MKS INSTRUMENTS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
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, 2004

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 (IRS Employer
Incorporation or Organization) Identification No.)

90 INDUSTRIAL WAY, WILMINGTON MASSACHUSETTS 01887
(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(978) 284-4000

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. [X]

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 30, 2004 based on the closing price
of the registrant's Common Stock on such date as reported by the Nasdaq National
Market: $441,475,286; Number of shares outstanding of the issuer's Common Stock,
no par value, as of February 25, 2005: 53,874,518.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for MKS' Annual Meeting of
Stockholders to be held on May 9, 2005 are incorporated by reference into Part
III of this Form 10-K.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

MKS' management 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 "believe,"
"anticipate," "plan," "expect," "estimate", "intend", "may", "see", "will",
"would" 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 as a
Massachusetts corporation. We are a leading worldwide provider of instruments,
components, subsystems and process control solutions that measure, control,
power and monitor critical parameters of semiconductor and other advanced
manufacturing processes.

We are managed as one operating segment which is organized around three
product groups: Instruments and Control Systems, Power and Reactive Gas Products
and Vacuum Products. Our products are derived from our 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.

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

- semiconductor devices for diverse 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;
and

- magnetic resonance imaging (MRI) medical equipment.

For over 40 years, we have focused on satisfying the needs of our customers
by establishing long-term, collaborative relationships. We have a diverse base
of customers that include manufacturers of semiconductor capital equipment,
semiconductor devices, data storage equipment, medical equipment and flat panel
displays, as well as industrial and biopharmaceutical manufacturing companies,
and university, government and industrial research laboratories. During the
years ended December 31, 2004, 2003 and 2002, we estimate that approximately
77%, 69%, and 70% of our net sales, respectively, were to semiconductor capital
equipment manufacturers and semiconductor device manufacturers. Our top 10
customers for the year ended December 31, 2004 were Applied Materials, ASM
International, Celerity Group, ESCO, Lam Research, Novellus Systems, Phillips,
PSK Tech, Tokyo Electron and Ulvac.

We file reports, proxy statements and other documents with the Securities
and Exchange Commission. You may read and copy any document we file at the SEC's
public reference room at Judiciary Plaza Building, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more
information on the public reference room. Our SEC filings are also available to
you on the SEC's Internet site at http://www.sec.gov.

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Our internet address is www.mksinstruments.com. We are not including the
information contained in our website as part of, or incorporating it by
reference into, this annual report on Form 10-K. We make available free of
charge through our web site our 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 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended as soon as reasonably practicable after we electronically
file such materials with the Securities and Exchange Commission.

MARKETS AND APPLICATIONS

We are focused on improving productivity by controlling advanced
manufacturing processes in semiconductor, thin-film and other non-semiconductor
market sectors. We estimate that approximately 77%, 69%, and 70% of our net
sales for the years ended December 31, 2004, 2003 and 2002, respectively, were
to semiconductor capital equipment manufacturers and semiconductor device
manufacturers. Approximately 7%, 10%, and 8% of our net sales in the years ended
December 31, 2004, 2003 and 2002, 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 16%, 21%, and 22% of our net sales in the years ended December 31,
2004, 2003 and 2002, 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.

We estimate that approximately 34%, 41%, and 36% of our net sales for the
years ended December 31, 2004, 2003 and 2002, respectively, were to customers
located in international markets. International sales include sales by our
foreign subsidiaries, but exclude direct export sales. Please refer to Note 11
in the Notes to Consolidated Financial Statements for further information.

SEMICONDUCTOR MANUFACTURING APPLICATIONS

The majority of our sales are derived from products sold to semiconductor
capital equipment manufacturers and semiconductor device manufacturers. Our
products are used in the major semiconductor processing steps such as depositing
materials onto substrates and etching and cleaning circuit patterns.

Our 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, we provide specialized
instruments that monitor the performance of manufacturing equipment and products
that distribute and manage process control information. We anticipate that the
semiconductor manufacturing market will continue to account for a substantial
portion of our sales. While the semiconductor device manufacturing market is
global, major semiconductor capital equipment manufacturers are concentrated in
Europe, Japan and the United States.

THIN-FILM MANUFACTURING APPLICATIONS

Flat Panel Display Manufacturing.

Our 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. Flat panel
display technology is designed to replace bulkier cathode ray tube (CRT)
technology in computer monitors and television sets. We sell products to flat
panel display equipment manufacturers and to end-users in the flat panel display
market. The transition to larger panel sizes and higher display resolution is
driving the need for tighter process controls to reduce defects. The major
manufacturers of flat panel displays are concentrated in Japan, Korea and
Taiwan, and the major manufacturers of flat panel display equipment are
concentrated in Japan and the United States.

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Magnetic and Optical Storage Media.

Our 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. The major manufacturers of
storage media are concentrated in Japan and the Asia Pacific region, and the
major manufacturers of storage media capital equipment are concentrated in
Europe, Japan and the United States.

Optical Filters, Optical Fibers and Other Coating Processes

Our products are used in optical filter, optical fiber and other optical
thin-film coating processes. Our 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 film coating for eyeglasses, solar
panels and architectural glass are deposited using processes similar to those
used in semiconductor manufacturing. Optical filter, optical fiber and other
optical thin-film processing manufacturers are concentrated in Europe, Japan and
the United States.

OTHER NON-SEMICONDUCTOR MANUFACTURING APPLICATIONS

Our products are used in vacuum freeze drying of pharmaceuticals, foods and
beverages and in vacuum processes involved in light bulb and gas laser
manufacturing. Our power delivery products are also incorporated into other
end-market products such as MRI medical equipment. In addition, our products are
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 Europe, Japan and the United
States.

PRODUCT GROUPS

We group our products into three product groups: Instruments and Control
Systems, Power and Reactive Gas Products and Vacuum Products. Also, please refer
to Note 11 in the Notes to Consolidated Financial Statements for further
information.

1. INSTRUMENTS AND CONTROL SYSTEMS

This product group includes pressure measurement and control products,
material delivery products, gas and thin film composition analysis products, and
control and information technology products.

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

Baratron Pressure Measurement Products. 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. We believe we offer the widest
range of gas pressure measurement instruments in the semiconductor and advanced
thin-film materials processing industries.
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Automatic Pressure and Vacuum Control Products. 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.

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. Our
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 our 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. These products measure
and automatically control the mass flow rate of gases and vapors into the
process chamber. Our thermal-based mass flow controllers control gas flow based
on the molecular weight of gases and our pressure-based mass flow controllers,
based on Baratron pressure instrument measurement and control technology,
restrict flow in the gas line to transform pressure control into mass flow
control.

Our 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 our 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. 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 quadruple 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. 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. We
believe that our products are the smallest mass spectrometer-based helium leak
detectors currently available.

Optical Monitoring Instruments. We manufacture 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
measure the thickness and optical properties of a film being deposited, allowing
the user to better control the process.
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CONTROL AND INFORMATION TECHNOLOGY PRODUCTS. We design and manufacture a
suite of products that allows semiconductor manufacturing 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, we believe that we help customers optimize their processes
through Advanced Process Control (APC), and diagnose equipment problems from a
remote location (e-diagnostics).

2. POWER AND REACTIVE GAS PRODUCTS

This product group includes power delivery products and reactive gas
generation products.

Power Delivery Products. Our 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, our microwave, RF and DC
power supplies are used to provide energy to various etching, stripping and
deposition processes. In the medical market, our power delivery products are
used to provide power for MRI equipment. A range of impedance matching units
transfer power from the power supplies to the customer's process. Our power
amplifiers are also used in MRI medical equipment including the most advanced 3T
(three Tesla) machines.

Reactive Gas Generation Products. 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. Our 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

This product group consists of vacuum technology products, including vacuum
gauges, valves and components.

Vacuum Gauging Products. We offer 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 where less accuracy is required. Our 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. Our vacuum valves are used on the gas lines
between the process chamber and the pump downstream of the process chamber. Our
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. Our vacuum components are
designed to minimize such contamination and thus increase yields and reduce
downtime.

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APPLICATION-SPECIFIC INTEGRATED SUBSYSTEMS

We also combine products and technologies into application-specific
integrated subsystems. Integrated subsystems are made by each product group, and
typically provide higher functionality in a smaller footprint, depending upon
the application. Integrated subsystems represented approximately 25% of revenues
for the year ended December 31, 2004 compared to approximately 20% of revenues
for the year ended December 31, 2003.

For example, we have a line of integrated flow and pressure control
subsystems that combine two or more of our products and technologies into
products for specific process applications. We have 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
manufacturing. By combining the functions of our Baratron pressure measurement
instruments, flow measurement instruments, control electronics and valves into a
range of compact subsystems, this product line addresses the need for smaller
components that save valuable clean room space.

CUSTOMERS

Our largest customers include leading semiconductor capital equipment
manufacturers such as Applied Materials, Lam Research, Novellus Systems and
Tokyo Electron. Sales to our top ten customers accounted for approximately 49%,
42%, and 49% of net sales for the years ended December 31, 2004, 2003 and 2002,
respectively. Applied Materials accounted for approximately 20%, 18%, and 23% of
our net sales for the years ended December 31, 2004, 2003 and 2002,
respectively.

SALES, MARKETING AND SUPPORT

Our worldwide sales, marketing and support organization is critical to our
strategy of maintaining close relationships with semiconductor capital equipment
manufacturers and semiconductor device manufacturers. We sell our products
primarily through our direct sales force. As of December 31, 2004, we had 157
sales employees worldwide, located in China, France, Germany, Japan, Korea, the
Netherlands, Singapore, Taiwan, the United Kingdom and the United States. Sales
representatives and agents in a number of countries including Canada, China,
India, Israel, and Italy and in select U.S. cities supplement this direct sales
force. We maintain 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, we maintain a worldwide sales and
support organization in 14 countries. Technical support is provided by
applications engineers located at offices in China, France, Germany, Japan,
Korea, the Netherlands, Singapore, Taiwan, the United Kingdom and the United
States. Repair and calibration services are provided at 32 service depots
located worldwide. We provide warranties from one to three years, depending upon
the type of product.

RESEARCH AND DEVELOPMENT

Our products incorporate sophisticated technologies to power, measure,
control and monitor increasingly complex gas-related semiconductor manufacturing
processes, thereby enhancing uptime, yield and throughput for our semiconductor
device manufacturing customers. Our products have continuously advanced as our
customers' needs have evolved. We have developed, and continue to develop, new
products to address emerging industry trends such as the transition from the use
of 200mm wafers to 300mm wafers and the shrinking of integrated circuit
line-widths from 0.18 micron to 0.13 micron and smaller. In addition, we have
developed, and continue to develop, products that support the migration to new
classes of materials, such as copper for low resistance conductors, high-k
dielectric materials for capacitors and gates and low-k dielectric materials for
low loss insulators that are used in small geometry manufacturing. We have
undertaken an
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initiative to involve our marketing, engineering, manufacturing and sales
personnel in the concurrent development of new products in order to reduce the
time to market for new products. Our employees also work closely with customers'
development personnel. These relationships help us identify and define future
technical needs on which to focus research and development efforts. We support
research at academic institutions targeted at advances in materials science and
semiconductor process development. At December 31, 2004, we had 383 research and
development employees, primarily located in the United States. Our research and
development expense was $57.0 million, $47.7 million, and $46.0 million for the
years ended December 31, 2004, 2003 and 2002, respectively. Our research and
development efforts include numerous projects, none of which are individually
material, and generally have a duration of 12 to 30 months. In addition, we
acquired in-process technology of $8.4 million in 2002.

MANUFACTURING

Our manufacturing facilities are located in China, Germany, Israel, Japan,
Mexico, the United Kingdom and the United States. Manufacturing activities
include the assembly and testing of components and subassemblies, which are
integrated into products. We outsource some of our subassembly work. We purchase
a wide range of electronic, mechanical and electrical components, some of which
are designed to our specifications. We consider our 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 our products is highly competitive. Principal competitive
factors include:

- historical customer relationships;

- product quality, performance and price;

- breadth of product line;

- manufacturing capabilities; and

- customer service and support.

Although we believe that we compete favorably with respect to these
factors, there can be no assurance that we will continue to do so.

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

PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS

We rely on a combination of patent, copyright, trademark and trade secret
laws and license agreements to establish and protect our proprietary rights. As
of December 31, 2004, we owned 221 U.S. patents, 156 foreign patents and had 91
pending U.S. patent applications. Foreign counterparts of certain of these
applications have been filed or may be filed at the appropriate time. Although
we believe that certain patents may be important for certain aspects of our
business, we believe that our success also depends upon close customer contact,
innovation, technological expertise, responsiveness and worldwide distribution.

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We require each of our employees, including our executive officers, to
enter into standard agreements pursuant to which the employee agrees to keep
confidential all of our proprietary information and to assign to us all
inventions while they are employed by us.

For a discussion of litigation relating to our intellectual property, see
"Item 3. Legal Proceedings."

EMPLOYEES

As of December 31, 2004, we employed 2,319 persons. We believe that our
ongoing success depends upon our continued ability to attract and retain highly
skilled employees for whom competition is intense. None of our employees are
represented by a labor union or are party to a collective bargaining agreement.
We believe that our employee relations are good.

ITEM 2. PROPERTIES

As of December 31, 2004, the following table provides information
concerning MKS' principal and certain other owned and leased facilities:

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(1) This facility is owned by MKS.

(2) MKS leases two facilities, one has 39,000 square feet of space with a lease
term which expired on October 31, 2004 and is currently leased on a month to
month basis. 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 one facility with 8,200 square feet of space and a lease term
which expires on April 30, 2006. MKS owns another facility with 24,000
square feet.

(5) This facility is entirely subleased. The lease term expires on June 30,
2007.

(6) MKS owns this facility and has an Industrial Development Revenue Bond of
$5.0 million, due in 2014, that is collateralized by the building.

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(7) MKS leases 4,000 square feet of space with a lease term which expires April
30, 2005. MKS owns another facility with 5,000 square feet of space.

(8) MKS leases two facilities, one has 14,500 square feet of space and a lease
term which expires April 30, 2005 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 6,600 square feet.

(9) MKS owns this facility and has a mortgage note payable of approximately $3.1
million outstanding at December 31, 2004 which is payable in monthly
installments with final payment due in March 2007.

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 July 12, 2004, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against us in federal district court in Delaware, seeking injunctive
relief and damages for alleged infringement of a patent held by Advanced Energy.
On August 30, 2004, we filed our answer to the complaint, denying Advanced
Energy's claims and stating a counterclaim seeking a declaratory judgment that
the claims of the patent are invalid, unenforceable and not infringed by us or
our products. On March 1, 2005, the parties agreed to dismiss the case, without
prejudice. Accordingly, the court dismissed the case on March 11, 2005.

On January 12, 2004, Gas Research Institute ("GRI") brought suit in federal
district court in Illinois against us, On-Line Technologies, Inc. ("On-Line")
which we acquired in 2001, and another defendant, Advanced Fuel Research, Inc.
("AFR"), for breach of contract, misappropriation of trade secrets and related
claims relating to certain infra-red gas analysis technology allegedly developed
under a January 1995 Contract for Research between GRI and AFR. The technology
was alleged to have been incorporated into certain of our products. GRI made
claims for damages, exemplary damages, attorney's fees and costs and injunctive
relief. We filed an answer, denying liability and asserting various defenses to
GRI's claims. We also asserted a cross-claim against co-defendant AFR, alleging
misrepresentation, breach of contract and breach of various duties owed by AFR,
and alleging that in the event we and On-Line are held liable to GRI, AFR would
be required to reimburse, indemnify, and hold harmless On-Line and us for any
such liability. On November 9, 2004, the parties entered into a settlement
agreement and the court dismissed the case, including cross-claims, pursuant to
the settlement.

On April 3, 2003, Advanced Energy filed suit against us in federal district
court in Colorado ("Colorado Action"), seeking a declaratory judgment that
Advanced Energy's Xstream product does not infringe three patents held by our
subsidiary, Applied Science and Technology, Inc. ("ASTeX"). On May 14, 2003, we
brought suit in federal district court in Delaware against Advanced Energy for
infringement of five ASTeX patents, including the three patents at issue in the
Colorado Action. We sought injunctive relief and damages for Advanced Energy's
infringement. These lawsuits are unrelated to the Advanced Energy litigation
described above. On December 24, 2003, the Colorado court granted our motion to
transfer Advanced Energy's Colorado Action to Delaware. In connection with the
jury trial, the parties agreed to present the jury with representative claims
from three of the five ASTeX patents. On July 23, 2004, the jury found that
Advanced Energy infringed all three patents. We have filed a motion for a
permanent injunction, which is pending before the court and the parties are
currently briefing post-trial motions in that case. The parties are also
awaiting a trial with respect to damages and associated claims of MKS and
certain remaining affirmative defenses and related claims of Advanced Energy.
That trial date has not yet been scheduled.

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 judgment 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
10

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 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 and
related claims. The suit sought injunctive relief and damages for infringement.
Perkin-Elmer, Inc. filed a counterclaim seeking invalidity of the patent, costs
and attorneys' fees. In June 2002, the defendants filed a motion for summary
judgment. In April 2003, the court granted the motion and dismissed the case. We
appealed this decision to the federal circuit court of appeals. On October 13,
2004, the federal circuit court of appeals reversed the lower court's dismissal
of certain claims in the case. Accordingly, the case has been remanded to the
United States District Court in Connecticut for further proceedings on the
merits of the remaining claims. On March 11, 2005, Perkin-Elmer, Inc. submitted
to the court a stipulation agreeing that they have infringed a specified claim
of On-Line's patent and filed a motion for summary judgment that such patent
claim is invalid. We intend to file a reply to the summary judgment motion in
the next few weeks. The parties will then await the court's response to the
motion.

We are 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 our 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 2004 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

Our common stock is traded on the Nasdaq National Market under the symbol
MKSI. On February 25, 2005, the closing price of our common stock, as reported
on the Nasdaq National Market, was $18.74 per share. The following table sets
forth for the periods indicated the high and low bid prices per share of our
common stock as reported by the Nasdaq National Market.

On February 25, 2005, we had approximately 184 stockholders of record.

DIVIDEND POLICY

We have never declared or paid any cash dividends. We currently intend to
retain earnings, if any, to support our growth strategy and do not anticipate
paying cash dividends in the foreseeable future. Payment of future dividends, if
any, will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, operating results,
current and anticipated cash needs, plans for expansion, and changes in tax and
regulatory rulings.

11

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 from operations, net income and net income per share for the year
ended December 31, 2004 include restructuring, asset impairment and other
charges of $0.4 million. Loss from operations, net loss and net loss per
share for the year ended December 31, 2003 include restructuring, asset
impairment and other charges of $1.6 million. Loss from operations, net loss
and net loss per share for the year ended December 31, 2002 include
restructuring and asset impairment charges of $2.7 million and purchase of
in-process technology of $8.4 million. Loss from operations, net loss and
net loss per share for the year ended December 31, 2001 include
restructuring and asset impairment charges of $3.7 million, merger expenses
of $7.7 million and purchase of in-process technology of $2.3 million.

(4) Net income and net income per share for the year ended December 31, 2004
include a gain from the collection of a note receivable of $5.0 million
which had been written off in 2002. During the year ended December 31, 2002
and 2003, a valuation allowance against net deferred tax assets was
maintained. Net income and net income per share for the year ended December
31, 2002 and 2003 include tax expense which is comprised primarily of state
and foreign taxes. During 2004, the valuation allowance was reduced against
the net deferred tax assets and net income and net income per share for the
year ended December 31, 2004 include a deferred tax benefit of $10.2
million. See Note 9 of the Notes to the Consolidated Financial Statements.

12

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

OVERVIEW

We are a leading worldwide provider of instruments, components, subsystems
and process control solutions that measure, control, power and monitor critical
parameters of semiconductor and other advanced manufacturing processes.

We are managed as one operating segment which is organized around three
product groups: Instruments and Control Systems, Power and Reactive Gas Products
and Vacuum Products. Our products are derived from our 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. Our products are used to manufacture
semiconductors and thin film coatings for diverse markets such as flat panel
displays, optical and magnetic storage media, architectural glass and
electro-optical products. We also provide technologies for medical imaging
equipment.

We have a diverse base of customers that include semiconductor capital
equipment manufacturers, semiconductor device manufacturers, industrial
manufacturing companies, medical equipment manufacturers and university,
government and industrial research laboratories. During the years ended December
31, 2004, 2003 and 2002, we estimate that approximately 77%, 69%, and 70% of our
net sales, respectively, were to semiconductor capital equipment manufacturers
and semiconductor device manufacturers. We expect that sales to semiconductor
capital equipment manufacturers and semiconductor device manufacturers will
continue to account for a substantial majority of our sales.

During the latter half of 2003 and continuing into the first half of 2004,
the semiconductor capital equipment market experienced a market upturn after a
downturn of almost three years. Starting in the fourth quarter of 2003, we
experienced an increase in orders and sales. Beginning in the third quarter of
2004 and continuing through the fourth quarter of 2004, our orders and sales
declined from the level achieved in the second quarter of 2004. We currently
expect our first quarter 2005 sales to be lower than the fourth quarter of 2004.
The semiconductor capital equipment industry is subject to rapid demand shifts
which are difficult to predict.

A significant portion of our net sales is to operations in international
markets. International net sales include sales by our foreign subsidiaries, but
exclude direct export sales. International net sales accounted for approximately
34%, 41% and 36% of net sales for the years ended December 31, 2004, 2003 and
2002, respectively, a significant portion of which were sales in Japan. We
expect that international net sales will continue to represent a significant
percentage of our net sales.

RECENT ACQUISITIONS

On September 30, 2003, we acquired Wenzel Instruments, a privately held
developer of solid state MicroElectroMechanical System (MEMS) based vacuum
sensor technology for advanced manufacturing processes.

On January 31, 2002, we completed the acquisition of the ENI Business
("ENI") of Emerson Electric Co. ("Emerson"), a 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. We
acquired ENI in order to offer higher value and more integrated application
solutions by combining ENI's solid-state power conversion technology with our
core competency in plasma and reactive gas solutions. The acquisition has been
accounted for under the purchase method of accounting.

Also in 2002, we acquired three companies that expanded our position in
distributed computer-based process control and data management. On March 13,
2002, we 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, we 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, we

13

acquired EquipNet Ltd., a privately held company that develops web-based
connectivity equipment for the semiconductor industry.

The results of operations of these acquired companies are included in our
consolidated statement of operations as of and since the respective dates of
purchase.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our 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, we evaluate our estimates and
judgments, including those related to revenue recognition, inventory, warranty
costs, intangible assets, goodwill and other long-lived assets, in-process
research and development and income taxes. We base our 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.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our 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. In most transactions, we have no
obligations to our customers after the date products are shipped other than
pursuant to warranty obligations. In some instances, we provide installation and
training to customers after the product has been shipped. We defer the fair
value of any undelivered elements until the installation or training is
complete. Fair value is the price charged when the element is sold separately.
Shipping and handling fees billed to customers, if any, are recognized as
revenue. The related shipping and handling costs are recognized in cost of
sales.

We monitor and track the amount of product returns, provide for accounts
receivable allowances and reduce revenue at the time of shipment for the
estimated amount of such future returns, based on historical experience. While
product returns have historically been within our expectations and the
provisions established, there is no assurance that we will continue to
experience the same return rates that we have in the past. Any significant
increase in product return rates could have a material adverse impact on our
operating results for the period or periods in which such returns materialize.
While we maintain a credit approval process, significant judgments are made by
management in connection with assessing our customers' ability to pay at the
time of shipment. Despite this assessment, from time to time, our customers are
unable to meet their payment obligations. We continuously monitor our customers'
credit worthiness, and use our judgment in establishing a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
there is no assurance that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of our customers could have a material adverse impact on the
collectability of accounts receivable and our future operating results.

Inventory. We value our inventory at the lower of cost (first-in,
first-out method) or market. We regularly review inventory quantities on hand
and record a provision to write down excess and obsolete inventory to our
estimated net realizable value, if less than cost, based primarily on our
estimated forecast of product demand. Demand for our products can fluctuate
significantly. A significant increase in the demand for our products could
result in a short-term increase in the cost of inventory purchases from supply
shortages or a decrease in the cost of inventory purchases as a result of volume
discounts, while a significant decrease in demand could result in an increase in
the charges for excess inventory quantities on hand. In addition, our
14

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 our inventory and our reported operating
results.

Warranty Costs. We provide for the estimated costs to fulfill customer
warranty obligations upon the recognition of the related revenue. We provide
warranty coverage for our products ranging from 12 to 36 months, with the
majority of our products ranging from 12 to 24 months. We estimate the
anticipated costs of repairing our products under such warranties based on the
historical costs of the repairs and any known specific product issues. The
assumptions we use to estimate warranty accruals are reevaluated periodically in
light of actual experience and, when appropriate, the accruals are adjusted. Our
determination of the appropriate level of warranty accrual is based upon
estimates. Should product failure rates differ from our estimates, actual costs
could vary significantly from our expectations.

Intangible assets, goodwill and other long-lived assets. We review
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 we 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 our
use of the asset or the strategy for our overall business and significant and
negative industry or economic trends. When we determine 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, we compare 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, we may be required to record an impairment charge to write down the
asset to its net realizable value.

We assess goodwill for impairment at least annually, or more frequently
when events and circumstances occur indicating that the recorded goodwill at the
reporting unit level may be impaired. Reporting units are defined as operating
segments or one level below an operating segment, referred to as a component. We
have determined that our reporting units are components of our one operating
segment. We allocate goodwill to reporting units at the time of acquisition and
base that allocation on which reporting units will benefit from the acquired
assets and liabilities. 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. If actual cash flows differ significantly from the estimates used by
management, we may be required to record an impairment charge to write down the
goodwill to its net realizable value.

In-process research and development. We value tangible and intangible
assets acquired through our business acquisitions, including in-process research
and development ("IPR&D"), at fair value. We determine IPR&D through established
valuation techniques for various projects for the development of new products
and technologies and expense 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, we expensed approximately $8.4 million in IPR&D charges
primarily related to the ENI acquisition because the technological feasibility
of certain products under development had not been established and no future
alternative uses existed. If we acquire other companies with IPR&D in the
future, we will value the IPR&D through established valuation techniques and
will incur future IPR&D charges if those products under development have not
reached technical feasibility.

15

Income taxes. We evaluate the realizability of our net deferred tax assets
and assess the need for a valuation allowance on a quarterly basis. The future
benefit to be derived from our deferred tax assets is dependent upon our ability
to generate sufficient future taxable income to realize the assets. We record a
valuation allowance to reduce our net deferred tax assets to the amount that may
be more likely than not to be realized. To the extent we established a valuation
allowance, an expense is recorded within the provision for income taxes line on
the statement of operations. During the year ended December 31, 2002, we
established a full valuation allowance for our net deferred tax assets. During
the fourth quarter of 2004, after examining a number of factors, including
historical results and near term earnings projections, we determined that it was
more likely than not that we would realize all of our net deferred tax assets,
except for those relating to certain state tax credits. An adjustment to the
valuation allowance was recorded as a reduction to income tax expense. In future
periods, if we were to determine that it was more likely than not that we would
not be able to realize the recorded amount of our 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 our consolidated statement
of operations data:

YEAR ENDED 2004 COMPARED TO 2003

Net Sales. Net sales increased $217.8 million or 64.6% to $555.1 million
for the year ended December 31, 2004 from $337.3 million for the year ended
December 31, 2003. International net sales were approximately $187.8 million for
the year ended December 31, 2004 or 33.8% of net sales and $138.1 million for
the year ended December 31, 2003 or 41.0% of net sales. The increase in 2004
sales was primarily driven by stronger worldwide demand for our products from
our semiconductor capital equipment manufacturer and semiconductor device
manufacturer customers, which increased $193.2 million or 83.5% to $424.6
million.

Gross Profit. Gross profit as a percentage of net sales increased to 39.5%
for the year ended December 31, 2004 from 35.0% for the year ended December 31,
2003. Of the 4.5 increase in percentage points, 3.4 percentage points of gross
margin improvement were mainly related to overhead costs becoming a lower
percentage of a higher sales volume. The additional 1.1 percentage points of
gross margin improvement

16

primarily reflected the net effect of a gradual transition to lower cost
material and manufacturing sources, offset by unfavorable changes in warranty
cost and product mix.

Research and Development. Our research and development is primarily
focused on developing and improving our instruments, components, subsystems and
process control solutions that measure, control, power and monitor critical
parameters of semiconductor and other advanced manufacturing processes.

We have hundreds of products and our research and development efforts
primarily consist of a large number of projects related to these products, none
of which is in and of itself material to us. Current projects typically have a
duration of 12 to 30 months depending upon whether the product is an enhancement
of existing technology or a new product. Our current initiatives include
projects to enhance the performance characteristics of older products, to
develop new products and to integrate various technologies into subsystems.
These projects support in large part the transition in the semiconductor
industry to larger wafer sizes and smaller integrated circuit geometries, which
require more advanced process control technology. Research and development
expenses consist primarily of salaries and related expense for personnel engaged
in research and development, fees paid to consultants, material costs for
prototypes and other expenses related to the design, development, testing and
enhancement of our products.

Research and development expense increased $9.3 million or 19.6% to $57.0
million or 10.3% of net sales for the year ended December 31, 2004 from $47.7
million or 14.1% of net sales for the year ended December 31, 2003. The increase
was primarily due to increased compensation expense of $5.9 million as a result
of higher staffing levels, restored compensation levels, salary increases and
incentive compensation, $2.1 million of higher project material expenses, mainly
related to our power and reactive gas products, and $1.3 million of increased
consulting costs. At December 31, 2004, we had 383 research and development
employees as compared to 326 research and development employees at December 31,
2003.

We believe that the continued investment in research and development and
ongoing development of new products are essential to the expansion of our
markets, and expect to continue to make significant investment in research and
development activities. We are subject to risks if products are not developed in
a timely manner, due to rapidly changing customer requirements and competitive
threats from other companies and technologies. Our success primarily depends on
our products being designed into new generations of equipment for the
semiconductor industry. We develop products that are technologically advanced so
that they are positioned to be chosen for use in each successive generation of
semiconductor capital equipment. If our products are not chosen to be designed
into our customers' products, our net sales may be reduced during the lifespan
of those products.

Selling, General and Administrative. Selling, general and administrative
expenses increased $17.4 million or 24.9% to $87.3 million or 15.7% of net sales
for the year ended December 31, 2004 from $69.9 million or 20.7% of net sales
for the year ended December 31, 2003. The increase was due primarily to
increased compensation expense of $8.4 million, as a result of restored
compensation levels, salary increases, incentive compensation and higher sales
commissions, $2.8 million in higher legal fees related mainly to our patent
infringement litigation against Advanced Energy, $2.0 million in increased
consulting fees primarily for IT related services, and $2.0 million in increased
professional fees primarily related to compliance with the Sarbanes Oxley Act of
2002 ("Sarbanes Oxley").

Amortization of Acquired Intangible Assets. For the year ended December
31, 2004, amortization expense resulting from identified intangibles acquired
from our completed acquisitions was $14.8 million compared to $14.7 million for
the year ended December 31, 2003. We did not acquire any new entities in 2004.

Restructuring, Asset Impairment and Other Charges. As a result of our
various acquisitions from 2000 through 2002 and the downturn in the
semiconductor capital equipment market which began in 2000, we had redundant
activities and excess manufacturing capacity and office space. Therefore in
2002, and continuing through the first quarter of 2004, we implemented
restructuring activities to rationalize manufacturing operations and reduce
operating expenses. As a result, in 2002 we took a restructuring charge of $2.7
million

17

which consisted of $1.2 million related to exiting leased facilities, $0.6
million of severance cost related to 225 terminated employees and an asset
impairment charge of $0.9 million.

During 2003, we recorded restructuring, asset impairment and other charges
of $1.6 million related to our restructuring activities. The charges consisted
of $0.4 million of severance costs related to workforce reductions, $1.1 million
of lease cost, professional fees and other costs related to facility
consolidations and an asset impairment charge of $0.1 million. The workforce
reduction was across all functional groups.

During the three months ended March 31, 2004, we completed our
restructuring activities related to the consolidation of operations from
acquired companies when we exited an additional leased facility and recorded a
restructuring charge of $0.4 million.

The combined restructuring initiatives are expected to generate annual
savings of approximately $12.6 million mainly through reduced payroll and
facility related costs. We began to realize savings related to the restructuring
initiatives in the fourth quarter of 2002. For the year ended December 31, 2004,
we realized approximately $11.8 million of annualized savings. The remaining
expected annualized savings should be realized in 2005. We continue to explore
other cost savings programs which may lead to additional restructuring
initiatives in future periods.

A summary of the restructuring charges, asset impairments and other charges
during 2003 and 2004, and the related accrual balance is outlined as follows:

The remaining cash outlays at December 31, 2004 of $1.6 million consist
primarily of terminated lease obligations, the latest term of which expires in
2008. These payments will be made out of current working capital. The accrual
for workforce reductions and lease payments is recorded in Other accrued
expenses and Other liabilities.

Interest Income (Expense), Net. For the year ended December 31, 2004, net
interest income was $1.9 million, an increase of $0.8 million from the $1.1
million for the year ended December 31, 2003. The increase in net interest
income in 2004 is mainly related to higher investment balances.

Other Income (Expense). During 2001, we 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. 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, we considered the value of the note and
warrants to be impaired. Accordingly, during 2002, we recorded a charge of $4.1
million to other expense for our estimate of the impairment on the note
receivable and warrants. During the second quarter of 2004, we received $5.0
million related to the collection of the note receivable and accrued interest
and recorded a gain to other income.

During 2003, we recorded a gain of $0.9 million from the early repayment of
premiums related to a split dollar life insurance policy covering our Chairman
and CEO.

Provision (Benefit) for Income Taxes. We recorded a benefit for income
taxes of $2.6 million for the year ended December 31, 2004, as compared to a tax
provision of $2.7 million for the year ended December 31, 2003. During fourth
quarter of 2004, after examining a number of factors, including historical

18

results and near term earnings projections, we determined that it was more
likely than not that we would realize all of our net deferred tax assets, except
for those related to certain state tax credits. An adjustment was made to reduce
the valuation allowance to reflect the amount of the realizable net deferred tax
assets at December 31, 2004. The benefit for income taxes in 2004 is comprised
of tax expense from foreign operations and state taxes, offset by a deferred tax
benefit of approximately $10.2 million.

YEAR ENDED 2003 COMPARED TO 2002

Net Sales. Net sales increased $22.5 million or 7.2% to $337.3 million for
the year ended December 31, 2003 from $314.8 million for the year ended December
31, 2002. International net sales were approximately $138.1 million for the year
ended December 31, 2003 or 41.0% of net sales and $114.6 million for the year
ended December 31, 2002 or 36.4% of net sales. During the year ended December
31, 2002, we acquired ENI, Tenta and IPC. These acquisitions increased our net
sales by $9.9 million for the year ended December 31, 2003, as they were
included in net sales for the full period in 2003 while net sales for the year
ended December 31, 2002 includes their revenues only from the date of
acquisition. The remaining increase in 2003 was the result of increased service
revenues as well as increased demand for our products from our semiconductor
capital equipment manufacturer customers, as compared to the year ended December
31, 2002. The increase in service revenues, which represents less than 10% of
total net sales, has been driven by the prolonged slow-down in the semiconductor
capital equipment market, as customers tried to maintain equipment rather than
invest in new capital.

Gross Profit. Gross profit as a percentage of net sales increased to 35.0%
for the year ended December 31, 2003 from 33.6% for the year ended December 31,
2002. The increase in gross profit percent was mainly due to a slight increase
in volumes that increased our fixed cost absorption and a favorable foreign
exchange impact, offset by higher materials costs of new products in initial
production runs.

Research and Development. Research and development expense increased $1.7
million or 3.6% to $47.7 million or 14.1% of net sales for the year ended
December 31, 2003 from $46.0 million or 14.6% of net sales for the year ended
December 31, 2002. The increase was due mainly to increased compensation expense
of $1.0 million, as a result of including a full year of costs in 2003 of the
companies acquired during 2002 and an increase in project material costs of $0.7
million.

Selling, General and Administrative. Selling, general and administrative
expenses decreased $7.9 million or 10.2% to $69.9 million or 20.7% of net sales
for the year ended December 31, 2003 from $77.8 million or 24.7% of net sales
for the year ended December 31, 2002. The decrease was due primarily to lower
compensation expense, as a result of lower headcount, of $3.5 million resulting
from cost savings initiatives and decreased professional fees of $2.5 million.

Amortization of Acquired Intangible Assets. For the year ended December
31, 2003, amortization expense was $14.7 million, an increase of $0.8 million or
5.7% from the $13.9 million for the year ended December 31, 2002. The increase
in amortization was due to a full year of amortization of intangibles in 2003
from companies acquired in 2002.

Restructuring, Asset Impairment and Other Charges. As a result of our
various acquisitions from 2000 through 2002 and the downturn in the
semiconductor capital equipment market which began in 2000, we had redundant
activities and excess manufacturing capacity and office space. Therefore in
2002, and continuing through the first quarter of 2004, we implemented
restructuring activities to rationalize manufacturing operations and reduce
operating expenses. As a result, in 2002 we took a restructuring charge of $2.7
million which consisted of $1.2 million related to exiting leased facilities,
$0.6 million of severance cost related to 225 terminated employees and an asset
impairment charge of $0.9 million.

During 2003, we recorded restructuring, asset impairment and other charges
of $1.6 million related to our restructuring activities. The charges consisted
of $0.4 million of severance costs related to workforce reductions, $1.1 million
of lease cost, professional fees and other costs related to facility
consolidations and an asset impairment charge of $0.1 million. The workforce
reduction was across all functional groups.

19

A summary of the restructuring charges, asset impairments and other charges
during 2002 and 2003, and the related accrual balance is outlined as follows:

The accruals for severance costs and lease payments are recorded in Other
accrued expenses and Other liabilities.

Purchase of In-process Technology. There was no purchase of in-process
research and development expenses in 2003. In-process research and development
of $8.4 million for the year ended December 31, 2002 arose from the acquisitions
we made in 2002.

In January 2002, we 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%. We believe
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 our
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. The significant projects were completed within
their scheduled 12 month expected period.

Interest Income (Expense), Net. For the year ended December 31, 2003, net
interest income was $1.1 million, a decrease of $0.4 million from the $1.5
million for the year ended December 31, 2002. The decrease in net interest
income in 2003 was mainly related to slightly lower investment balances and
lower interest rates in 2003.

Income from Litigation Settlement. On November 30, 2000, Applied Science
and Technology, Inc. ("ASTeX"), which we acquired 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 our patent and found
that Advanced Energy infringed the patent. On May 31, 2002, based on the jury's
findings, the Court entered a judgment on the infringement claim in favor of us
and against Advanced Energy, and awarded $4.2 million in damages to compensate
us for Advanced Energy's infringing activity. Advanced Energy filed motions to
overturn the verdict. During August of 2002, we entered into an agreement with
Advanced Energy whereby Advanced Energy agreed to pay the awarded damages amount
to us and withdraw its motions to overturn the verdict. We received the $4.2
million in September 2002, and recorded the amount as Income from litigation
settlement.

20

Other Income (Expense). During 2003, we recorded a gain of $0.9 million
from the early repayment of premiums related to a split dollar life insurance
policy covering our Chairman and CEO.

During 2001, we 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. 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, we considered the value of the note and warrants to be
impaired. Accordingly, during 2002, we recorded a charge of $4.1 million to
other expense for our estimate of the impairment on the note receivable and
warrants.

Provision (Benefit) for Income Taxes. We recorded a provision for income
taxes of $2.7 million for the year ended December 31, 2003, as compared to a tax
benefit of $2.0 million for the year ended December 31, 2002. As a result of
incurring significant operating losses since 2001, we determined that it was
more likely than not that our deferred tax assets may not be realized, and since
the fourth quarter of 2002 have established a full valuation allowance for our
net deferred tax assets. Accordingly, we did not record a deferred tax benefit
from the net operating loss incurred in the year ended December 31, 2003. The
provision for income taxes in 2003 was comprised of tax expense from foreign
operations and state taxes.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term marketable securities totaled $235.9
million at December 31, 2004 compared to $129.2 million at December 31, 2003.
This increase is mainly due to an increase of $66.4 million of cash generated
from operations during 2004 and net proceeds of approximately $32.5 million from
our public offering of common stock in the first quarter of 2004. Additionally,
we collected approximately $5.0 million from a note receivable that had been
previously written off in 2002. The primary driver in our current and
anticipated future cash flows is and will continue to be cash generated from
operations, consisting mainly of our net income and changes in operating assets
and liabilities. In periods when our sales are growing, higher sales to
customers will result in increased trade receivables, and inventories will
generally increase as we build products for future sales. This may result in
lower cash generated from operations. Conversely, in periods when our sales are
declining, our trade accounts receivable and inventory balances will generally
decrease, resulting in increased cash from operations.

Net cash provided by operating activities of $66.4 million for the year
ended December 31, 2004 resulted primarily from net income of $69.8 million, an
increase in operating liabilities of $16.8 million, non-cash charges of $27.8
million for depreciation and amortization, offset by an increase in operating
assets of $32.4 million, a deferred tax benefit of $10.2 million and a $5.0
million gain related to the collection of a previously written off note
receivable. The increase in operating assets consisted mainly of an increase in
accounts receivable of $15.2 million due to increased shipments resulting in
increased sales of $29.1 million in the fourth quarter of 2004 as compared to
the fourth quarter of 2003 and an increase in inventory of $15.9 million as a
result of increased production volumes in 2004 to support higher revenues. The
increase in operating liabilities consisted primarily of an increase in accounts
payable and accrued expenses of $7.2 million resulting from increased accrued
compensation, warranty reserves, accrued professional fees and non-income tax
related tax accruals and a $9.6 million increase in income taxes payable. Net
cash used in operating activities of $0.2 million for the year ended December
31, 2003 was impacted by the net loss of $16.4 million and an increase in
operating assets of $22.8 million, offset by non-cash charges of $28.2 million
for depreciation and amortization and an increase in operating liabilities of
$9.9 million. The increase in operating assets consisted mainly of an increase
in accounts receivable of $17.4 million due to the increased shipments in the
fourth quarter of 2003 as compared to the fourth quarter of 2002, which
contributed to a slight increase in our days sales outstanding from 53 days at
the end of 2002 to 58 days in 2003, and an increase in inventory of $6.7 million
as a result of increased production volumes in the fourth quarter of 2003. The
increase in operating liabilities consisted primarily of an increase in accounts
payable of $9.7 million resulting from increased production activity in the
fourth quarter.

Net cash used in investing activities of $44.2 million for the year ended
December 31, 2004 resulted primarily from the net purchases of $34.1 million of
available for sale investments mainly from the net

21

proceeds received from our stock offering, and the purchase of property, plant
and equipment of $18.3 million for investments in manufacturing equipment and
for the consolidation of our IT infrastructure, partially offset by the $5.0
million proceeds received from the collection of a note receivable previously
written off. Net cash used in investing activities of $21.4 million for the year
ended December 31, 2003 resulted mainly from the net purchases of $14.0 million
of available for sale securities, the purchase of property, plant and equipment
of $6.3 million, and the purchase of a small technology business for $2.2
million.

Net cash provided by financing activities of $39.7 million for the year
ended December 31, 2004 consisted primarily of $32.5 million in net proceeds
received from our common stock offering during 2004, $6.0 million in proceeds
from the exercise of stock options and purchases under the employee stock
purchase plan, net proceeds of $3.7 million from short-term borrowings, offset
by $2.6 million of principal payments on long-term debt. Net cash provided by
financing activities of $5.3 million for the year ended December 31, 2003
consisted of $8.6 million in proceeds from the exercise of stock options and
purchases under the employee stock purchase plan, net proceeds of $2.2 million
from short-term borrowings, offset by $5.5 million of principal payments on
long-term debt.

On July 30, 2003, our $40.0 million unsecured credit facility with two
domestic banks expired and we elected not to renew this facility. There had been
no borrowings made under this line of credit.

On August 3, 2004, we entered into an unsecured short-term LIBOR based loan
agreement with a bank to be utilized primarily by our Japanese subsidiary for
short-term liquidity purposes. The credit line, which expires on August 1, 2005,
provides for us to borrow in multiple currencies of up to an equivalent of $35.0
million U.S. dollars. At December 31, 2004, we had outstanding borrowings of
$14.6 million U.S. dollars, payable on demand, at an interest rate of 1.30%.

Certain of our foreign subsidiaries have credit lines and short-term
borrowing arrangements with various financial institutions which provide for
aggregate borrowings as of December 31, 2004 of up to $30.2 million, which
generally expire and are renewed in three month intervals. At December 31, 2004,
total borrowings outstanding under these arrangements totaled $7.8 million with
$22.4 million available for future borrowings.

We have provided financial guarantees for unsecured borrowings and have
standby letters of credit and performance bonds, some of which do not have fixed
expiration dates. At December 31, 2004, our maximum exposure as a result of
these standby letters of credit and performance bonds was approximately $1.2
million.

Future payments due under debt, lease and purchase commitment obligations
as of December 31, 2004 (in thousands) are as follows:

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

(1) The majority of the outstanding inventory purchase commitments of
approximately $63.6 million at December 31, 2004 are to be purchased within
the next 12 months. Additionally, approximately $27.1 million represents a
commitment to a third party engaged to provide certain computer equipment,
IT network services and IT support. This contract is for a period of
approximately six years beginning in September 2004 and has a significant
penalty for early termination. The actual timing of payments and

22

amounts may vary based on equipment deployment dates. However, the amount
noted represents the Company's expected obligation based on anticipated
deployment.

(2) Excluded from Other Long-Term Liabilities was $1.0 million of operating
leases related to restructuring charges that have been accrued on our
balance sheet as they are included in the Operating Leases amount above.

We believe that our working capital, together with the cash anticipated to
be generated from operations, will be sufficient to satisfy our estimated
working capital and planned capital expenditure requirements through at least
the next 12 months.

To the extent permitted by Massachusetts law, our Restated Articles of
Organization, as amended, require us to indemnify any of our current or former
officers or directors or any person who has served or is serving in any capacity
with respect to any of our employee benefit plans. Because no claim for
indemnification has been pursued by any person covered by the relevant
provisions of our Restated Articles of Organization, we believe that the
estimated exposure for these indemnification obligations is currently minimal.
Accordingly, we have no liabilities recorded for these requirements as of
December 31, 2004.

We also enter into standard indemnification agreements in the ordinary
course of business. Pursuant to these agreements, we indemnify, hold harmless
and agree to reimburse the indemnified party for losses suffered or incurred by
the indemnified party, generally our customers, in connection with any patent,
any other intellectual property infringement claim, or other specified claims,
by any third party with respect to our products. The term of these
indemnification agreements is generally perpetual any time after execution of
the agreement. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is, in some instances,
unlimited. We have never incurred costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, we believe the
estimated fair value of these agreements is minimal. Accordingly, we have no
liabilities recorded for these agreements as of December 31, 2004.

When as part of an acquisition, we acquire all of the stock or all of the
assets and liabilities of another company, we assume liability for certain
events or occurrences that took place prior to the date of acquisition. The
maximum potential amount of future payments we 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 we have not made
significant payments for these indemnifications. Accordingly, no liabilities
have been recorded for these obligations.

In conjunction with certain asset sales, we 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 we have not made significant payments for these indemnifications.

DERIVATIVES

We conduct our operations globally. Consequently, the results of our
operations are exposed to movements in foreign currency exchange rates. We hedge
a portion of our 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 in the
Consolidated Statements of Stockholder's Equity 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 in the
Consolidated Statements of Operations. As of December 31, 2004, the amount that
will be reclassified from accumulated other comprehensive income to cost of
sales over the next twelve months is an

23

unrealized loss of $1.0 million, net of taxes. The ineffective portion of the
derivatives is recorded in cost of sales and were immaterial in 2004, 2003 and
2002, respectively.

We hedge 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 or loss on these derivatives was
immaterial in 2004, 2003 and 2002.

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 Consolidated Statements 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 Statements of Cash Flows as investing
activities. We do not hold or issue derivative financial instruments for trading
purposes.

There were forward exchange contracts with notional amounts totaling $26.3
million outstanding at December 31, 2004. Of such forward exchange contracts,
$21.6 million were outstanding to exchange Japanese yen for US dollars. There
were forward exchange contracts with notional amounts totaling $41.0 million
outstanding at December 31, 2003 of which $32.5 million were outstanding to
exchange Japanese yen for US dollars. There were forward exchange contracts with
notional amounts totaling $23.3 million outstanding at December 31, 2002 of
which $17.2 million were outstanding to exchange Japanese yen for US dollars.
Local currency purchased options with notional amounts totaling $0, $0, and $5.1
million to exchange foreign currencies for U.S. dollars were outstanding at
December 31, 2004, 2003 and 2002, respectively.

Foreign exchange gains and losses on forward exchange contracts and
currency options which did not qualify for hedge accounting were immaterial
during 2004, 2003 and 2002. 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 loss of $1.7 million and $1.4
million for the years ended December 31, 2004 and 2003, respectively, and a gain
of $0.5 million for the year ended December 31, 2002.

The fair values of local currency purchased options at December 31, 2002,
which were obtained through dealer quotes, were immaterial. There were no
purchased options outstanding at December 31, 2004 or 2003.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any financial partnerships with unconsolidated entities,
such as entities often referred to as structured finance, special purpose
entities or variable interest entities which are often established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. Accordingly, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had such relationships.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March 2004, the Financial Accounting Standards Board ("FASB") issued
EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"), which provides new guidance
for assessing impairment losses on debt and equity investments. Additionally,
EITF 03-1 includes new disclosure requirements for investments that are deemed
to be temporarily impaired. In September 2004, the FASB delayed the accounting
provisions of EITF 03-1; however, the disclosure requirements remain effective
and have been adopted for our fiscal year ended December 31, 2004. We will
evaluate the effect, if any, of EITF 03-1 when final guidance is released.

In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs" ("SFAS 151"). SFAS 151 amends ARB No. 43,
Chapter 4, "Inventory Pricing." This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material, and requires those items be recognized as current period charges
regardless of whether they meet the
24

criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We are currently
assessing the potential impact of SFAS 151.

In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"). SFAS 123R replaces SFAS
123 and supersedes APB 25. SFAS 123R focuses primarily on the accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123R requires companies to recognize in the statement of
operations the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with
limited exceptions). This statement is effective as of the first reporting
period that begins after June 15, 2005. Accordingly, we will adopt SFAS 123R in
the third quarter of fiscal 2005 and expect to use the modified-prospective
transition method and will not restate prior periods for the adoption of SFAS
123R. Although we are currently evaluating the provisions of SFAS 123R and its
implications on our employee benefit plans, we believe that the adoption of this
standard, based on the terms of our options outstanding at December 31, 2004,
will have a material effect on net income in the second half of 2005.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

We estimate that approximately 77%, 69%, and 70% of our net sales for the
years ended December 31, 2004, 2003 and 2002, respectively, were to
semiconductor capital equipment manufacturers and semiconductor device
manufacturers, and we expect that sales to such customers will continue to
account for a substantial majority of our sales. Our 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 our 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. In 2001, 2002 and the first half of 2003, we experienced
a significant reduction in demand from OEM customers, and lower gross margins
due to reduced absorption of manufacturing overhead. In addition, many
semiconductor manufacturers have operations and customers in Asia, a region that
in recent years has experienced serious economic problems including currency
devaluations, debt defaults, lack of liquidity and recessions. We cannot be
certain that semiconductor downturns will not continue or recur. A decline in
the level of orders as a result of any downturn or slowdown in the semiconductor
capital equipment industry could have a material adverse effect on our business,
financial condition and results of operations.

OUR QUARTERLY OPERATING RESULTS HAVE VARIED, AND ARE LIKELY TO CONTINUE TO VARY
SIGNIFICANTLY. THIS MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR COMMON
STOCK.

A substantial portion of our shipments occurs shortly after an order is
received and therefore we operate with a low level of backlog. As a result, a
decrease in demand for our products from one or more customers could occur with
limited advance notice and could have a material adverse effect on our results
of operations in any particular period. A significant percentage of our 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 our results of
operations. Factors that could cause fluctuations in our net sales include:

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

- shipment delays;

- disruption in sources of supply;

25

- seasonal variations of capital spending by customers;

- production capacity constraints; and

- specific features requested by customers.

In addition, our quarterly operating results may be adversely affected due
to charges incurred in a particular quarter, for example, relating to inventory
obsolescence, bad debt or asset impairments.

As a result of the factors discussed above, it is likely that we may in the
future experience quarterly or annual fluctuations and that, in one or more
future quarters, our operating results may fall below the expectations of public
market analysts or investors. In any such event, the price of our common stock
could decline significantly.

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

Our top ten customers accounted for approximately 49%, 42%, and 49% of our
net sales for the years ended December 31, 2004, 2003 and 2002, respectively.
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 our business, financial condition and results of
operations. During the years ended December 31, 2004, 2003 and 2002, one
customer, Applied Materials, accounted for approximately 20%, 18%, and 23%,
respectively, of our net sales. None of our significant customers, including
Applied Materials, has entered into an agreement requiring it to purchase any
minimum quantity of our products. The demand for our products from our
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 of net sales
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. Our future success will continue to
depend upon:

- our ability to maintain relationships with existing key customers;

- our ability to attract new customers;

- our ability to introduce new products in a timely manner for existing and
new customers; and

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

AS PART OF OUR BUSINESS STRATEGY, WE HAVE ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT
AND COSTLY TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR
DIVERT MANAGEMENT ATTENTION.

We made several acquisitions in the years 2000 through 2002. As a part of
our business strategy, we 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 our ongoing business and
distraction of management, expenses related to the acquisition and potential
unknown liabilities associated with acquired businesses. If we are not
successful in completing acquisitions that we may pursue in the future, we may
be required to reevaluate our growth strategy, and we may incur substantial
expenses and devote significant management time and resources in seeking to
complete proposed acquisitions that will not generate benefits for us.

In addition, with future acquisitions, we could use substantial portions of
our available cash as all or a portion of the purchase price. We could also
issue additional securities as consideration for these acquisitions, which could
cause significant stockholder dilution. Our prior acquisitions and any future
acquisitions may not ultimately help us achieve our strategic goals and may pose
other risks to us.

As a result of our previous acquisitions, we have added several different
decentralized operating and accounting systems, resulting in a complex reporting
environment. We expect that we will need to continue to

26

modify our accounting policies, internal controls, procedures and compliance
programs to provide consistency across all our operations. In order to increase
efficiency and operating effectiveness and improve corporate visibility into our
decentralized operations, we are currently in the planning and design phase of
implementing a new worldwide Enterprise Resource Planning ("ERP") system. We
expect to implement the ERP system by converting our operations in phases over
the next few years, beginning in the second half of 2005. Although we have a
detailed plan to accomplish the ERP implementation, we may risk potential
disruption of our operations during the conversion periods, the implementation
could require significantly more management time than currently estimated and we
could incur significantly higher implementation costs than currently estimated.

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

The markets for our products are highly competitive. Our competitive
success often depends upon factors outside of our 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,
our success will depend in part on our ability to have semiconductor device
manufacturers specify that our products be used at their semiconductor
fabrication facilities. In addition, we may encounter difficulties in changing
established relationships of competitors that already have a large installed
base of products within such semiconductor fabrication facilities.

IF OUR PRODUCTS ARE NOT DESIGNED INTO SUCCESSIVE GENERATIONS OF OUR CUSTOMERS'
PRODUCTS, WE 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. Our success depends on our
products being designed into new generations of equipment for the semiconductor
industry. We must develop products that are technologically advanced so that
they are positioned to be chosen for use in each successive generation of
semiconductor capital equipment. If customers do not choose our products, our
net sales may be reduced during the lifespan of our customers' products. In
addition, we must make a significant capital investment to develop products for
our customers well before our products are introduced and before we can be sure
that we will recover our capital investment through sales to the customers in
significant volume. We are thus also at risk during the development phase that
our products may fail to meet our customers' technical or cost requirements and
may be replaced by a competitive product or alternative technology solution. If
that happens, we may be unable to recover our development costs.

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

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

27

WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY.

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

- historical customer relationships;

- product quality, performance and price;

- breadth of product line;

- manufacturing capabilities; and

- customer service and support.

Although we believe that we compete favorably with respect to these
factors, there can be no assurance that we will continue to do so. We encounter
substantial competition in most of our product lines. Certain of our competitors
may have greater financial and other resources than we have. In some cases,
competitors are smaller than we are, but well established in specific product
niches. We may encounter difficulties in changing established relationships of
competitors with a large installed base of products at such customers'
fabrication facilities. In addition, our 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 our products.

SALES TO FOREIGN MARKETS CONSTITUTE A SUBSTANTIAL PORTION OF OUR NET SALES;
THEREFORE, OUR 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 our foreign subsidiaries, but exclude
direct export sales. International sales accounted for approximately 34%, 41%,
and 36% of net sales for the years ended December 31, 2004, 2003 and 2002,
respectively, a significant portion of which were sales to Japan.

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

RISKS RELATING TO OUR INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.

We have substantial international sales, service and manufacturing
operations in Europe and Asia, which expose us to foreign operational and
political risks that may harm our business. Our international operations are
subject to inherent risks, which may adversely affect us, including:

- political and economic instability in countries where we have sales,
service and manufacturing operations;

- 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.
28

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

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

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

KEY PERSONNEL MAY BE DIFFICULT TO ATTRACT AND RETAIN.

Our 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 our
business, financial condition and results of operations. We believe that our
future success will depend in part on our ability to attract and retain highly
skilled technical, financial, managerial and marketing personnel. We cannot be
certain that we will be successful in attracting and retaining such personnel.

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

As of December 31, 2004, we owned 221 U.S. patents, 156 foreign patents and
had 91 pending U.S. patent applications. Although we seek to protect our
intellectual property rights through patents, copyrights, trade secrets and
other measures, we cannot be certain that:

- we will be able to protect our technology adequately;

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

- any of our pending patent applications will be issued;

- intellectual property laws will protect our intellectual property rights;
or

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

PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS MAY RESULT IN COSTLY LITIGATION.

Litigation may be necessary in order to enforce our patents, copyrights or
other intellectual property rights, to protect our trade secrets, to determine
the validity and scope of the proprietary rights of others or to defend against
claims of infringement. We have been in the past, and currently are, involved in
lawsuits enforcing and defending our intellectual property rights and may be
involved in such litigation in the future. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, financial condition and results of operations.

We may need to expend significant time and expense to protect our
intellectual property regardless of the validity or successful outcome of such
intellectual property claims. If we lose any litigation, we may be required to
seek licenses from others or change, stop manufacturing or stop selling some of
our products.

29

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

The stock market has from time to time experienced, and is likely to
continue to experience, extreme price and volume fluctuations. 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 our common stock has fluctuated greatly
since our 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 we were the object of securities class action litigation, it
could result in substantial costs and a diversion of our management's attention
and resources.

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

We rely on sole, limited source suppliers, and international suppliers, for
a few of our components and subassemblies that are critical to the manufacturing
of our 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 our suppliers to develop technologically
advanced products to support our growth and development of new systems.

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

WE ARE SUBJECT TO GOVERNMENTAL REGULATIONS. IF WE FAIL TO COMPLY WITH THESE
REGULATIONS, OUR BUSINESS COULD BE HARMED.

We are subject to federal, state, local and foreign regulations, including
environmental regulations and regulations relating to the design and operation
of our products. We must ensure that the affected products meet a variety of
standards, many of which vary across the countries in which our systems are
used. For example, the European Union has published directives specifically
relating to power supplies. In addition, the European Union has issued
directives relating to future regulation of recycling and hazardous substances,
which may be applicable to our products, or which some customers may voluntarily
elect to adhere to. We must comply with any applicable directive in order to
ship affected products into countries that are members of the European Union. We
believe we are in compliance with current applicable regulations, directives and
standards and have obtained all necessary permits, approvals, and authorizations
to conduct our business. However, compliance with future regulations, directives
and standards could require us to modify or redesign certain systems, make
capital expenditures or incur substantial costs. If we do not comply with
current or future regulations, directives and standards:

- we could be subject to fines;

- our production could be suspended; or

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

30

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

As of December 31, 2004, John R. Bertucci, our Chairman and Chief Executive
Officer and certain members of his family, in the aggregate, beneficially owned
approximately 18% of our outstanding common stock. As a result, these
stockholders, acting together, are able to exert substantial influence over our
actions. Pursuant to the acquisition of the ENI Business of Emerson Electric Co.
("Emerson"), we issued approximately 12,000,000 shares of common stock to
Emerson and its wholly owned subsidiary, Astec America, Inc. Emerson owned
approximately 19% of our outstanding common stock as of December 31, 2004, and
James G. Berges, the President and a director of Emerson, is a member of our
board of directors. Accordingly, Emerson is able to exert substantial influence
over our actions.

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

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 price of the common stock. Such provisions may also inhibit
increases in the market price of the common stock that could result from
takeover attempts. For example, while we have no present plans to issue any
preferred stock, our 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 us. The issuance of preferred stock could
adversely affect the voting power of the holders of our common stock, including
the loss of voting control to others. In addition, our 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 us.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK AND SENSITIVITY ANALYSIS

Our primary exposures to market risks include fluctuations in interest
rates on our investment portfolio, short and long term debt as well as
fluctuations in foreign currency exchange rates.

FOREIGN EXCHANGE RATE RISK

We enter into local currency purchased options and forward exchange
contracts to reduce currency exposure arising from intercompany sales of
inventory. There were no local currency purchased options outstanding at
December 31, 2004 or 2003.

There were forward exchange contracts with notional amounts totaling $26.3
million and $41.0 million outstanding at December 31, 2004 and 2003,
respectively. Of such forward exchange contracts, $21.6 million and $32.5
million, respectively, were outstanding to exchange Japanese yen for US dollars
with the remaining amounts relating to contracts to exchange the British pound
and Euro for US dollars. The potential fair value loss for a hypothetical 10%
adverse change in the forward currency exchange rate on our forward exchange
contracts at December 31, 2004 and 2003 would be $3.1 million and $4.8 million,
respectively. The potential losses in 2004 and 2003 were estimated by
calculating the fair value of the forward exchange contracts at December 31,
2004 and 2003 and comparing that with those calculated using the hypothetical
forward currency exchange rates.

At December 31, 2004, MKS had $22.4 million related to short-term
borrowings and current portion of long-term debt 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 $2.5 million. The potential increase in
fair value was estimated by calculating the fair value of the short-term
borrowings at December 31, 2004 and comparing that with the fair value using the
hypothetical year end exchange rate.

31

At December 31, 2003, MKS had $18.7 million related to short-term
borrowings and current portion of long-term debt 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 $2.1 million. The potential increase in
fair value was estimated by calculating the fair value of the short-term
borrowings at December 31, 2003 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 our cash and investment
portfolio at December 31, 2004 and 2003 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.

Our total long-term debt outstanding, including the current portion, at
December 31, 2004 and 2003, was $8.7 million and $11.2 million, respectively,
and consisted mainly of a mortgage note and industrial development revenue bond.
The interest rates on these debt instruments are primarily variable and range
from 1.8% to 4.0% at December 31, 2004 and 1.2% to 4.0% at December 31, 2003.
Due to the immaterial amounts of the outstanding debt, a hypothetical change of
10% in interest rates would not have a material effect on our near-term
financial condition or results of operations.

From time to time, MKS has outstanding short-term borrowings with variable
interest rates, primarily denominated in Japanese yen. At December 31, 2004 and
2003, we had $22.4 million and $17.7 million, respectively, outstanding related
to these short-term borrowings at interest rates ranging from 1.13% to 1.50%.
Due to the short-term nature and amount of this short-term debt, a hypothetical
change of 10% in interest rates would not have a material effect on our
near-term financial condition or results of operations.

32

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Directors and Shareholders of
MKS Instruments, Inc.:

We have completed an integrated audit of MKS Instruments, Inc.'s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, 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,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, 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. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 of financial statements
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 provide a
reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Management's
Annual Report on Internal Control Over Financial Reporting appearing under Item
9A, that the Company maintained effective internal control over financial
reporting as of December 31, 2004 based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control -- Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external

33

purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Boston, Massachusetts
March 14, 2005

34

MKS INSTRUMENTS, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial
statements.
35

MKS INSTRUMENTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of the consolidated financial
statements.
36

MKS INSTRUMENTS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

MKS INSTRUMENTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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 and is a leading worldwide
provider of instruments, components, subsystems and process control solutions
that measure, control, power and monitor critical parameters of semiconductor
and other advanced manufacturing processes. MKS is managed as one operating
segment which is organized around three product groups: Instruments and Control
Systems, Power and Reactive Gas Products and Vacuum Products. MKS' products are
derived from its 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.

2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of MKS
Instruments, Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.

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:

Options outstanding of 5,513,054, 8,897,899 and 8,284,693 during the years
ended December 31, 2004, 2003 and 2002, respectively, are excluded from the
calculation of diluted net income (loss) per common share because their
inclusion would be anti-dilutive.

STOCK-BASED COMPENSATION

The Company has several stock-based employee compensation plans. The
Company accounts for stock-based awards to employees using the intrinsic value
method as prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.

39

MKS INSTRUMENTS, INC.

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

Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts with fixed exercise prices at least equal to the fair market
value of the Company's common stock at the date of grant. The Company has
adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," ("SFAS 123") through disclosure only.

The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of SFAS
123 to stock-based employee awards:

There is no tax benefit included in the stock-based employee compensation
expense determined under the fair-value-based method for the years ended
December 31, 2003 and 2002, as the Company had a full valuation allowance for
its net deferred tax assets during 2002 and 2003. For 2004, stock-based employee
compensation expense included a tax benefit.

The weighted average grant date fair value of options granted during 2004,
2003 and 2002 was $11.24, $15.91 and $14.22 per option, respectively. The fair
value of options at the date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:

The weighted average fair value of employee stock purchase rights granted
in 2004, 2003 and 2002 was $7.05, $7.08 and $9.35, respectively. The fair value
of the employees' purchase rights was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:

40

MKS INSTRUMENTS, INC.

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

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.
Income and expense accounts are translated at the average exchange rates
prevailing during the year. The resulting translation adjustments are included
in accumulated other comprehensive income in consolidated stockholders' equity.
Foreign exchange transaction gains and losses were immaterial in 2004, 2003 and
2002.

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. In most transactions, the Company has no obligations to
customers after the date products are shipped other than pursuant to warranty
obligations. In some instances, the Company provides installation and training
to customers after the product has been shipped. In accordance with the Emerging
Issues Task Force ("EITF") 00-21 "Accounting For Revenue Arrangements With
Multiple Deliverables," the Company allocates the revenue between the multiple
elements based upon fair value and defers the revenue related to the undelivered
elements until the installation or training is complete. Fair value is the price
charged when the element is sold separately. 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 a maturity date of three months or less
at the date of purchase are considered to be cash equivalents.

The fair value of short-term available-for-sale investments with maturities
or estimated lives of less than one year consists of the following:

41

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
or estimated lives 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 gross
unrealized losses on available-for-sale investments were not material at
December 31, 2004 and 2003. Realized gains (losses) on securities were
immaterial in 2004, 2003 and 2002. The cost of securities sold is based on the
specific identification method.

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.

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

42

MKS INSTRUMENTS, INC.

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

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 on an annual basis during the
fourth quarter of each fiscal year, 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 and consist mainly
of compensation related expenses and project materials. The Company's research
and development efforts include numerous projects which generally have a
duration of 12 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
immaterial in 2004, 2003 and 2002.

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
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

43

MKS INSTRUMENTS, INC.

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

was made. During the fourth quarter of 2004, after examining a number of
factors, including historical results and near term earnings projections, the
Company determined that it was more likely than not that it would realize all of
its net deferred tax assets, except for those related to certain state tax
credits and adjusted the valuation allowance at December 31, 2004.

On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was
signed into law. The Act contains a provision allowing U.S. multinational
companies a one-time incentive to repatriate foreign earnings at an effective
tax rate of 5.25%. The Company has started an evaluation of the effects of the
repatriation provision but does not anticipate it will complete this evaluation
until some time after Congress and Treasury issue further guidance. Through
December 31, 2004, the Company has not provided deferred income taxes on the
undistributed earnings of its foreign subsidiaries because such earnings were
intended to be permanently reinvested outside the U.S. Determination of the
potential deferred income tax liability on these undistributed earnings is not
practicable because such liability, if any, is dependent on circumstances
existing if and when remittance occurs. At December 31, 2004 the Company had
$50,037,549 of undistributed earnings in its foreign subsidiaries.

NEW ACCOUNTING PRONOUNCEMENTS

In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1"), which provides new guidance for assessing impairment losses on
debt and equity investments. Additionally, EITF 03-1 includes new disclosure
requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of EITF 03-1;
however, the disclosure requirements remain effective and have been adopted for
the Company's fiscal year ended December 31, 2004. The Company will evaluate the
effect, if any, of EITF 03-1 when final guidance is released.

In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs" ("SFAS 151"). SFAS 151 amends ARB No. 43,
Chapter 4, "Inventory Pricing." This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material, and requires those items be recognized as current period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. SFAS 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company is currently assessing the
potential impact of SFAS 151.

In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"). SFAS 123R replaces SFAS
123 and supersedes APB 25. SFAS 123R focuses primarily on the accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123R requires companies to recognize in the statement of
operations the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards (with
limited exceptions). This statement is effective as of the first reporting
period that begins after June 15, 2005. Accordingly, the Company will adopt SFAS
123R in its third quarter of fiscal 2005 and expects to use the
modified-prospective transition method and will not restate prior periods for
the adoption of SFAS 123R. Although the Company is currently evaluating the
provisions of SFAS 123R and its implications on its employee benefit plans, it
believes that the adoption of this standard, based on the terms of the options
outstanding at December 31, 2004, will have a material effect on net income in
the second half of 2005.

44

MKS INSTRUMENTS, INC.

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

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 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, 2004, the amount that
will be reclassified from accumulated other comprehensive income to cost of
sales over the next twelve months is an unrealized loss of $991,000, net of
taxes. The ineffective portion of the derivatives is recorded in cost of sales
and was immaterial in 2004, 2003 and 2002.

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 immaterial in 2004, 2003 and 2002.

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
$26,301,000 outstanding at December 31, 2004. Of such forward exchange
contracts, $21,550,000 were outstanding to exchange Japanese yen for U.S.
dollars. There were forward exchange contracts with notional amounts totaling
$41,018,000 outstanding at December 31, 2003 of which $32,488,000 were
outstanding to exchange Japanese yen for US dollars. There were forward exchange
contracts with notional amounts totaling $23,287,000 outstanding at December 31,
2002 of which $17,213,000 were outstanding to exchange Japanese yen for U.S.
dollars. Local
45

MKS INSTRUMENTS, INC.

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

currency purchased options with notional amounts totaling $5,053,000 to exchange
foreign currencies for U.S. dollars were outstanding at December 31, 2002. There
were no local currency purchased options outstanding at December 31, 2004 and
2003.

Foreign exchange gains on forward exchange contracts which did not qualify
for hedge accounting were immaterial during 2004, 2003 and 2002. 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
loss of $1,666,000 and $1,411,000 for the years ended December 31, 2004 and 2003
and a gain of $452,000 for the year ended December 31, 2002.

The fair values of forward exchange contracts at December 31, 2004 and
2003, determined by applying period end currency exchange rates to the notional
contract amounts, amounted to an unrealized loss of $1,479,000 and $2,081,000,
respectively. The fair values of local currency purchased options at December
31, 2002 were immaterial. There were no purchased options outstanding at
December 31, 2004 or 2003.

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 some banks with which it has borrowings. 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. The Company's customers are primarily
concentrated in the semiconductor industry, and a limited number of customers
account for a significant portion of the Company's revenues. The Company
regularly monitors the creditworthiness of its customers and believes it has
adequately provided for potential credit loss exposures. Credit is extended for
all customers based on financial condition and collateral is not required.

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:

46

MKS INSTRUMENTS, INC.

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

5) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

Depreciation and amortization of property, plant and equipment totaled
$13,074,000, $13,508,000 and $14,830,000 for the years ended December 31, 2004,
2003 and 2002, respectively.

6) DEBT

CREDIT AGREEMENTS AND SHORT-TERM BORROWINGS

On August 3, 2004, the Company entered into an unsecured short-term LIBOR
based loan agreement with a bank to be utilized primarily by its Japanese
subsidiary for short-term liquidity purposes. The credit line, which expires on
August 1, 2005, provides for the Company to borrow in multiple currencies of up
to an equivalent of $35,000,000 U.S. dollars. At December 31, 2004, the Company
had outstanding borrowings of $14,608,000 U.S. dollars, payable on demand, at an
interest rate of 1.30%.

Additionally, the Company's Japanese subsidiary has lines of credit and
short-term borrowing arrangements with various financial institutions which
provide for aggregate borrowings as of December 31, 2004 of up to $30,191,000,
which generally expire and are renewed at three month intervals. At December 31,
2004 and 2003, total borrowings outstanding under these arrangements were
$7,790,000 and $17,736,000, respectively, at interest rates of 1.24% at December
31, 2004 and ranging from 1.23% to 1.50% at December 31, 2003.

LONG-TERM DEBT

Long-term debt consists of the following:

47

MKS INSTRUMENTS, INC.

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

In connection with the purchase of Telvac Engineering, Ltd., the Company
issued term loans of $752,000. Principal payments of $61,000 were 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 fixed interest
rate for the term loan is 4.0% and the remaining principal due as of December
31, 2004 was $640,000.

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, 2004 the interest rate was 1.80%.
The bond is collateralized by the building. The remaining principal balance
outstanding at December 31, 2004 was $5,000,000. The net book value of the
building at December 31, 2004 was approximately $10,358,000.

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,
2004 was $3,096,000 with a variable interest rate of 3.97%. The net book value
of the land and building at December 31, 2004 was approximately $18,128,000.

The Company had an outstanding term loan from a foreign bank, with
principal due on April 2, 2004. This loan was paid in full in 2004.

The Company had a loan outstanding from a foreign bank in the form of a
mortgage note at December 31, 2002 with a balance of $687,000 and an interest
rate of 1.88%. Principal and interest were payable in monthly installments
through 2005. The loan was collateralized by mortgages on certain of the
Company's foreign properties. This remaining principal balance was repaid in
full during 2003.

In connection with the purchase of On-Line Technologies, Inc., the Company
assumed term loans of $4,728,000. The principal and interest accrued were due in
two installments, the first installment on April 27, 2002, and the second
installment on April 27, 2003. This loan was paid off in full in 2003.

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

7) COMMITMENTS AND CONTINGENCIES

On July 12, 2004, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against MKS in federal district court in Delaware, seeking injunctive
relief and damages for alleged infringement of a patent held by Advanced Energy.
On August 30, 2004, MKS filed its answer to the complaint, denying Advanced
Energy's claims and stating a counterclaim seeking a declaratory judgment that
the claims of the patent are

48

MKS INSTRUMENTS, INC.

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

invalid, unenforceable and not infringed by MKS or its products. On March 1,
2005, the parties agreed to dismiss the case, without prejudice. Accordingly,
the court dismissed the case on March 11, 2005.

On January 12, 2004, Gas Research Institute ("GRI") brought suit in federal
district court in Illinois against MKS, On-Line Technologies, Inc. ("On-Line")
which MKS acquired in 2001, and another defendant, Advanced Fuel Research, Inc.
("AFR"), for breach of contract, misappropriation of trade secrets and related
claims relating to certain infra-red gas analysis technology allegedly developed
under a January 1995 Contract for Research between GRI and AFR. The technology
was alleged to have been incorporated into certain of MKS' products. GRI made
claims for damages, exemplary damages, attorney's fees and costs and injunctive
relief. MKS filed an answer, denying liability and asserting various defenses to
GRI's claims. MKS also asserted a cross-claim against co-defendant AFR, alleging
misrepresentation, breach of contract and breach of various duties owed by AFR,
and alleging that in the event MKS and On-Line are held liable to GRI, AFR would
be required to reimburse, indemnify, and hold harmless On-Line and us for any
such liability. On November 9, 2004, the parties entered into a settlement
agreement and the court dismissed the case, including cross-claims, pursuant to
the settlement.

On April 3, 2003, Advanced Energy filed suit against MKS in federal
district court in Colorado ("Colorado Action"), seeking a declaratory judgment
that Advanced Energy's Xstream product does not infringe three patents held by
MKS' subsidiary, Applied Science and Technology, Inc. ("ASTeX"). On May 14,
2003, MKS brought suit in federal district court in Delaware against Advanced
Energy for infringement of five ASTeX patents, including the three patents at
issue in the Colorado Action. MKS sought injunctive relief and damages for
Advanced Energy's infringement. These lawsuits are unrelated to the Advanced
Energy litigation described above. On December 24, 2003, the Colorado court
granted our motion to transfer Advanced Energy's Colorado Action to Delaware. In
connection with the jury trial, the parties agreed to present the jury with
representative claims from three of the five ASTeX patents. On July 23, 2004,
the jury found that Advanced Energy infringed all three patents. MKS has filed a
motion for a permanent injunction, which is pending before the court and the
parties are currently briefing post-trial motions in that case. The parties are
also awaiting a trial with respect to damages and associated claims of MKS and
certain remaining affirmative defenses and related claims of Advanced Energy.
That trial date has not yet been scheduled.

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 judgment 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 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 and
related claims. The suit sought injunctive relief and damages for infringement.
Perkin-Elmer, Inc. filed a counterclaim seeking invalidity of the patent, costs
and attorneys' fees. In June 2002, the defendants filed a motion for summary
judgment. In April 2003, the court granted the motion and dismissed the case.
MKS appealed this decision to the federal circuit court of appeals. On October
13, 2004, the federal circuit court of appeals reversed the lower court's
dismissal of certain claims in the case.

49

MKS INSTRUMENTS, INC.

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

Accordingly, the case has been remanded to the United States District Court in
Connecticut for further proceedings on the merits of the remaining claims. On
March 11, 2005, Perkin-Elmer, Inc. submitted to the court a stipulation agreeing
that they have infringed a specified claim of On-Line's patent and filed a
motion for summary judgment that such patent claim is invalid. On-Line intends
to file a reply to the summary judgment motion in the next few weeks. The
parties will then await the court's response to the motion.

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 2004 and
thereafter. Generally, the facility leases require the Company to pay
maintenance, insurance and real estate taxes. Rental expense under operating
leases totaled $8,344,000, $7,253,000 and $6,278,000, for the years ended
December 31, 2004, 2003 and 2002, respectively.

Minimum lease payments under operating leases are as follows:

As of December 31, 2004, the Company has entered into non-cancelable
purchase commitments for certain inventory components and other equipment and
services used in its normal operations. The majority of these purchase
commitments covered by these arrangements are for periods of less than one year
and aggregate to approximately $63,563,000. Additionally, the Company has
engaged a third party to provide certain computer equipment, IT network services
and IT support. This contract is for a period of approximately six years
beginning in September 2004 and has a significant penalty for early termination.
The obligation of approximately $27,100,000 will be paid over the term of the
arrangement. Annualized payments are expected to be approximately $5,000,000.

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 pursued 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, 2004.

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, any other intellectual property infringement claim,
or other specified claims, 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

50

MKS INSTRUMENTS, INC.

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

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, 2004.

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 is 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

ISSUANCE OF COMMON STOCK

On January 21, 2004, the Company issued 1,142,857 shares of its common
stock at $26.25 per share through a public offering. Proceeds of the offering,
net of underwriters discount and offering expenses, were $28,251,000. On January
23, 2004, the underwriters exercised their over-allotment option and therefore,
the Company issued an additional 171,429 shares of its common stock, which
generated net proceeds of $4,298,000.

STOCK PURCHASE PLANS

The Company's Third Amended and Restated 1999 Employee Stock Purchase Plan
(the "Purchase Plan") authorizes the issuance of up to an aggregate of 1,250,000
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 2004 and 2003 the Company issued 100,867 and
101,102 shares, respectively, of Common Stock to employees who participated in
the Purchase Plan at exercise prices of $19.86 and $14.44 in 2004, and $16.16
and $16.49 in 2003. On March 4, 2004, the board of directors approved, and on
May 13, 2004 the shareholders approved, an increase in the number of shares
available for issuance under the Purchase Plan from 700,000 shares to the
current 1,250,000 shares. As of December 31, 2004 there were 705,612 shares
reserved for future issuance under the Purchase Plan.

The Company's Second Amended and Restated International Employee Stock
Purchase Plan (the "Foreign Purchase Plan") authorizes the issuance of up to an
aggregate of 250,000 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

51

MKS INSTRUMENTS, INC.

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

(2) 85% of the closing price on the day that each offering terminates. During
2004 and 2003, the Company issued 21,786 and 25,809 shares of Common Stock to
employees who participated in the Foreign Purchase Plan at exercise prices of
$19.86 and $14.44, and $16.16 and $16.49 per share, respectively. On March 4,
2004, the board of directors approved, and on May 13, 2004 the shareholders
approved, an increase in the number of shares available for issuance under the
Purchase Plan from 75,000 shares to the current 250,000 shares. As of December
31, 2004 there were 163,389 shares reserved for future issuance under the
Foreign Purchase Plan.

STOCK OPTION PLANS

The Company's 2004 Stock Incentive Plan (the "2004 Plan") was adopted by
the board of directors on March 4, 2004 and approved by the shareholders on May
13, 2004. As of December 31, 2004, no shares were available for issuance under
the 2004 Plan. As of January 1, 2005, there were 2,691,955 shares available for
future issuance under the 2004 Plan, which amount shall increase each year by an
amount equal to 5% of the total outstanding shares of the Company's common stock
outstanding on January 1 of such year, provided that the maximum aggregate
number of shares of common stock which may be issued under the 2004 Plan is
15,000,000 shares (subject to adjustment for certain changes in MKS'
capitalization). The Company may grant options, restricted stock awards, stock
appreciation rights and other stock-based awards to employees, officers,
directors, consultants and advisors under the 2004 Plan. To date, no awards have
been granted under the 2004 Plan.

The Company's Second Restated 1995 Stock Incentive Plan (the "1995 Plan")
authorized, as of December 31, 2004, 14,347,091 shares of common stock for
issuance thereunder. As of January 1, 2005, 15,000,000 shares of common stock
were authorized for issuance thereunder. Pursuant to the terms of the 1995 Plan,
the number of shares available for issuance under the 1995 Plan has increased
annually by an amount equal to 5% of the total outstanding shares of the
Company's common stock outstanding on January 1 of such year, provided that that
the maximum aggregate number of common stock which may be issued under the 1995
Plan is 15,000,000 shares (subject to adjustment for certain changes in MKS'
capitalization). Pursuant to the 1995 Plan, the Company may grant options,
restricted stock or other stock-based awards to employees, officers, directors,
consultants and advisors. In March 2002, the board of directors approved, and in
May 2002, the shareholders approved an increase in the number of shares that may
be granted under the 1995 Plan to the current 15,000,000 shares. The 1995 Plan
will expire in November 2005. As of December 31, 2004 there were 2,879,864
shares reserved for future issuance under the 1995 Plan.

The Company's 1997 Director Stock Plan (the "1997 Director Plan") provides
for (i) the initial grant of options to purchase 20,000 shares of common stock
to each person who first becomes an outside director and (ii) annual grants of
options to purchase 12,000 shares of common stock on the date of the annual
meeting of shareholders. In December 2004, the board of directors amended the
1997 Director Plan to allow for all options granted on or after May 17, 2000 to
be exercisable within the three year period from the date of the director's
termination as director. On March 4, 2004, the board of directors approved, and
on May 13, 2004, the shareholders approved, an increase in the number of shares
available for issuance under the 1997 Director Plan from 300,000 shares to
750,000 shares. As of December 31, 2004 there were 475,500 shares reserved for
future issuance under the 1997 Director Plan.

On January 7, 2005, the Company accelerated the vesting of outstanding
options with an exercise price of $23.00 or greater. As a result of this action,
options to purchase approximately 1.6 million shares became exercisable on
January 7, 2005. No compensation expense will be recorded in 2005 related to
this action as these options had no intrinsic value on January 7, 2005. Under
the recently issued SFAS 123R, the Company will be required to apply the expense
recognition provisions under SFAS 123R beginning July 1, 2005. The reason that
the Company accelerated the vesting of the identified stock options was to
reduce the Company's compensation charge in periods subsequent to June 30, 2005.

52

MKS INSTRUMENTS, INC.

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

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

At December 31, 2004, 3,355,364 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 2004, 2003 and 2002 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 earliest of (1) the
next annual meeting, (2) 13 months from date of grant, or (3) the effective date
of an acquisition.

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, 2004:

53

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 2004, 2003 and 2002 effective tax rate to
the U.S. federal statutory rate follows:

54

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, 2004 and 2003 the significant components of the deferred
tax assets and deferred tax liabilities were as follows:

The Company incurred significant operating losses in fiscal 2003, 2002 and
2001. At December 31, 2003 a $22,933,000 valuation allowance was maintained
against the Company's net deferred tax assets. This valuation allowance was
maintained because the Company determined that it was more likely than not that
all of the deferred tax assets may not be realized.

55

MKS INSTRUMENTS, INC.

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

During the year ended December 31, 2004, after examining a number of
factors, including historical results and near term earnings projections, the
Company determined that it was more likely than not that it would realize all of
its net deferred tax assets, except for those related to certain state tax
credits.

As a result of this analysis the Company reduced its valuation allowance by
$20,063,000 at December 31, 2004 resulting in a net deferred tax asset of
$14,313,000. Of the total tax benefit from the reversal of the valuation
allowance, $3,850,000 was recorded as a reduction of goodwill and $5,271,000 was
recorded to additional paid-in capital for the tax benefit from the exercise of
stock options during both the current and prior years. The remaining valuation
allowance of $2,870,000 relates to state tax credits for which it is more likely
than not that they will not be realized.

At December 31, 2004, the Company had federal net operating loss
carryforwards of $4,681,000, including approximately $1,636,000 the utilization
of which may be limited by the change in ownership rules under Section 382 of
the Internal Revenue Code ("Section 382"). The Company also had federal general
business and minimum tax credit carryforwards ("credit carryforwards") of
$5,791,000 and $841,000 respectively. In addition, at December 31, 2004, the
Company had approximately $9,624,000 of state net operating loss carryforwards.
The federal net operating losses and general business credit carryforwards begin
to expire in 2021 and 2012, respectively. The state net operating loss
carryforwards begin to expire in 2008. Under the provisions of Section 382,
certain substantial changes in the Company's ownership may result in a
limitation on the amount of net operating loss and credit carryforwards that can
be used in future periods.

On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was
signed into law. The Act contains a provision allowing U.S. multinational
companies a one-time incentive to repatriate foreign earnings at an effective
tax rate of 5.25%. The Company has started an evaluation of the effects of the
repatriation provision but does not anticipate it will complete this evaluation
until some time after Congress and Treasury issue further guidance. Through
December 31, 2004, the Company has not provided deferred income taxes on the
undistributed earnings of its foreign subsidiaries because such earnings were
intended to be permanently reinvested outside the U.S.. Determination of the
potential deferred income tax liability on these undistributed earnings is not
practicable because such liability, if any, is dependent on circumstances
existing if and when remittance occurs. At December 31, 2004 the Company had
$50,037,549 of undistributed earnings in its foreign subsidiaries.

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 between 1% and
20% of their annual compensation to this plan, and, with respect to employees
who are age 50 and older, certain specified additional amounts, limited by an
annual maximum amount determined by the Internal Revenue Service. 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 $1,685,000, $1,503,000 and
$1,938,000 for 2004, 2003 and 2002, 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. The bonus
expense was $4,617,000 in 2004, was immaterial in 2003 and there was no bonus
expense in 2002.

The Company provides supplemental retirement benefits for certain of its
officers and executive officers. This obligation was not material at December
31, 2004.

56

MKS INSTRUMENTS, INC.

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

11) SEGMENT AND GEOGRAPHICAL INFORMATION AND SIGNIFICANT CUSTOMER

The Company operates in one segment for the development, manufacturing,
sales and servicing of products that measure, control, power and monitor
critical parameters of advanced manufacturing processes. The Company's chief
decision-maker reviews consolidated operating results to make decisions about
allocating resources and assessing performance for the entire Company.

Information about the Company's operations in different geographic regions
is presented in the tables below. 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.

The Company groups its products into three product groups. Net sales for
these product groups are as follows:

The Company had one customer comprising 20%, 18% and 23% of net sales for
the years ended December 31, 2004, 2003 and 2002, respectively. During the years
ended December 31, 2004, 2003 and 2002, the Company estimates that approximately
77%, 69% and 70% of its net sales, respectively, were to semiconductor capital
equipment manufacturers and semiconductor device manufacturers.

57

MKS INSTRUMENTS, INC.

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

12) ACQUISITIONS

On September 30, 2003, the Company acquired Wenzel Instruments, a privately
held developer of solid state MicroElectroMechanical System (MEMS) based vacuum
sensor technology for advanced manufacturing processes. This acquisition expands
our vacuum gauge product line offering to help meet current demand for process
control sensors with higher accuracy and a faster response in a smaller
footprint. The purchase price was $2,150,000 and was accounted for under the
purchase method of accounting. The purchase price was primarily allocated to the
assets acquired based upon their estimated fair values, with the full purchase
price being allocated to intangible assets as completed technology. This
intangible asset is being amortized over its estimated useful life of 5 years.
The results of operations are included in the Company's consolidated statement
of income as of and since the date of the purchase.

On January 31, 2002, MKS completed its acquisition of the ENI Business
("ENI") of Emerson Electric Co., 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. 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: six
years for completed technology, eight years for patents, and eight years for
customer relationships. The total weighted average amortizable life of the
acquired intangible assets is six 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

58

MKS INSTRUMENTS, INC.

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

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. The significant projects were completed within
their scheduled 12-month timeframe.

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. 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 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 privately held companies 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.
Acquired intangibles are being amortized over a weighted average of six years.

59

MKS INSTRUMENTS, INC.

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

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

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.

13) SALE OF ASSETS

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
had an annual interest rate of 9.0% and was scheduled to mature on August 7,
2004. 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. During
2004, the Company received $5,042,000 related to the collection of the note
receivable and accrued interest. This amount was recorded as a gain and included
in other income.

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

14) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

As a result of our various acquisitions from 2000 through 2002 and the
downturn in the semiconductor capital equipment market which began in 2000, we
had redundant activities and excess manufacturing capacity and office space.
Therefore in 2002, and continuing through the first quarter of 2004, we
implemented restructuring activities to rationalize manufacturing operations and
reduce operating expenses. 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.

During 2003, the Company continued its consolidation of recent acquisitions
that it initiated in 2002, and recorded restructuring, asset impairment and
other charges of $1,593,000. The charges in 2003 consisted of $356,000 of
severance costs related to workforce reductions, $1,145,000 of lease cost,
professional fees and other costs related to facility consolidations and an
asset impairment charge of $92,000. The workforce reduction was across all
functional groups.

60

MKS INSTRUMENTS, INC.

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

During 2004, we completed our enacted restructuring activities related to
the consolidation of operations from acquired companies when we exited an
additional leased facility and recorded a restructuring charge of $437,000.

The following table sets forth the components of the restructuring
activities initiated during 2004, 2003 and 2002, and the related accruals
remaining at December 31, 2004:

The remaining accruals for workforce reductions are expected to be paid by
September of 2005. The facilities consolidation charges will be paid over the
respective lease terms, the latest of which ends in 2008. The accrual for
severance costs and lease payments are recorded in Other accrued expenses and
Other liabilities.

INVENTORY WRITEDOWN

During the second quarter and fourth quarter of 2001, the Company recorded
significant charges to writedown excess and obsolete inventory to its estimated
net realizable value. The following is a summary of the activity related to this
writedown during 2001, 2002, 2003 and 2004:

61

MKS INSTRUMENTS, INC.

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

15) GOODWILL AND INTANGIBLE ASSETS

The Company adopted the provisions of SFAS 142 on January 1, 2002.
Accordingly, the Company ceased the ratable amortization of goodwill on that
date. In addition, 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.

The Company is required to perform an annual impairment test of its
goodwill under the provisions of SFAS 142. SFAS 142 requires that companies
identify and assess goodwill at the reporting unit level. Reporting units are
defined as operating segments or one level below an operating segment, referred
to as a component. The Company has determined that its reporting units are
components of its operating segment. The Company allocates goodwill to reporting
units at the time of acquisition and bases that allocation on which reporting
units will benefit from the acquired assets and liabilities. The fair value of
each reporting unit with goodwill is compared to its recorded book value. An
excess of book value over fair value indicates that an impairment of goodwill
exists. Fair value is based on a discounted cash flow analysis of expectations
of future earnings for each of the reporting units with goodwill. The Company
completed its annual impairment for 2004 in the fourth quarter. No adjustment to
goodwill was necessary.

The changes in the carrying amount of goodwill during the years ended
December 31, 2004 and 2003 were as follows:

Components of the Company's acquired intangible assets are comprised of the
following:

62

MKS INSTRUMENTS, INC.

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

Aggregate amortization expense related to acquired intangibles for the
years ended December 31, 2004, 2003 and 2002 were $14,764,000, $14,692,000 and
$13,897,000, respectively. Estimated amortization expense related to acquired
intangibles for each of the five succeeding years is as follows:

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 years ended December 31, were as follows:

17) OTHER ACCRUED EXPENSES

Other accrued expenses consist of:

18) RELATED PARTY TRANSACTIONS

The Vice President and General Manager of the Vacuum Products Group is the
general partner of Aspen Industrial Park Partnership, LLLP ("Aspen"). The
Company leases from Aspen certain facilities occupied by the Company's' Vacuum
Products Group in Boulder, Colorado. The Company paid Aspen $1,111,000,
$1,106,000 and $866,000 in 2004, 2003 and 2002, respectively, to lease such
facilities.

A director of the Company is also the president and a director of Emerson
Electric Co. ("Emerson"). As of December 31, 2004, Emerson was the beneficial
owner of approximately 19% of the outstanding shares of Common Stock. During
2004, 2003 and 2002, the Company purchased materials and administrative services
from Emerson and its subsidiaries totaling approximately $1,854,000, $1,403,000
and $1,156,000, respectively. In addition, in accordance with the terms of a
Shareholder's Agreement between the Company and Emerson, the Company paid the
expenses of Emerson relating to the registration of shares in connection with a
public offering of Common Stock that closed in January 2004. Such expenses were
$176,000.

In 2003, the Company recorded a gain of $927,000 from the early repayment
of premiums related to a split dollar life insurance policy covering the
Chairman of the Company. This gain was recorded in other income (expense) in the
consolidated statement of operations.

63

MKS INSTRUMENTS, INC.

SUPPLEMENTAL FINANCIAL DATA

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

(1) Net income for the quarter ended June 30, 2004 includes a gain of $5.0
million on the collection of a note receivable which had been written off in
2002. During the year ended December 31, 2003 and for the quarters ended
March 31, June 30 and September 30, 2004, a valuation allowance against net
deferred tax assets was maintained. Net income and net income per share for
those periods include tax expense which is comprised primarily of state and
foreign taxes. During the quarter ended December 31, 2004, the valuation
allowance was reduced against the net deferred tax assets. Net income and
net income per share for the quarter ended December 31, 2004 include a net
benefit for income taxes of $14.1 million, primarily from the benefit from
the reduction of the valuation allowance.

(2) Income (loss) from operations for the quarter ended December 31, 2003
includes restructuring charges of $1.0 million and an adjustment of $0.8
million to reduce depreciation expense.

(3) Net income (loss) for the quarter ended December 31, 2003 includes a gain of
$0.9 million from the early repayment of premiums related to a split dollar
life insurance policy covering the Chairman and CEO of the Company.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES

MKS' management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2004. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended ("the Exchange Act"), means controls and other
procedures of a

64

company that 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. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of December 31, 2004,
our chief executive officer and chief financial officer concluded that, as of
such date, our disclosure controls and procedures were effective at the
reasonable assurance level.

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of MKS is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under
the Exchange Act as a process designed by, or under the supervision of, the
company's principal executive and principal financial officers and effected by
the company's board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:

- Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the company;

- Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and

- Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2004. In making this assessment, MKS'
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.

Based on our assessment, management concluded that, as of December 31,
2004, our internal control over financial reporting was effective based on those
criteria.

Our management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears on pages 33 and 34.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There was no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the quarter ended December 31, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

65

ITEM 9B. OTHER INFORMATION

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", "Executive Officers", "Code of Ethics" and "Directors
-- Audit Committee Financial Expert" in our definitive proxy statement for the
2005 Annual Meeting of Stockholders, and 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 statement for the 2005 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 Officers -- Executive Compensation" in our definitive proxy statement
for the 2005 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 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 2005 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.

The information required by Item 201(d) of Regulation S-K is set forth
under the caption "Executive Officers -- Equity Compensation Plan Information"
in our definitive proxy statement for the 2005 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is set forth under the caption
"Executive Officers -- Certain Relationships and Related Transactions" in our
definitive proxy statement for the 2005 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 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is set forth under the caption
"Independent Registered Public Accounting Firm" in our definitive proxy
statement for the 2005 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.

66

PART IV

ITEM 15. EXHIBITS AND FINANCIAL SCHEDULES

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

1. Financial Statements. The following Consolidated Financial
Statements are included under Item 8 on this Annual Report on Form 10-K.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

2. Financial Statement Schedules

The following consolidated financial statement schedule is included in
this Annual Report on Form 10-K of 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. The following exhibits are filed as part of this Annual
Report on Form 10-K pursuant to Item 15(c).

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

+ 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.

(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) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-23621) for the quarter ended June 30, 2004.

(8) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 000-23621) for the year ended December 31, 2004.

(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 000-23621) for the quarter ended September 30, 2004.

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

(11) Incorporate by reference to Registrant's Current Report on Form 8-K filed
with the Security and Exchange Commission on February 25, 2005.

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

(13) 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.

(c) Exhibits.

MKS hereby files as exhibits to our Annual Report on Form 10-K those
exhibits listed in Item 15 above.

(d) Financial Statement Schedules

68

MKS INSTRUMENTS, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

69

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
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.