instrumentation to the semiconductor and
thin-film processing industries. The reasons for the acquisition of ENI were
based upon the ability to offer higher value and more integrated application
solutions by combining ENI's solid-state power conversion technology with the
Company's core competency in plasma and reactive gas solutions. The acquisition
has been accounted for under the purchase method of accounting. The purchase
price was approximately $266,530,000 and consisted of approximately 12,000,000
shares of MKS common stock valued at approximately $261,264,000 and transaction
expenses of approximately $5,266,000. The value of MKS common stock was
approximately $21.7720 per share based on the average closing price of MKS'
common stock for the five-day period including the date of the announcement of
the signing of the merger agreement and the two days preceding and succeeding
such date.

The purchase price was allocated to the assets acquired based upon their
estimated fair values and resulted in an allocation of approximately
$197,123,000 to goodwill. The results of operations are included in

59

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

the Company's consolidated statement of income as of and since the date of the
purchase. The allocation of the purchase price is as follows:

Current assets.............................................. $ 31,038
Other assets................................................ 2,123
Fixed assets................................................ 18,882
Completed technology........................................ 39,600
Patents..................................................... 6,500
Customer relationships...................................... 2,600
In-process research and development......................... 7,500
Goodwill.................................................... 197,123
Other current liabilities................................... (13,883)
Deferred tax liabilities.................................... (19,480)
Other long term liabilities................................. (5,473)
--------
$266,530
========

The amounts allocated to acquired intangible assets are being amortized
using the straight-line method over their respective estimated useful lives: 6
years for completed technology, 8 years for patents, and 8 years for customer
relationships. The total weighted average amortizable life of the acquired
intangible assets is 6 years. Approximately $9,700,000 of the goodwill is tax
deductible.

In connection with the acquisition of ENI, the Company obtained an
appraisal from an independent appraiser of the fair value of its intangible
assets. This appraisal valued purchased in-process research and development
("IPR&D") of various projects for the development of new products and
technologies at approximately $7,500,000. Because the technological feasibility
of products under development had not been established and no future alternative
uses existed, the purchased IPR&D was expensed during the six months ended June
30, 2002. The value of the purchased IPR&D was determined using the income
approach, which discounts expected future cash flows from projects under
development to their net present value. Each project was analyzed to determine
the technological innovations included; the utilization of core technology; the
complexity, cost and time to complete development; any alternative future use or
current technological feasibility; and the stage of completion. The cash flows
derived from the IPR&D projects were discounted at rates ranging from 25% to
30%. The Company believes these rates were appropriate given the risks
associated with the technologies for which commercial feasibility had not been
established. The percentage of completion for each in-process project was
determined by identifying the cost incurred to date of the project as a ratio of
the total estimated cost required to bring the project to technical and
commercial feasibility. The percentage of completion for in-process projects
acquired ranged from 65% to 80%, based on management's estimates of tasks
completed and the tasks to be completed to bring the projects to technological
and commercial feasibility. The projects were generally expected to have
durations of up to 12 months.

On March 13, 2002, MKS acquired Tenta Technology, Ltd. ("Tenta"), a company
that designs and supplies modular, computer-based process control systems for
300mm semiconductor process tool applications. The reasons for the acquisition
were based upon the ability to offer higher value and more integrated
application solutions by integrating Tenta's process controllers with MKS
digital network products to provide a more complete process control solution.
The acquisition has been accounted for under the purchase method of accounting.
The purchase price was approximately $26,400,000 and consisted of 700,000 shares
of MKS common stock valued at approximately $21,100,000, cash of $5,000,000 and
transaction expenses of approximately $300,000. The value of MKS common stock
was based on the average closing price of MKS' common stock for the five-day
period including the date of the announcement of the signing of the merger

60

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

agreement and the two days preceding and succeeding such date. The purchase
price was allocated to the assets acquired based upon their estimated fair
values. The results of operations are included in the Company's consolidated
statement of income as of and since the date of the purchase. The allocation of
the purchase price was as follows:

Current assets.............................................. $ 5,051
Completed technology........................................ 10,400
Other acquired intangibles.................................. 540
In-process research and development......................... 180
Goodwill.................................................... 18,899
Other net liabilities assumed............................... (8,670)
-------
$26,400
=======

Completed technology and other acquired intangibles are being amortized on
a straight-line basis over 6 to 8 years. None of the goodwill is tax deductible.

In 2002, the Company acquired two other businesses for a total purchase
price of $12,200,000, including IPC Fab Automation GmbH, a developer and
provider of web-based hardware and software that enable e-diagnostics and
advanced process control for advanced manufacturing applications. There were no
shares of MKS common stock issued for these acquisitions. Goodwill recognized in
these transactions was approximately $11,000,000 and acquired intangible assets
were approximately $2,800,000.

On April 27, 2001, MKS completed its acquisition of On-Line Technologies,
Inc. ("On-Line"), a company that designs and manufactures products used for gas
analysis, wafer metrology and complementary analysis and control software. The
reasons for the acquisition of On-Line were to expand our range of products for
monitoring the composition of process gases and thin-films, and to provide our
customers with integrated products that help them to increase their
manufacturing yield. The acquisition has been accounted for under the purchase
method of accounting. The purchase price was approximately $23,829,000 and
consisted of approximately 660,000 shares of MKS common stock valued at
approximately $12,110,000, cash payments of $6,295,000, assumption of On-Line
debt of approximately $4,728,000 and transaction expenses of approximately
$696,000. The value of MKS common stock was based on the average closing price
of MKS' common stock for the five-day period including the date of the
announcement of the signing of the merger agreement and the two days preceding
and succeeding such date. The purchase price was allocated to the assets
acquired based upon their estimated fair values and resulted in an allocation of
approximately $16,050,000 to goodwill. The results of operations are included in
the Company's consolidated statement of income (loss) as of and since the
effective date of the purchase. The allocation of the purchase price was as
follows:

Net tangible assets acquired................................ $ (971)
In-process research and development......................... 2,340
Completed technology........................................ 4,710
Other acquired intangibles.................................. 1,700
Goodwill.................................................... 16,050
-------
$23,829
=======

The completed technology and other intangibles are being amortized on a
straight-line basis over 5 to 7 years. None of the goodwill is tax deductible.

In connection with the acquisition of On-Line, the Company obtained an
appraisal from an independent appraiser of the fair value of its intangible
assets. This appraisal valued purchased IPR&D of various projects

61

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

for the development of new products and technologies at approximately
$2,340,000. The projects were generally expected to have durations of 24 to 48
months. Because the technological feasibility of products under development had
not been established and no future alternative uses existed, the purchased IPR&D
was expensed during the quarter ended June 30, 2001. The value of the purchased
IPR&D was determined using the income approach, which discounts expected future
cash flows from projects under development to their net present value.

Each project was analyzed to determine the technological innovations
included; the utilization of core technology; the complexity, cost and time to
complete development; any alternative future use or current technological
feasibility; and the stage of completion. The cash flows derived from the
in-process technology projects were discounted at a rate of 25%. The Company
believes this rate was appropriate given the risks associated with the
technologies for which commercial feasibility had not been established. The
percentage of completion for each in-process project was determined by
identifying the elapsed time invested in the project as a ratio of the total
time required to bring the project to technical and commercial feasibility. The
percentage of completion for in-process projects acquired ranged from 55% to
65%, based on management's estimates of tasks completed and the tasks to be
completed to bring the projects to technological and commercial feasibility.

On September 6, 2000 the Company acquired D.I.P., Inc., a company with
products and technology in digital process control. The reasons for the
acquisition of D.I.P. were to provide higher value products by incorporating
D.I.P.'s digital network technology into our existing range of instruments and
to provide our customers with a complete digital network solution as they
migrated from traditional analog to digital control. The purchase price was
$14,000,000 and consisted of $6,900,000 cash; 231,392 shares of MKS common stock
valued at $6,800,000; and $300,000 in acquisition costs. The value of MKS common
stock was based on the average closing price of MKS' common stock for the
five-day period including the date of the announcement of the signing of the
merger agreement and the two days preceding and succeeding such date. The
purchase price was allocated to the assets acquired based on their estimated
fair values. Acquired technology and other intangibles are being amortized on a
straight-line basis over 3 to 5 years. Approximately $4,100,000 of the goodwill
is tax deductible. The allocation of the purchase is as follows:

Current assets.............................................. $ 3,000
Completed technology........................................ 7,200
Other acquired intangibles.................................. 1,700
Goodwill.................................................... 4,300
Other assets................................................ 200
Liabilities assumed......................................... (2,400)
-------
$14,000
=======

On July 21, 2000 the Company acquired Spectra International, LLC, a
privately held company with products and technology in process monitoring. MKS
acquired Spectra to expand its range of process monitoring products,
particularly in the area of PVD cluster tool monitoring, and to address the
increased needs of our semiconductor device manufacturing customers as they look
to maximize yields in increasingly complex processes. The purchase price
consisted of $9,700,000 cash; 183,293 shares of MKS common stock valued at
$6,500,000; fully vested options to purchase 83,675 shares of MKS common stock
valued at $2,400,000 using the Black-Scholes option pricing model, calculated at
an exchange ratio of 0.4768 shares of MKS common stock per share of Spectra
common stock; and $400,000 in acquisition costs. The value of MKS common stock
was based on the average closing price of MKS' common stock for the five-day
period including the date of the announcement of the signing of the merger
agreement and the two days preceding and succeeding such date. The transaction
also includes contingent earnout payments of up to an aggregate of $12,000,000
over 5 years, which will be treated as compensation expense as it is earned. The
purchase price

62

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

was allocated to the assets acquired based on their estimated fair values.
Acquired technology and other intangible assets are being amortized on a
straight-line basis over 5 to 7 years. Approximately $6,000,000 of the goodwill
is tax deductible. The allocation of the purchase price is as follows:

Current assets.............................................. $ 5,400
Customer relationships...................................... 3,700
Other acquired intangibles.................................. 4,200
Completed technology........................................ 3,700
Goodwill.................................................... 6,100
Other assets................................................ 400
Liabilities and debt assumed................................ (4,500)
-------
$19,000
=======

The intangible assets include approximately $0.3 million for acquired
in-process technology for projects that did not have future alternative uses.
The value of the purchased IPR&D was determined using the income approach, which
discounts expected future cash flows from projects under development to their
net present value. At the date of the acquisition, the development of these
projects had not yet reached technological feasibility, and the technology in
progress had no alternative future uses. Accordingly, these costs were expensed
in the three months ended September 30, 2000.

Development of in-process technology remains a substantial risk to the
Company due to a variety of factors including the remaining effort to achieve
technical feasibility, rapidly changing customer requirements and competitive
threats from other companies and technologies.

In 2000, the Company acquired three other businesses for a total purchase
price of $16,700,000, including approximately 137,000 shares of MKS common stock
valued at $8,400,000. The acquisitions included a manufacturer of high
performance sputtering equipment for the semiconductor and magnetic storage
industries, a manufacturer of vacuum subsystems, and a company with products and
technology in process monitoring. Goodwill recognized in those transactions was
approximately $12,900,000 and acquired intangible assets were approximately
$1,600,000.

The following unaudited pro forma results of operations of the Company for
2002 and 2001 give effect to the acquisitions made in 2002 and 2001 as if the
acquisitions had occurred at the beginning of 2001. The following unaudited pro
forma results of operations for 2000 give effect to the acquisitions made in
2001 and 2000 as if the acquisitions had occurred at the beginning of 2000.

These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred at the
beginning of the period, or which may result in the future. Additionally, the
charges for purchased IPR&D were not included in the unaudited pro forma
results, because they were non-recurring and directly related to the
transactions.

63

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

POOLING OF INTEREST COMBINATIONS

On January 26, 2001, MKS acquired ASTeX. Each outstanding share of ASTeX
common stock was exchanged for 0.7669 newly issued shares of common stock of
MKS, resulting in the issuance of approximately 11,200,000 shares of common
stock of MKS. The acquisition was accounted for under the pooling of interests
method of accounting, and accordingly, the consolidated financial statements
reflect the combined financial position and results of operations and cash flows
of MKS Instruments, Inc. and ASTeX, for all periods presented.

13) SALE OF ASSETS

During 2002, the Company sold an investment in a company for approximately
$2,500,000. The gain on the transaction was not material.

In August 2001, the Company sold certain assets for proceeds of
approximately $9,000,000, consisting of approximately $4,700,000 in cash,
$3,900,000 in a note receivable, and $200,000 of warrants. The note receivable
matures August 7, 2004, and bears an annual interest rate of 9.0%. The loss on
the transaction was $1,246,000 before taxes. During 2002, due to the downturn in
the semiconductor industry and its result on the acquirer's operations, and the
acquirer's inability to raise financing, the Company considered the value of the
note and warrants to be impaired. Accordingly, during 2002, MKS recorded a
charge of $4,121,000 to other expense for the Company's estimate of the
impairment on the note receivable and warrants.

In December 2001, the Company sold an investment in a company for
approximately $367,000. The loss on the transaction was $1,133,000 before taxes.

14) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

During 2002 the Company implemented a consolidation of recent acquisitions
to accelerate product development, rationalize manufacturing operations, and
reduce operating costs. As a result of these actions, the Company recorded
restructuring and asset impairment charges of $2,726,000 in 2002. The charges
consisted of $631,000 of severance costs related to a workforce reduction,
$1,228,000 related to consolidation of leased facilities, and an asset
impairment charge of $867,000 primarily related to the impairment of an
intangible asset from the discontinuance of certain product development
activities. The fair value of the impaired intangible asset was determined using
the expected present value of future cash flows. The workforce reduction was
across all functional groups and consisted of 225 employees, with 179 terminated
during 2002. Severance costs of approximately $300,000 were paid in 2002. The
remaining severance costs of $331,000 are expected to be paid by the end of the
first quarter of 2004. The facilities consolidation charges will be paid over
the respective lease terms, the latest of which ends in 2007. The accrual for
severance costs and lease payments is recorded in Other accrued expenses and
Other liabilities.

64

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

A summary of the restructuring charges and related asset impairments during
2002 is outlined as follows:

During the second quarter and fourth quarter of 2001, the Company recorded
significant charges to reserve for excess and obsolete inventory. The following
is a summary of the changes in these inventory reserves during 2001 and 2002:

When the Company acquired the Shamrock product line, it was expected that
sales of the existing system design and development of new system designs would
generate future revenues. Since the acquisition, the Company has provided
potential customers with purchase quotations for Shamrock systems, including a
significant quotation to a potential customer in January 2001 for the sale of
several systems. The potential customer did not purchase the systems, and the
quotation expired in March 2001. The Company has been unsuccessful in selling
any systems of the product line since the acquisition and, with the expiration
of the significant quote in March 2001, the Company evaluated the recoverability
of the long-lived assets, primarily goodwill. As a result, based on discounted
cash flow analysis, the Company recorded an impairment charge for the carrying
value of the related goodwill of approximately $3,720,000 in the quarter ended
March 31, 2001.

15) GOODWILL AND INTANGIBLE ASSETS

SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles such as
goodwill, reassessment of the useful lives of existing recognized intangible
assets, and reclassification of certain intangibles out of previously reported
goodwill. The Company adopted SFAS 142 on January 1, 2002.

In accordance with SFAS 142, the Company reassessed the classification of
its goodwill and intangible assets. This analysis, which was completed during
the quarter ended March 31, 2002, resulted in the reclassification of workforce
related intangible assets of $2,023,000 to goodwill. Also, in accordance with
this statement, the Company reassessed the useful lives of its amortizable
intangible assets and determined that the lives were appropriate.

65

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Acquired amortizable intangible assets consisted of the following as of
December 31, 2002:

Acquired amortizable intangible assets consisted of the following as of
December 31, 2001:

Aggregate amortization expense related to acquired intangibles for the year
ended December 31, 2002 was $13,900,000 and was $5,200,000 for the year ended
December 31, 2001, respectively. Estimated amortization expense related to
acquired intangibles for each of the five succeeding fiscal years is as follows:

GOODWILL

SFAS 142 requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption and perform annual
impairment tests thereafter. During the second quarter of 2002, the Company
completed the transitional goodwill impairment test as of January 1, 2002. The
Company completed the annual impairment test in the fourth quarter of 2002. No
adjustment to goodwill was necessary. The

66

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

changes in the carrying amount of goodwill during the years ended December 31,
2002 and 2001 were as follows:

The following is the pro forma effect on net income and net income per
share had SFAS No. 142 been in effect for the following periods:

16) PRODUCT WARRANTIES

The Company provides for the estimated costs to fulfill customer warranty
obligations upon the recognition of the related revenue. While the Company
engages in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of its component suppliers, the Company's
warranty obligation is affected by product failure rates, utilization levels,
material usage, and supplier warranties on parts delivered to the Company.
Should actual product failure rates, utilization levels, material usage, or
supplier warranties on parts differ from the Company's estimates, revisions to
the estimated warranty liability would be required.

Product warranty activity for the year ended December 31, 2002 was as
follows:

Balance as of December 31, 2001............................. $ 3,630
Fair value of warranty liabilities acquired................. 3,813
Provisions for product warranties........................... 2,974
Direct charges to the warranty liability.................... (3,496)
-------
Balance as of December 31, 2002............................. $ 6,921
=======

67

MKS INSTRUMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

17) OTHER ACCRUED EXPENSES

Other accrued expenses consist of:

68

MKS INSTRUMENTS, INC.
SUPPLEMENTAL FINANCIAL DATA
(IN THOUSANDS)

- ---------------

(1) Income (loss) from operations for the quarter ended September 30, 2002
includes restructuring and asset impairment charges of $2.4 million.

(2) Net income (loss) for the quarter ended December 31, 2002 includes a
deferred tax charge of $13.4 million to establish a valuation allowance for
the Company's net deferred tax assets. These assets remain available for use
as deductions against future taxable income.

(3) Gross profit for the year ended December 31, 2001 includes significant
charges for excess and obsolete inventory of $14.0 million in the fourth
quarter of 2001 and $2.6 million in the second quarter of 2001. These
charges were primarily caused by a significant reduction in demand,
including reduced demand for older technology products.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is set forth under the captions
"Election of Directors" and "Executive Officers" in our definitive proxy
statement for the 2003 Annual Meeting of Stockholders, is incorporated herein by
reference.

We are also required under Item 405 of Regulation S-K to provide
information concerning delinquent filers of reports under Section 16 of the
Securities and Exchange Act of 1934, as amended. This information is listed
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
our definitive proxy

69

statement for the 2003 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission no later than 120 days after the end of our
fiscal year. This information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is set forth under the caption
"Executive Compensation" in our definitive proxy statement for the 2003 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
not later than 120 days after the end of our fiscal year. This information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by Item 403 of Regulation S-K is set forth under
the caption "Security Ownership of Certain Beneficial Owners and Management" in
our definitive proxy statement for the 2003 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission not later than 120 days after
the end of our fiscal year. This information is incorporated herein by
reference.

The information required by Item 201(d) of Regulation S-K is set forth
under the caption "Equity Compensation Plan Information" in our definitive proxy
statement for the 2003 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission not later than 120 days after the end of our
fiscal year. This information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is set forth under the caption
"Certain Relationships and Related Transactions" in our definitive proxy
statement for the 2003 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission not later than 120 days after the end of our
fiscal year. This information is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

1) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of a date within 90 days of the filing date of this
Annual Report on Form 10-K, the Company's chief executive officer and chief
financial officer have concluded that the Company's disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.

2) CHANGES IN INTERNAL CONTROLS

There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their most recent evaluation.

As a result of its recent acquisitions, the Company has added several
different decentralized accounting systems, resulting in a complex reporting
environment. The Company expects that it will need to continue to modify its
accounting policies, internal controls, procedures and compliance programs to
provide consistency across all its operations.

70

PART IV

ITEM 15. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this Report:

(1) Financial Statements. See below for index to Consolidated
Financial Statements under Item 8.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:
Report of Independent Accountants........................... 34-35
Consolidated Balance Sheets at December 31, 2002 and 2001... 36
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000.......................... 37
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000.............. 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.......................... 39
Notes to Consolidated Financial Statements.................. 40

(a) 2 Financial Statement Schedule:

The following consolidated financial statement schedule is included in
Item 15(d):

Schedule II -- Valuation and Qualifying Accounts

Schedules other than those listed above have been omitted since they are
either not required or information is otherwise included.

(3) Exhibits.

(a) The Exhibits listed in Exhibit Index immediately preceding such
Exhibits are filed as part of this Annual Report on Form 10-K.

- ---------------

+ Previously filed.

* Management contract or compensatory plan arrangement filed as an Exhibit to
this Form 10-K pursuant to Item 15(c) of this report.

(1) Incorporated by reference to the Registration Statement on Form S-4 (File
No. 333-49738) filed with the Securities and Exchange Commission on
November 13, 2000.

(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-23621) for the quarter ended June 30, 2001.

72

(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-23621) for the quarter ended June 30, 2002.

(4) Incorporated by reference to the Registration Statement on Form S-1 (File
No. 333-71363) filed with the Securities and Exchange Commission on January
28, 1999, as amended.

(5) Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-54486) filed with the Securities and Exchange Commission on January
29, 2001.

(6) Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-54488) filed with the Securities and Exchange Commission on January
29, 2001.

(7) Incorporate by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-23621) for the quarter ended September 30, 2002.

(8) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 000-23621) for the fiscal year ended December 31, 1999.

(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-23621) for the quarter ended March 31, 2000.

(10) Incorporated by reference to the Applied Science and Technology, Inc.'s
Quarterly Report on Form 10-Q (File No. 333-71467) for the quarter ended
March 25, 2000.

(11) Incorporated by reference to the Registrant's Definitive Proxy Statement on
Schedule 14A (Commission File No. 000-23621) filed with the Securities and
Exchange Commission on December 4, 2001.

(12) Incorporated by reference to the Registrant's report on Form 8-K (File No.
000-23621) filed with the Securities and Exchange Commission on February
12, 2002.

(b) Reports on Form 8-K.

No reports filed on Form 8-K were filed during the last quarter of the
year ended December 31, 2002.

(c) Exhibits.

The Company hereby files as exhibits to our Annual Report on Form 10-K
those exhibits listed in Item 14(a)(2) above.

(d) Financial Statement Schedules.

73

MKS INSTRUMENTS, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)

74

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

MKS INSTRUMENTS, INC.

By: /s/ JOHN R. BERTUCCI
------------------------------------
John R. Bertucci
President, Chairman of the Board of
Directors and Chief Executive
Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

75

CERTIFICATIONS

I, John R. Bertucci, certify that:

1. I have reviewed this annual report on Form 10-K of MKS Instruments,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

Dated: March 31, 2003 /s/ JOHN R. BERTUCCI
--------------------------------------
John R. Bertucci
Chairman, Chief Executive Officer and
President
(Principal Executive Officer)

76

I, Ronald C. Weigner, certify that:

1. I have reviewed this annual report on Form 10-K of MKS Instruments,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

Dated: March 31, 2003 /s/ RONALD C. WEIGNER
--------------------------------------
Ronald C. Weigner
Vice President and Chief Financial
Officer
(Principal Financial Officer)

77