UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended September 30, 2005

[ ] 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

MKS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)

Massachusetts 04-2277512
(State or other jurisdiction (I.R.S. Employer
of 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

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No .
----- -----

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X .
----- -----

Number of shares outstanding of the issuer's common stock as of October 28,
2005: 54,251,483

MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Consolidated Balance Sheets -
September 30, 2005 and December 31, 2004 3

Consolidated Statements of Operations -
Three and nine months ended September 30, 2005 and 2004 4

Consolidated Statements of Cash Flows -
Nine months ended September 30, 2005 and 2004 5

Notes to Consolidated Financial Statements 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. 15

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 28

ITEM 4. CONTROLS AND PROCEDURES. 28

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. 29

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS. 29

ITEM 6. EXHIBITS. 30

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

September 30, December 31,
2005 2004
------------- ------------
(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents ................................... $159,989 $138,389
Short-term investments ...................................... 111,376 97,511
Trade accounts receivable, net .............................. 76,061 82,315
Inventories ................................................. 97,776 99,633
Deferred income taxes ....................................... 11,937 12,129
Other current assets ........................................ 13,723 9,908
-------- --------
Total current assets ..................................... 470,862 439,885
Long-term investments ....................................... 1,240 4,775
Property, plant and equipment, net .......................... 79,699 80,917
Goodwill, net ............................................... 255,337 255,740
Acquired intangible assets, net ............................. 30,560 41,604
Deferred income taxes ....................................... 2,597 2,184
Other assets ................................................ 2,473 3,572
-------- --------
Total assets ............................................. $842,768 $828,677
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ....................................... $ 19,419 $ 22,400
Current portion of long-term debt ........................... 1,429 2,069
Current portion of capital lease obligations ................ 394 40
Accounts payable ............................................ 20,319 23,338
Accrued compensation ........................................ 11,698 13,767
Income taxes payable ........................................ 8,943 9,133
Other accrued expenses ...................................... 21,095 21,438
-------- --------
Total current liabilities ................................ 83,297 92,185
Long-term debt ................................................. 5,595 6,667
Long-term portion of capital lease obligations ................. 843 80
Other liabilities .............................................. 3,569 3,111
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; none issued and outstanding .................. -- --
Common Stock, no par value, 200,000,000 shares authorized;
54,230,946 and 53,839,098 issued and outstanding at
September 30, 2005 and December 31, 2004, respectively ... 113 113
Additional paid-in capital .................................. 636,648 631,760
Retained earnings ........................................... 104,537 82,077
Accumulated other comprehensive income ...................... 8,166 12,684
-------- --------
Total stockholders' equity ............................... 749,464 726,634
-------- --------
Total liabilities and stockholders' equity ............... $842,768 $828,677
======== ========

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

MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------

Net sales .................................... $122,520 $139,651 $380,120 $424,221
Cost of sales ................................ 74,863 84,045 231,315 252,993
-------- -------- -------- --------
Gross profit ................................. 47,657 55,606 148,805 171,228

Research and development ..................... 13,684 14,201 42,922 43,157
Selling, general and administrative .......... 22,341 22,971 69,230 65,784
Amortization of acquired intangible assets ... 3,382 3,689 10,765 11,073
Restructuring ................................ (278) -- 176 437
-------- -------- -------- --------
Income from operations ....................... 8,528 14,745 25,712 50,777
Interest expense ............................. 186 100 611 384
Interest income .............................. 1,997 542 4,868 1,424
Other income ................................. -- -- -- 5,402
-------- -------- -------- --------
Income before income taxes ................... 10,339 15,187 29,969 57,219
Provision for income taxes ................... 3,115 3,037 7,509 11,495
-------- -------- -------- --------
Net income ................................... $ 7,224 $ 12,150 $ 22,460 $ 45,724
======== ======== ======== ========
Net income per share:
Basic ..................................... $ 0.13 $ 0.23 $ 0.42 $ 0.86
======== ======== ======== ========
Diluted ................................... $ 0.13 $ 0.22 $ 0.41 $ 0.83
======== ======== ======== ========
Weighted average common shares outstanding:
Basic ..................................... 54,146 53,602 54,000 53,466
======== ======== ======== ========
Diluted ................................... 54,743 54,302 54,529 54,785
======== ======== ======== ========

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

MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

Nine Months Ended
September 30,
----------------------
2005 2004
---------- ---------

Cash flows from operating activities:
Net income .......................................................................... $ 22,460 $ 45,724
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 19,792 20,460
Gain on collection of a note receivable .......................................... -- (5,042)
Deferred taxes ................................................................... (1,234) 501
Other ............................................................................ 1,065 (423)
Changes in operating assets and liabilities:
Trade accounts receivable ..................................................... 2,857 (20,399)
Inventories ................................................................... (896) (22,546)
Other current assets .......................................................... (3,014) (5,475)
Accrued expenses and other current liabilities ................................ 221 15,180
Accounts payable .............................................................. (1,666) 384
Income taxes payable .......................................................... 723 14,720
--------- ---------
Net cash provided by operating activities ........................................... 40,308 43,084
--------- ---------
Cash flows from investing activities:
Purchases of short-term and long-term available for sale investments ............. (181,868) (175,061)
Maturities and sales of short-term and long-term available for sale investments .. 171,394 126,677
Purchases of property, plant and equipment ....................................... (7,603) (13,983)
Proceeds from sale of property, plant and equipment .............................. -- 1,294
Proceeds from collection of a note receivable .................................... -- 5,042
Other ............................................................................ 846 1,023
--------- ---------
Net cash used in investing activities ............................................... (17,231) (55,008)
--------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings .............................................. 61,247 67,157
Payments on short-term borrowings ................................................ (62,175) (63,478)
Principal payments on long-term debt ............................................. (1,969) (2,139)
Proceeds from issuance of common stock, net of issuance costs .................... -- 32,549
Proceeds from exercise of stock options and employee stock purchase plan ......... 3,970 3,952
--------- ---------
Net cash provided by financing activities ........................................... 1,073 38,041
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ........................ (2,550) (642)
--------- ---------
Increase in cash and cash equivalents ............................................... 21,600 25,475
Cash and cash equivalents at beginning of period .................................... 138,389 74,660
--------- ---------
Cash and cash equivalents at end of period .......................................... $ 159,989 $ 100,135
========= =========

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

MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except per share data)

1) Basis of Presentation

The terms "MKS" and the "Company" refer to MKS Instruments, Inc. and its
subsidiaries. The interim financial data as of September 30, 2005 and for
the three and nine months ended September 30, 2005 and 2004 is unaudited;
however, in the opinion of MKS, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of the results for the interim periods. The unaudited
consolidated financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The consolidated financial statements should be read in
conjunction with the December 31, 2004 audited consolidated financial
statements and notes thereto included in the MKS Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 16, 2005.

In connection with the preparation of the accompanying financial
statements, the Company concluded that it was appropriate to classify its
investments in auction rate securities as short-term available-for-sale
marketable securities. Such investments were originally classified as cash
and cash equivalents at September 30, 2004. Accordingly, the Company has
revised the classification to exclude from cash and cash equivalents
$23,425,000 of auction rate securities at September 30, 2004, and made a
corresponding adjustment to reflect the gross purchases and sales of these
securities as investing activities in the accompanying Consolidated
Statement of Cash Flows. As a result, cash used in investing activities
increased by $23,425,000 for the nine months ended September 30, 2004. This
change in classification does not affect previously reported cash flows
from operations or cash flows from financing activities. Additionally,
certain immaterial amounts in prior periods have been reclassified to be
consistent with current period classifications.

The preparation of these consolidated 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 consolidated 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, accounts receivable,
inventory, intangible assets, goodwill, other long-lived assets, income
taxes, deferred tax valuation allowance 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.

2) 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 Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations. 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 Statement of
Financial Accounting Standards ("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.

MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Tables in thousands, except per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2005 2004 2005 2004
------- ------- -------- --------

Net income as reported .............................................. $ 7,224 $12,150 $ 22,460 $ 45,724
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all awards,
net of tax .................................................... (1,583) (6,125) (22,006) (18,075)
------- ------- -------- --------
Pro forma net income ............................................. $ 5,641 $ 6,025 $ 454 $ 27,649
======= ======= ======== ========

Basic net income per share:
As reported ...................................................... $ 0.13 $ 0.23 $ 0.42 $ 0.86
======= ======= ======== ========
Pro forma ........................................................ $ 0.10 $ 0.11 $ 0.01 $ 0.52
======= ======= ======== ========
Diluted net income per share:
As reported ...................................................... $ 0.13 $ 0.22 $ 0.41 $ 0.83
======= ======= ======== ========
Pro forma ........................................................ $ 0.10 $ 0.11 $ 0.01 $ 0.50
======= ======= ======== ========

There was no tax benefit included in the stock-based employee compensation
expense determined under the fair-value-based method for the three and nine
months ended September 30, 2004, respectively, as the Company had a full
valuation allowance for its net deferred tax assets. For the three and nine
months ended September 30, 2005, stock-based employee compensation expense
is net of the related tax benefit.

In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS 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. SFAS 123R was originally expected to be effective
for the Company beginning in its third quarter of fiscal 2005. In April
2005, the effective date was amended by the Securities and Exchange
Commission. As a result, SFAS 123R is now effective for the Company as of
the first annual period that begins after June 15, 2005. Accordingly, the
Company will adopt SFAS 123R in its first quarter of fiscal 2006. The
Company 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
September 30, 2005, will have a material effect on its net income for the
year ending December 31, 2006.

On January 7, 2005, the Company accelerated the vesting of outstanding
stock options granted to employees and officers with an exercise price of
$23.00 or greater. As a result of this action, options to purchase
approximately 1.6 million shares of the Company's common stock became
exercisable on January 7, 2005. No compensation expense was recorded in the
Company's Consolidated Statement of Operations for the three months ended
March 31, 2005 related to this action as these options had no intrinsic
value on January 7, 2005. For purposes of the SFAS 123 pro forma
calculation above, the expense related to the options that were accelerated
was $16,886,000, net of tax, for the three months ended March 31, 2005. The
reason that the Company accelerated the vesting of the identified stock
options was to reduce the Company's compensation expense in periods
subsequent to the adoption of SFAS 123R.

MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Tables in thousands, except per share data)

3) Goodwill and Intangible Assets

Intangible Assets

Acquired amortizable intangible assets consisted of the following as of
September 30, 2005:

Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------

Completed technology ....................... $72,461 $(48,954) $23,507
Customer relationships ..................... 6,640 (4,266) 2,374
Patents, trademarks, tradenames and other .. 12,393 (7,714) 4,679
------- -------- -------
$91,494 $(60,934) $30,560
======= ======== =======

Acquired amortizable intangible assets consisted of the following as of
December 31, 2004:

Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------

Completed technology ....................... $72,738 $(39,969) $32,769
Customer relationships ..................... 6,640 (3,581) 3,059
Patents, trademarks, tradenames and other .. 12,395 (6,619) 5,776
------- -------- -------
$91,773 $(50,169) $41,604
======= ======== =======

Aggregate amortization expense related to acquired intangibles for the
three and nine months ended September 30, 2005 was $3,382,000 and
$10,765,000, respectively. Aggregate amortization expense related to
acquired intangibles for the three and nine months ended September 30, 2004
was $3,689,000 and $11,073,000, respectively. Estimated amortization
expense related to acquired intangibles for the remainder of 2005 and in
total for the year is $3,099,000 and $13,864,000, respectively. Estimated
amortization expense for 2006 and for each of the three succeeding fiscal
years is as follows:

Year Amount
---- -------

2006 $11,763
2007 11,129
2008 2,759
2009 1,205

Goodwill

The change in the carrying amount of goodwill during the three and nine
months ended September 30, 2005 was not material.

MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Tables in thousands, except per share data)

4) Net Income Per Share

The following table sets forth the computation of basic and diluted net
income per share:

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------

Numerator
Net income ............................................ $ 7,224 $12,150 $22,460 $45,724
======= ======= ======= =======
Denominator
Shares used in net income per common share - basic .... 54,146 53,602 54,000 53,466
Effect of dilutive securities:
Stock options and employee stock purchase plan ..... 597 700 529 1,319
------- ------- ------- -------
Shares used in net income per common share - diluted .. 54,743 54,302 54,529 54,785
======= ======= ======= =======
Net income per common share
Basic .............................................. $ 0.13 $ 0.23 $ 0.42 $ 0.86
======= ======= ======= =======
Diluted ............................................ $ 0.13 $ 0.22 $ 0.41 $ 0.83
======= ======= ======= =======

For purposes of computing diluted net income per common share, 4,856,000
and 6,378,000 outstanding options for the three and nine months ended
September 30, 2005, respectively, and 7,333,000 and 5,002,000 outstanding
options for the three and nine months ended September 30, 2004,
respectively, were excluded from the calculation as their inclusion would
be anti-dilutive. There were options to purchase approximately 9,568,000
and 10,318,000 shares of the Company's common stock outstanding as of
September 30, 2005 and 2004, respectively.

5) Inventories

Inventories consist of the following:

September 30, December 31,
2005 2004
------------- ------------

Raw material ..................... $42,704 $46,479
Work in process .................. 20,169 18,330
Finished goods ................... 34,903 34,824
------- -------
$97,776 $99,633
======= =======

MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Tables in thousands, except per share data)

6) Stockholders' Equity

Comprehensive Income

Components of comprehensive income were as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
------ ------- ------- -------

Net income .................................................. $7,224 $12,150 $22,460 $45,724
Other comprehensive income (loss):
Changes in value of financial instruments designated as
cash flow hedges (net of taxes of $54 and
$0 for the three months ended September 30,
respectively, and $1,020 and $0 for the
nine months ended September 30, respectively) ......... 89 460 1,702 2,368
Foreign currency translation adjustment .................. (878) 311 (6,207) (1,041)
Unrealized gain (loss) on investments (net of
taxes of $15 and $0 for the three months
ended September 30, respectively, and net of
benefit of $7 and $0 for the nine months
ended September 30, respectively) ..................... 26 83 (13) 110
------ ------- ------- -------
Other comprehensive income (loss) ........................... (763) 854 (4,518) 1,437
------ ------- ------- -------
Total comprehensive income .................................. $6,461 $13,004 $17,942 $47,161
====== ======= ======= =======

Common Stock Offering

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
approximately $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
approximately $4,298,000.

7) 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 consolidated
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 Consolidated Statements of Operations.

As a result of incurring significant operating losses from 2001 through
2003, the Company established a full valuation allowance for its net
deferred tax assets. 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. At September 30, 2005, the Company
continues to maintain a valuation allowance for certain state tax credits
for which it is more likely than not that they will not be realized.

During the second quarter of 2005, the Internal Revenue Service ("IRS")
completed its examination of the Company's tax returns for the tax years
1999 through 2002. As a result of this examination, during the quarter

MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Tables in thousands, except per share data)

ended June 30, 2005, the Company recorded a benefit to income tax expense
of $1,901,000 and a $576,000 reduction of goodwill related to a previous
acquisition.

The Company's effective tax rate for the nine months ending September 30,
2005 was 25%. The effective tax rate is less than the statutory tax rate
primarily due to completion of the IRS examination, the benefit from U.S.
research and development credits and the profits of the Company's
international subsidiaries being taxed at rates lower than the U.S.
statutory tax rate.

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 is continuing to study this new
provision but does not expect that it will have a material impact on future
periods. Through September 30, 2005, the Company has not provided deferred
U.S. 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 September 30, 2005, the Company had $69,768,000 of undistributed
earnings in its foreign subsidiaries.

8) Geographic, Product and Significant Customer Information

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 operating results for the entire Company 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.

Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------

Geographic net sales
United States ...... $ 78,063 $ 93,052 $237,206 $280,971
Japan .............. 19,969 21,181 62,165 63,979
Europe ............. 12,171 11,744 40,077 36,807
Asia ............... 12,317 13,674 40,672 42,464
-------- -------- -------- --------
$122,520 $139,651 $380,120 $424,221
======== ======== ======== ========

September 30, December 31,
2005 2004
------------- ------------

Long-lived assets:
United States .... $67,596 $68,719
Japan ............ 5,674 6,202
Europe ........... 4,656 5,544
Asia ............. 4,246 4,024
------- -------
$82,172 $84,489
======= =======

MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Tables in thousands, except per share data)

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

Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------

Instruments and Control Systems .. $ 57,732 $ 65,310 $177,021 $191,976
Power and Reactive Gas Products .. 50,459 57,978 158,094 179,932
Vacuum Products .................. 14,329 16,363 45,005 52,313
-------- -------- -------- --------
$122,520 $139,651 $380,120 $424,221
======== ======== ======== ========

The Company had one customer comprising 17% and 16%, respectively, and one
customer comprising 11% and 10%, respectively, of net sales for the three
and nine months ended September 30, 2005. The Company had one customer
comprising 19% and 20%, respectively, and one customer comprising 10% and
10%, respectively, of net sales for the three and nine months ended
September 30, 2004.

9) Commitments and Contingencies

On April 3, 2003, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against MKS in federal district court in Colorado (the "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 (the "Court") against Advanced Energy
for infringement of five ASTeX patents (the "Delaware Action"), including
the three patents at issue in the Colorado Action. MKS sought injunctive
relief and damages for Advanced Energy's infringement. On December 24,
2003, the Colorado court granted MKS' 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. See Note 13 for additional information.

On November 3, 1999, On-Line Technologies, Inc. ("On-Line"), which was
acquired by MKS in 2001, brought suit in federal district court in
Connecticut against Perkin-Elmer, Inc. and certain other defendants
(collectively, "Perkin-Elmer") 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, 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. 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,
submitted to the court a stipulation that it infringed a specified claim of
On-Line's patent and filed a motion for summary judgment that such patent
claim is invalid. On April 6, 2005, On-Line filed a reply to the summary
judgment motion. The parties are awaiting 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.

MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Tables in thousands, except per share data)

10) Restructuring, Asset Impairment and Other Charges

As a result of the Company's various acquisitions from 2000 through 2002
and the downturn in the semiconductor capital equipment market, which began
in 2000, the Company had redundant activities and excess manufacturing
capacity and office space. Therefore, in 2002 and continuing through the
first quarter of 2004, the Company implemented restructuring activities to
rationalize manufacturing operations and reduce operating expenses. As a
result of these actions, the Company recorded restructuring, asset
impairment charges and other charges of $2,726,000, $1,593,000 and $437,000
in 2002, 2003 and 2004, respectively. The charges consisted of $987,000 of
severance costs related to workforce reductions, $2,810,000 related to
consolidation of leased facilities, and asset impairment charges of
$959,000 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 reductions were across
all functional groups.

During the three months ended March 31, 2005, the Company initiated a
restructuring plan related to its Berlin, Germany location. This
consolidation of activities included the reduction of 16 employees. The
total restructuring charge related to this consolidation was $454,000,
which consisted of $251,000 related to the repayment of a government grant
and $203,000 in severance costs.

During the three months ended September 30, 2005, the Company terminated a
lease related to a facility previously exited. At June 30, 2005, the
Company had an accrual of approximately $784,000 related to this facility.
After making the lease settlement payment and payments for other
contractual obligations, the remaining balance of approximately $278,000
was reversed as there was no remaining obligation.

The following table sets forth the activity in the restructuring accruals
from December 31, 2004 to September 30, 2005:

Workforce Facility
Reductions Consolidations Other Total
---------- -------------- ----- ------

Balance as of December 31, 2004 ............. $ 89 $1,532 $ -- $1,621
Restructuring provision in first quarter .... 203 -- 251 454
Charges utilized in first quarter ........... (9) (110) -- (119)
---- ------ ---- ------
Balance as of March 31, 2005 ................ 283 1,422 251 1,956
Charges utilized in second quarter .......... (56) (135) -- (191)
---- ------ ---- ------
Balance as of June 30, 2005 ................. 227 1,287 251 1,765
Reversal of restructuring in third quarter .. -- (278) -- (278)
Charges utilized in third quarter ........... (71) (563) -- (634)
---- ------ ---- ------
Balance as of September 30, 2005 ............ $156 $ 446 $251 $ 853
==== ====== ==== ======

The remaining accruals for workforce reductions are expected to be paid by
January of 2006. The facilities consolidation charges will be paid over the
respective lease terms, the latest of which ends in 2007. The accruals for
severance costs and lease payments are recorded in Other accrued expenses
and Other liabilities in the Consolidated Balance Sheets.

11) 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

MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Tables in thousands, except per share data)

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 activities for the nine months ended September 30 were as
follows:

2005 2004
------- -------

Balance at beginning of year ................................ $ 7,601 $ 5,804
Provisions for product warranties during the period ......... 5,139 6,473
Direct charges to the warranty liability during the period .. (6,153) (4,429)
------- -------
Balance as of September 30 .................................. $ 6,587 $ 7,848
======= =======

12) Other Income

During the second quarter of 2004, the Company received $5,042,000 related
to the collection of a note receivable that had been written off in the
third quarter of 2002. This amount was recorded as a gain and included in
Other income in the Consolidated Statements of Operations for the nine
months ended September 30, 2004.

13) Subsequent Event

On October 3, 2005, MKS and Advanced Energy entered into a settlement
agreement (see Note 9), pursuant to which Advanced Energy paid MKS
$3,000,000 in cash in October 2005. This settlement is not reflected in the
MKS financial statements as of September 30, 2005. The settlement agreement
also provided that Advanced Energy would not make, use, sell or offer to
sell its Rapid, Rapid FE, Rapid OE, and Xstream products (or related
products) in the United States or any other country in which MKS holds a
relevant patent or patent application, during the life of any such patent
(or resulting patent, in the case of patent applications). On October 6,
2005, the Court issued a final judgment of infringement and an injunction
prohibiting Advanced Energy from making, using, selling, offering to sell,
or importing into the United States such products.

MKS INSTRUMENTS, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

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

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 other markets,
including the medical imaging equipment market.

Our customers include semiconductor capital equipment manufacturers,
semiconductor device manufacturers, industrial manufacturing companies, medical
equipment manufacturers and university, government and industrial research
laboratories. For the nine months ended September 30, 2005 and the year ended
December 31, 2004, we estimate that approximately 70% and 74% of our net sales,
respectively, were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers.

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 shipments and as a result have returned to
profitability. Beginning in the third quarter of 2004 and continuing through the
third quarter of 2005, our orders and sales have declined from the level
achieved in the second quarter of 2004. The semiconductor capital equipment
industry is subject to rapid demand shifts which are difficult to predict.

A portion of our sales is to operations in international markets.
International sales include sales by our foreign subsidiaries, but exclude
direct export sales. For the nine months ended September 30, 2005 and the year
ended December 31, 2004, international sales accounted for approximately 38% and
34% of net sales, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make judgments, assumptions and
estimates that affect the amounts reported. There have been no material changes
in our critical accounting policies since December 31, 2004. See the discussion
of critical accounting policies in our Annual Report on Form 10-K for the year
ended December 31, 2004.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
total net sales of certain line items included in MKS' consolidated statements
of operations data.

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
----- ----- ----- -----

Net sales ................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 61.1 60.2 60.9 59.6
----- ----- ----- -----
Gross profit ................................ 38.9 39.8 39.1 40.4
Research and development .................... 11.2 10.2 11.3 10.2
Selling, general and administrative ......... 18.2 16.4 18.2 15.5
Amortization of acquired intangible assets .. 2.8 2.6 2.8 2.6
Restructuring ............................... (0.2) -- -- 0.1
----- ----- ----- -----
Income from operations ...................... 6.9 10.6 6.8 12.0
Interest income, net ........................ 1.5 0.3 1.1 0.2
Other income, net ........................... -- -- -- 1.3
----- ----- ----- -----
Income before income taxes .................. 8.4 10.9 7.9 13.5
Provision for income taxes .................. 2.5 2.2 2.0 2.7
----- ----- ----- -----
Net income .................................. 5.9% 8.7% 5.9% 10.8%
===== ===== ===== =====

Net Sales (dollars in millions)

Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 % Change 2005 2004 % Change
------ ------ -------- ------ ------ --------

Net sales .. $122.5 $139.7 (12.3)% $380.1 $424.2 (10.4)%

Net sales decreased $17.2 million during the three month period ended
September 30, 2005 mainly due to a decrease in worldwide demand from our
semiconductor capital equipment manufacturer customers, which decreased $18.8
million or 21.0% compared to the same period for the prior year. Primarily
offsetting this decrease was a net sales increase of $2.1 million or 8.1%,
compared to the same period for the prior year, for other non-semiconductor
manufacturing applications which include, but are not limited to, industrial
manufacturing, magnetic resonance imaging (MRI) medical equipment,
biopharmaceutical manufacturing, and university, government and industrial
research laboratories. International net sales were $44.5 million for the three
months ended September 30, 2005 or 36.3% of net sales compared to $46.6 million
for the same period of 2004 or 33.4% of net sales.

Net sales decreased $44.1 million during the nine month period ended
September 30, 2005 mainly due to a decrease in worldwide demand from our
semiconductor capital equipment manufacturer customers, which decreased $55.4
million or 19.6% compared to the same period for the prior year. Primarily
offsetting this decrease was a net sales increase of $11.0 million or 15.4%,
compared to the same period for the prior year, for other non-semiconductor
manufacturing applications. International net sales were $142.9 million for the
nine months ended September 30, 2005 or 37.6% of net sales compared to $143.3
million for the same period of 2004 or 33.8% of net sales.

Gross Profit

Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Percentage Percentage
2005 2004 Points Change 2005 2004 Points Change
---- ---- ------------- ---- ---- -------------

Gross Profit as percentage
of net sales.............. 38.9% 39.8% (0.9) 39.1% 40.4% (1.3)

Gross profit as a percentage of net sales decreased during the three months
ended September 30, 2005 mainly due to overhead costs representing a higher
percentage of sales, partially offset by lower material and labor costs as a
percentage of sales compared to the same period in 2004.

Gross profit as a percentage of net sales decreased during the nine months
ended September 30, 2005 mainly due to overhead costs representing a higher
percentage of sales, partially offset by lower material and labor costs as a
percentage of sales compared to the same period in 2004. In the first nine
months of 2004, gross profit reflected a favorable impact of overhead absorption
compared to the first nine months of 2005. This was primarily due to a
sequential increase in sales and inventory during the nine months ended
September 30, 2004, related to a significant increase in demand in 2004.
Inventory increased by $22.3 million from $82.0 million at December 31, 2003 to
$104.3 million at September 30, 2004 and decreased by $1.9 million during the
same period in 2005.

Research and Development (dollars in millions)

Research and
development expenses ... $13.7 $14.2 (3.6)% $42.9 $43.2 (0.5)%

Research and development expenses for the three months ended September 30,
2005 decreased $0.5 million primarily due to lower consulting and other costs as
a result of projects being completed during the quarter. Research and
development expenses for the nine months ended September 30, 2005 and 2004 were
substantially consistent as we continued to primarily focus our efforts on
developing and improving our instruments, components, subsystems and process
control solutions to improve process performance and productivity.

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 expenses 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.

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 (dollars in millions)

Selling, general and
administrative expenses ... $22.3 $23.0 (2.7)% $69.2 $65.8 5.2%

Selling, general and administrative expenses decreased $0.7 million during
the three months ended September 30, 2005 mainly due to decreased legal fees of
$1.4 million primarily related to litigation which had been subsequently
resolved, partially offset by higher professional fees of $0.5 million
principally related to the timing of fees for compliance with the Sarbanes-Oxley
Act of 2002 ("Sarbanes Oxley").

Selling, general and administrative expenses increased $3.4 million during
the nine months ended September 30, 2005 mainly due to higher consulting fees
primarily for IT related services of $2.8 million, higher professional fees of
$1.5 million principally related to the timing of fees for compliance with
Sarbanes Oxley, higher compensation and benefit expenses of $0.9 million and
higher insurance expenses of $0.7 million, partially offset by decreased legal
fees of $2.5 million mainly related to litigation which had been subsequently
resolved.

Amortization of Acquired Intangible Assets (dollars in millions)

Amortization of acquired
intangible assets.... $3.4 $3.7 (8.3)% $10.8 $11.1 (2.8)%

Amortization expense for the three and nine months ended September 30, 2005
and 2004, respectively, represents amortization of identifiable intangible
assets resulting from our completed acquisitions. The decreases during the three
and nine months ended September 30, 2005 are due to certain identifiable
intangible assets becoming fully amortized during the three months ended
September 30, 2005.

Restructuring (dollars in millions)

Restructuring........... $(0.3) -- -- $0.2 $0.4 (59.7)%

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, we recorded
restructuring, asset impairment charges and other charges of $2.7 million, $1.6
million and $0.4 million in 2002, 2003 and 2004, respectively. The charges
consisted of $1.0 million of severance costs related to workforce reductions,
$2.8 million related to consolidation of leased facilities, and asset impairment
charges of $0.9 million primarily related to the impairment of an intangible
asset from the discontinuance of certain product development activities. The
fair value of the impaired intangible asset was determined using the expected
present value of future cash flows. The workforce reductions were across all
functional groups.

During the three months ended March 31, 2004, we completed our
restructuring activities initiated in 2002, when we exited a leased facility and
recorded a restructuring charge of $0.4 million. We implemented these
restructuring activities to rationalize manufacturing operations and to reduce
operating expenses. There were no restructuring charges during the remainder of
2004.

During the three months ended March 31, 2005, we initiated a restructuring
plan related to our Berlin, Germany location. This consolidation of activities
included the reduction of 16 employees. The total restructuring charge related
to this consolidation was $0.5 million, which consisted of $0.3 million related
to the repayment of a government grant and $0.2 million in severance costs.
There were no restructuring charges during the second quarter of 2005.

During the three months ended September 30, 2005, we terminated a lease
related to a facility previously exited. At June 30, 2005, we had an accrual of
approximately $0.8 million related to this facility. After making the lease
settlement payment and payments for other contractual obligations, the remaining
balance of approximately $0.3 million was reversed as there was no remaining
obligation.

The following table sets forth the activity in the restructuring accruals
from December 31, 2004 to September 30, 2005:

Workforce Facility
Reductions Consolidations Other Total
---------- -------------- ----- ------

Balance as of December 31, 2004.............. $ 89 $1,532 $ -- $1,621
Restructuring provision in first quarter..... 203 -- 251 454
Charges utilized in first quarter............ (9) (110) -- (119)
---- ------ ---- ------
Balance as of March 31, 2005................. 283 1,422 251 1,956
Charges utilized in second quarter........... (56) (135) -- (191)
---- ------ ---- ------
Balance as of June 30, 2005.................. 227 1,287 251 1,765
Reversal of restructuring in third quarter... -- (278) -- (278)
Charges utilized in third quarter............ (71) (563) -- (634)
---- ------ ---- ------
Balance as of September 30, 2005............. $156 $ 446 $251 $ 853
==== ====== ==== ======

The remaining accruals for workforce reductions are expected to be paid by
January 2006. The facilities consolidation charges will be paid over the
respective lease terms, the latest of which ends in 2007.

Interest Income, Net (dollars in millions)

Interest income, net.... $1.8 $0.4 309.7% $4.3 $1.0 309.3%

Net interest income increased $1.4 million and $3.3 million, respectively,
for the three and nine month periods ended September 30, 2005, mainly related to
higher interest rates on higher average investment balances in those periods.

Other Income

Other income of $5.4 million for the nine months ended September 30, 2004
consisted primarily of a gain of $5.0 million related to the collection of a
note receivable in the second quarter of 2004 that was written off in 2002.

Provision for Income Taxes (dollars in millions)

Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
---- ---- ---- -----

Provision for income taxes... $3.1 $3.0 $7.5 $11.5

As a result of incurring significant operating losses from 2001 through
2003, we had established a full valuation allowance against 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 related to certain state tax credits, and reduced
the valuation allowance accordingly. At September 30, 2005, we continued to
maintain a valuation allowance for certain state tax credits for which it was
more likely than not that they will not be realized.

Our effective tax rate for the three and nine month periods ended September
30, 2005 was 30% and 25%, respectively. The effective tax rate is less than the
statutory tax rate primarily due to a tax benefit recorded as the result of the
completion of the Internal Revenue Service ("IRS") examination (see below), the
benefit from U.S. research and development credits and the profits of our
international subsidiaries being taxed at rates lower than the U.S. statutory
tax rate.

During the three and nine month periods ended September 30, 2004, the U.S.
taxable income was offset by U.S. operating loss carryforwards and the tax
provision was comprised of tax expense from foreign operations and state taxes.

In the normal course of business, our Company and our subsidiaries are
examined by various tax authorities, including the IRS. Generally an unfavorable
settlement of any issue under audit would require the use of cash. Favorable
resolution would result in a reduction to our effective tax rate in the quarter
of resolution. During the quarter ended June 30, 2005, the IRS completed its
examination of our tax returns for the tax years 1999 through 2002. As a result
of this examination, during the quarter ended June 30, 2005 we recorded a
benefit to income tax expense of $1.9 million and a $0.6 million reduction of
goodwill related to a previous acquisition.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments totaled $271.4 million at
September 30, 2005 compared to $235.9 million at December 31, 2004. The primary
source of funds for the first nine months of fiscal 2005 was cash provided by
operating activities of $40.3 million.

Net cash provided by operating activities of $40.3 million for the nine
months ended September 30, 2005, resulted mainly from net income of $22.5
million and non-cash charges of $19.8 million for depreciation and amortization
offset by an increase in operating assets of $1.1 million and a decrease in
operating liabilities of $0.7 million. The increase in operating assets is
mainly caused by a $3.0 million increase in other currents assets primarily due
to tax deposits and a $0.9 million increase in inventories, partially offset by
a $2.9 million decrease in accounts receivable as a result of lower revenues.
The decrease in operating liabilities is primarily the result of a $1.7 million
decrease in accounts payable, partially offset by a $0.7 million increase in
taxes payable. Net cash provided by operating activities of $43.1 million for
the nine months ended September 30, 2004 resulted mainly from net income of
$45.7 million, non-cash depreciation and amortization expenses of $20.5 million
and an increase in operating liabilities of $30.3 million, partially offset by
an increase in operating assets of $48.4 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 $20.4
million due to the higher shipments in the third quarter of 2004 of $139.7
million as compared to the fourth quarter of 2003 of $101.8 million, partially
offset by a decrease in our days sales outstanding from 63 days for the nine
months ended September 30, 2003 to 55 days for the nine months ended September
30, 2004 as a result of improved cash collections, and an increase in inventory
of $22.5 million as a result of higher production volumes in 2004 to support the
higher revenues. The increase in operating liabilities consisted primarily of an
increase in accrued expenses and other current liabilities of $15.2 million
resulting mainly from increased accrued compensation, warranty reserves and
non-income related tax accruals, as well as a $14.7 million increase in income
tax payable.

Net cash used in investing activities of $17.2 million for the nine months
ended September 30, 2005 resulted primarily from net purchases of available for
sale investments of $10.5 million and from the purchases of property, plant and
equipment of $7.6 million primarily for investment in manufacturing equipment
and for the consolidation of our IT infrastructure. Net cash used in investing
activities of $55.0 million for the nine months ended September 30, 2004
resulted from the net purchases of $48.4 million of available for sale
investments mainly from the net proceeds received from our stock offering in the
first quarter, and the purchase of property, plant and equipment of $14.0
million for investments in manufacturing equipment and for consolidation of our
IT infrastructure, partially offset by proceeds of $5.0 million received from
the collection of a note receivable that was previously written off.

Net cash provided by financing activities of $1.1 million for the nine
months ended September 30, 2005 consisted primarily of $4.0 million in proceeds
from the exercise of stock options and purchases under our employee stock
purchase plan, partially offset by $2.0 million in principal payments on
long-term debt and net payments of $0.9 million on short-term borrowings. Net
cash provided by financing activities of $38.0 million for the nine months ended
September 30, 2004 consisted primarily of $32.5 million in net proceeds received
from our common stock offering in the first quarter, $4.0 million in proceeds
from the exercise of stock options and purchases under the employee stock
purchase plan, and net proceeds of $3.7 million from short-term borrowings,
partially offset by $2.1 million of principal payments on long-term debt.

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.

On October 3, 2005, we and Advanced Energy Industries, Inc. ("Advanced
Energy") executed a settlement agreement in connection with the patent
infringement suit we had brought against Advanced Energy in federal district
court in Delaware. Pursuant to the settlement agreement, Advanced Energy paid us
$3 million in cash in October 2005.

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
September 30, 2005.

We also enter into agreements in the ordinary course of business which
include indemnification provisions. Pursuant to these agreements, we indemnify,
hold harmless and agree to reimburse the indemnified party, generally our
customers, for losses suffered or incurred by the indemnified party in
connection with certain patent or other intellectual property infringement
claims, and, in some instances, other claims, by any third party with respect to
our products. The term of these indemnification obligations is generally
perpetual 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 obligations.
As a result, we believe the estimated fair value of these obligations is
minimal. Accordingly, we have no liabilities recorded for these obligations as
of September 30, 2005.

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 amounts 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.

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.

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 70% of our net sales for the nine months
ended September 30, 2005 and 74%, 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. For example, in 2001 through 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 past 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;

- 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 48% of our net sales for
the nine months ended September 30, 2005, and 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 nine months ended September 30, 2005 and the
years ended December 31, 2004, 2003 and 2002, one customer, Applied Materials,
accounted for approximately 16%, 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, technology 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 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 implementing a new worldwide Enterprise Resource
Planning ("ERP") system. We expect to continue to implement the ERP system by
converting our operations in phases over the next few years and completed the
first site implementation in October 2005. Although we have a 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.

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, we may not be able to 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. Competitors may 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 38% of net
sales for the nine months ended September 30, 2005 and 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.

WE HAVE SIGNIFICANT FOREIGN OPERATIONS, AND OUTSOURCE CERTAIN MANUFACTURING
OFFSHORE, WHICH POSE SIGNIFICANT RISKS.

We have significant international sales, service, engineering and
manufacturing operations in Europe and Asia, and have outsourced a portion of
our manufacturing to Mexico. We may expand the level of manufacturing and
certain other operations that we do offshore in order to take advantage of cost
efficiencies available to us in those countries. However, we may not achieve the
significant cost savings or other benefits that we anticipate from this program.
These foreign operations expose us to operational and political risks that may
harm our business, including:

- political and economic instability;

- 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;

- reduced or less certain protection for intellectual property rights;

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

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

- increases in duties and taxation;

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

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

- expropriation of private enterprises; and

- unexpected changes in foreign regulations.

If any of these risks materialize, 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 may enter into 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;

- domestic and international 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.

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.

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

As of September 30, 2005, John R. Bertucci, our Executive Chairman, and
certain members of his family, in the aggregate, beneficially owned
approximately 17% 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 18% of our outstanding common stock as

of September 30, 2005, and James G. Berges, a representative 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information concerning market risk is contained in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 16, 2005. There were no material changes in our
exposure to market risk from December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES.

a) Effectiveness of disclosure controls and procedures.

Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of September 30, 2005. 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 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
September 30, 2005, 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.

b) 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 September 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On April 3, 2003, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against us in federal district court in Colorado (the "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 (the "Court") against Advanced Energy for infringement of five
ASTeX patents (the "Delaware Action"), including the three patents at issue in
the Colorado Action. We sought injunctive relief and damages for Advanced
Energy's infringement. 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. On October 3, 2005, the
parties entered into a settlement agreement, pursuant to which Advanced Energy
paid us $3 million in cash in October 2005. This payment is not reflected in our
financial statements as of September 30, 2005. The settlement agreement also
provided that Advanced Energy would not make, use, sell or offer to sell its
Rapid, Rapid FE, Rapid OE, and Xstream products (or related products) in the
United States or any other country in which we hold a relevant patent or patent
application, during the life of any such patent (or resulting patent, in the
case of patent applications). On October 6, 2005, the Court issued a final
judgment of infringement and an injunction prohibiting Advanced Energy from
making, using, selling, offering to sell, or importing into the United States
such products.

On November 3, 1999, On-Line Technologies, Inc. ("On-Line"), which we
acquired in 2001, brought suit in federal district court in Connecticut against
Perkin-Elmer, Inc. and certain other defendants (collectively, "Perkin-Elmer")
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, 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, submitted to the court a stipulation that it has infringed a
specified claim of On-Line's patent and filed a motion for summary judgment that
such patent claim is invalid. On April 6, 2005, On-Line filed a reply to the
summary judgment motion. The parties are awaiting 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On August 1, 2005, the Company issued a warrant to purchase 10,750 shares
of common stock to a former employee of the Company (the "Employee"). The
warrant was issued in exchange for the Employee entering into a settlement
agreement to terminate outstanding litigation between the Company and the
Employee. The warrant is exercisable at any time for ten years from the date of
issuance, at an exercise price of $15.05 per share. The Company issued the
warrant pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
the issuance was not in connection with a public offering.

ITEM 6. EXHIBITS.

Exhibit No. Exhibit Description
- ----------- -------------------

+3.1(1) Restated Articles of Organization
+3.2(2) Articles of Amendment, as filed with the Secretary of State of
Massachusetts on May 18, 2001
+3.3(3) Articles of Amendment, as filed with the Secretary of State of
Massachusetts on May 16, 2002
+3.4(4) Amended and Restated By-Laws
+4.1(4) Specimen certificate representing the common stock
+10.1(5) Settlement Agreement, dated October 3, 2005, by and among MKS
Instruments, Inc., Applied Science and Technology, Inc. and
Advanced Energy Industries, Inc.
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934,
as amended
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934,
as amended
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

- ----------
+ Previously filed

(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
for the quarter ended June 30, 2001.

(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
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 Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 7, 2005.

SIGNATURE

Pursuant to the requirements 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.

November 9, 2005 By: /s/ Ronald C. Weigner
------------------------------------------
Ronald C. Weigner
Vice President and Chief Financial Officer
(Principal Financial Officer)