We believe that this Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. When used herein, the words "believes," "anticipates," "plans," "expects," "estimates," "would," "will," "intends" 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. While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates or expectations change. Risks and uncertainties include, but are not limited to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 in the section entitled "Risk Factors."
Overview
We are a leading worldwide provider of instruments, components, subsystems and process control solutions that measure, control, power, monitor and analyze 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 composition analysis, electrostatic charge management, control and information technology, power and reactive gas generation and vacuum technology. Our products are used in diverse markets, applications and processes. Our primary served markets are manufacturers of capital equipment for semiconductor devices, and for other thin film applications including flat panel displays, solar cells, data storage media and other advanced coatings. We also leverage our technology in other markets with advanced manufacturing applications including medical equipment, pharmaceutical manufacturing, energy generation and environmental monitoring.
Our customers include manufacturers of semiconductor capital equipment and semiconductor devices; thin film capital equipment used in the manufacture of flat panel displays, solar cells, data storage media, and other coating applications; other industrial, medical and manufacturing companies; and university, government and industrial research laboratories. For the six months ended June 30, 2008 and the full year ended December 31, 2007, we estimate that approximately 61% and 68% of our net revenues, respectively, were to semiconductor capital equipment manufacturers and semiconductor device manufacturers. We expect that revenues to the semiconductor capital equipment manufacturers and semiconductor device manufacturers will continue to account for a substantial majority of our revenues.
During 2007 and 2008, quarterly revenues ranged from $171.0 million to $211.4 million. For the third quarter of 2008, we expect that our net revenues could be slightly below this range. However, the semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain how long revenue levels may be maintained or the timing or extent of any future downturn or upturn in the semiconductor capital equipment industry.
A portion of our net revenues is to operations in international markets. For the six months ended June 30, 2008 and full year ended December 31, 2007, international revenues accounted for approximately 39% and 39% of net revenues, 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, 2007. For further information, please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2007 in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates."

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

                                                 Three Months Ended         Six Months Ended
                                                      June 30,                  June 30,
                                                  2008         2007         2008        2007
 Net revenues
 Product                                           86.6 %       91.1 %       87.8 %      91.3 %
 Services                                          13.4          8.9         12.2         8.7

 Total net revenues                               100.0        100.0        100.0       100.0
 Cost of revenues
 Cost of product revenues                          49.9         52.0         50.2        51.3
 Cost of service revenues                           8.9          5.8          8.0         5.6

 Total cost of revenues                            58.8         57.8         58.2        56.9

 Gross profit                                      41.2         42.2         41.8        43.1
 Research and development                          12.0          9.0         10.9         8.8
 Selling, general and administrative               20.5         17.6         18.3        17.0
 Amortization of acquired intangible assets         1.2          2.0          1.4         2.0

 Income from operations                             7.5         13.6         11.2        15.3
 Interest income, net                               1.0          1.7          1.0         1.7
 Impairment of investments                         (0.1 )          -         (0.4 )         -

 Income before income taxes                         8.4         15.3         11.8        17.0
 Provision for income taxes                         3.0          4.3          3.7         5.0

 Net income                                         5.4 %       11.0 %        8.1 %      12.0 %

Net Revenue (dollars in millions)

                               Three Months Ended                         Six Month Ended
                                    June 30,                                  June 30,

                        2008        2007        % Change          2008        2007        % Change

  Net revenues
  Product              $ 148.1     $ 185.9          (20.4 )%     $ 319.8     $ 379.5          (15.7 )%
  Service                 22.9        18.1           26.9 %         44.6        35.9           24.1 %

  Total net revenues   $ 171.0     $ 204.0          (16.2 )%     $ 364.4     $ 415.4          (12.3 )%

Product revenues decreased $37.8 million during the three month period ended June 30, 2008 mainly due to a decrease in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers, which resulted in a decrease in revenues of $46.6 million or 36.9% compared to the same period for the prior year. This decrease was partially offset by an increase in revenues related to other markets, mainly solar, of $8.8 million or 14.8%.
Product revenues decreased $59.7 million during the six month period ended June 30, 2008 mainly due to a decrease in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers, which resulted in a decrease in revenues of $74.5 million or 27.9% compared to the same period for the prior year. This decrease was partially offset by an increase in revenues related to other markets, mainly solar, of $14.8 million or 13.2%.
Service revenues consist mainly of fees for services relating to the maintenance and repair of our products, software maintenance, installation services and training. Service revenue increased $4.8 million and $8.7 million during the three and six month periods ended June 30, 2008, respectively, mainly due to a higher installed base of products and increased software maintenance fees.
Total international net revenues, including product and service, were $73.1 million and $143.5 million for the three and six months ended June 30, 2008 or 42.8% and 39.4% of net revenues, respectively, compared to $76.5 million and $157.6 million for the three and six months ended June 30, 2007 or 37.5% and 37.9% of net revenues, respectively.

Gross Profit

                                             Three Months Ended                                       Six Months Ended
                                                  June 30,                                                June 30,

                                2008            2007           % Points Change          2008            2007           % Points Change

Gross profit as
percentage of net
revenues
Product                         42.4 %          42.9 %                (0.5 )%           42.8 %          43.8 %                (1.0 )%
Service                         33.4 %          34.8 %                (1.4 )%           34.6 %          35.1 %                (0.5 )%
Total gross profit
percentage                      41.2 %          42.2 %                (1.0 )%           41.8 %          43.1 %                (1.3 )%

Gross profit on product revenues decreased 0.5 percentage points for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Our margin was negatively impacted by approximately 3.2 percentage points from lower revenue volumes and 0.8 percentage points from unfavorable foreign currency fluctuations, largely offset by 2.7 percentage points from lower overhead spending and 0.8 percentage points from reduced warranty costs and favorable product mix.
Gross profit on product revenues decreased by 1.0 percentage point during the six months ended June 30, 2008 consisting of approximately 2.2 lower percentage points from decreased revenue volumes and 0.8 percentage point from unfavorable product mix, partially offset by 2.1 percentage points from lower overhead spending.
Cost of service revenues consists primarily of costs of providing services for repair and training which includes salaries and related expenses and other fixed costs. Service gross profit decreased by 1.4 and 0.5 percentage points for the three and six month periods ended June 30, 2008, respectively, compared to the corresponding periods of the prior year, primarily as a result of higher overhead costs partially offset by increased revenue volumes. Research and Development (dollars in millions)

                                          Three Months Ended                               Six Months Ended
                                               June 30,                                        June 30,

                                2008            2007           % Change          2008            2007          % Change

Research and
development expenses          $ 20.5          $ 18.4              11.6 %       $ 39.7          $ 36.7              8.4 %

Research and development expense increased $2.1 million during the three months ended June 30, 2008 mainly due to increased compensation expense of $0.8 million, as a result of higher staffing levels, $0.6 million of higher consultant costs and $0.7 million in other research and development costs, including patent related costs.
Research and development expense increased $3.1 million during the six months ended June 30, 2008 mainly due to $1.1 million of higher consultant costs, increased compensation expense of $1.0 million, as a result of higher staffing levels and $1.0 million in other research and development costs, including patent related costs.
Our research and development is primarily focused 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 focused on developing and improving our instruments, components, subsystems and process control solutions to improve process performance and productivity, none of which is individually 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 revenues may be reduced during the lifespan of those products.

Selling, General and Administrative (dollars in millions)

                                         Three Months Ended                              Six Months Ended
                                              June 30,                                       June 30,

                                2008            2007          % Change         2008            2007          % Change

Selling, general and
administrative expenses       $ 35.1          $ 35.9            (2.3 )%      $ 66.8          $ 70.5            (5.2 )%

Selling, general and administrative expenses decreased $0.8 million for the three months ended June 30, 2008 due mainly to a $1.6 million decrease in consulting costs, primarily related to IT infrastructure, and $0.6 million decrease in professional fees, partially offset by $0.7 million in foreign exchange losses and $0.5 million in higher facilities costs.
Selling, general and administrative expenses decreased $3.7 million for the six months ended June 30, 2008 mainly due to $2.9 million in lower consulting costs, primarily related to IT infrastructure, a $2.2 million reduction in foreign exchange as a result of foreign exchange gains of $1.5 million in 2008 compared to foreign exchange losses of $0.7 million in 2007, partially offset by $0.9 million in higher facility costs. The foreign exchange gains in 2008 were primarily attributable to the settlement of cash and intercompany loans at different foreign exchange rates in connection with a legal entity consolidation in the first quarter between some of our foreign subsidiaries. Amortization of Acquired Intangible Assets (dollars in millions)

                                        Three Months Ended                             Six Months Ended
                                             June 30,                                      June 30,

                               2008           2007          % Change         2008           2007          % Change

Amortization of
acquired intangible
assets                        $ 2.0          $ 4.1            (51.7 )%      $ 5.1          $ 8.2            (38.1 )%

Amortization expense for the three and six months ended June 30, 2008 decreased $2.1 million and $3.1 million, respectively, as certain acquired intangible assets became fully amortized during 2007 and 2008. Interest Income, Net (dollars in millions)

                                     Three Months Ended                  Six Months Ended
                                          June 30,                           June 30,

                                2008      2007      % Change       2008      2007      % Change

        Interest income, net   $ 1.6     $ 3.6       (54.3 )%     $ 3.8     $ 6.9       (44.6 )%

Interest income, net decreased $2.0 million and $3.1 million during the three and six month periods ended June 30, 2008, respectively, mainly as a result of lower average cash and cash equivalent balances and lower interest rates in 2008. The lower outstanding cash balances are primarily a result of our stock repurchase program.
Impairment of Investments (dollars in millions)

                                        Three Months Ended                  Six Months Ended
                                             June 30,                           June 30,

                                    2008       2007     % Change       2008      2007     % Change

      Impairment of investments    $  0.3     $  -          100 %     $ 1.4     $  -          100 %

During the fourth quarter of 2007, we determined that declines in the fair value of our investments in certain commercial paper were other-than-temporary. This commercial paper was issued by two structured investment vehicles (SIVs) that entered into receivership during the fourth quarter of 2007 and failed to make payments at maturity. Due to the mortgage-related assets these issuers held, they were exposed to the adverse market conditions that affected the value of their collateral and their ability to access short-term funding. These investments were not currently trading on active markets, and therefore, had no readily determinable market value. As a result of our assessment as of December 31, 2007, we recorded a $1.5 million impairment charge to earnings, based upon the Company receiving contemporaneous quotes from established third-party pricing services.
During the three and six months ended June 30, 2008, we determined that further declines in the value of these two investments were other-than-temporary. As a result we recorded additional impairment charges of $0.3 million and $1.4 million, respectively. This resulted in a new cost basis for these securities of $2.4 million at June 30, 2008.

Provision for Income Taxes (dollars in millions)

Provision for income taxes $ 5.1 $ 8.7 $ 13.5 $ 20.6

Our effective tax rate for the three and six month periods ending June 30, 2008 was 35.4% and 31.4%, respectively. The effective tax rate for the six months ended June 30, 2008, is less than the statutory tax rate primarily due to the profits of our international subsidiaries being taxed at rates lower than the U.S. statutory tax rate.
Our effective tax rate for the three and six month periods ended June 30, 2007 was 27.9% and 29.2%, respectively. The effective tax rate is less than the statutory tax rate primarily due to the profits of our international subsidiaries being taxed at rates lower than the U.S. statutory tax rate and the benefit from U.S. research and development credits.
We adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes ("FIN 48") in 2007. At December 31, 2007, the total amount of gross unrecognized tax benefits, which excludes interest and penalties discussed below, was approximately $16.1 million. If these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of approximately $13.2 million would impact the Company's effective tax rate. The total amount of gross unrecognized tax benefits at June 30, 2008 was approximately $16.9 million. The increase from January 1, 2008 was primarily attributable to tax positions taken by the Company in the six months ended June 30, 2008.
MKS and its subsidiaries are subject to U.S. federal income tax as well as the income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal income tax matters for years through 2002. The 2003 federal tax year remains open to the extent of the loss carryforward to 2004 and 2005. Currently the Company is under a federal income tax audit for the 2005 tax year. As of June 30, 2008, there were ongoing audits in various other tax jurisdictions. We do not expect any material changes to the returns as filed from these open audits.
Within the next 12 months, it is reasonably possible that the Company may recognize $4.5 million to $5.0 million of previously unrecognized tax benefits related to various federal, state, and foreign tax positions as a result of the conclusion of various audits and the expiration of the statute of limitations. The following tax years, in the major tax jurisdictions noted, are open for assessment or refund: U.S. Federal: 2003 to 2007, Germany: 2001 to 2007, Korea:
2005 to 2007, Japan: 2001 to 2007, and the United Kingdom: 2006 and 2007.
We will accrue interest and, if applicable, penalties, for any uncertain tax positions. This interest and penalty expense will be a component of income tax expense. At December 31, 2007 and June 30, 2008, we had $1.5 million and $1.9 million, respectively, accrued for interest on unrecognized tax benefits.
The U.S. Research and Development Tax Credit expired at the end of 2007 and to date has not been reinstated. As a result, we did not take any benefit for this credit in the three and six month periods ending June 30, 2008. The benefits taken in the three and six month periods ending June 30, 2007 for this credit were approximately $0.5 million and $0.8 million, respectively. Liquidity and Capital Resources
Cash, cash equivalents and short-term investments totaled $259.9 million at June 30, 2008 compared to $323.8 million at December 31, 2007. This decrease was attributable to our share repurchase program through which we repurchased $101.9 million of our common stock during the first six months of fiscal 2008. The primary source of funds for the first six months of fiscal 2008 was cash provided by operating activities of $42.2 million.
Net cash provided by operating activities of $42.2 million for the six months ended June 30, 2008, resulted mainly from net income of $29.6 million and non-cash charges of $12.2 million for depreciation and amortization and $6.2 million for stock-based compensation and related tax benefits, offset by an increase in net operating assets of $4.1 million and a decrease in net operating liabilities of $2.5 million. The $4.1 million increase in operating assets consisted primarily of a $2.4 million increase in other current assets, mainly due to increases in value added tax receivables at foreign locations and a $1.0 million increase in accounts receivable. The net decrease in operating liabilities is mainly caused by a decrease of $4.4 million in accounts payable and $2.0 million in income taxes payable, offset by an increase of $3.9 million in accrued expenses and other liabilities. Net cash provided by operating activities of $45.2 million for the six months ended June 30, 2007, resulted mainly from net income of $49.8 million, non-cash charges of $15.4 million for depreciation and amortization and $8.4 million for stock-based compensation and related tax benefits, offset by an increase in net operating assets of $21.7 million and an $8.2 million decrease in net operating liabilities. The $21.7 million increase in net operating assets consisted primarily of a $14.2 million increase in inventory, to support our then increased revenues and to support the increased inventory levels required for our planned China facility

relocation in the second half of 2007, and a $4.8 million increase in other current assets, primarily related to prepaid taxes. The decrease in net operating liabilities of $8.2 million is mainly caused by a decrease of $16.7 million in current income taxes payable, primarily due to payments of estimated U.S. taxes, offset by an increase of $8.9 million in accrued expenses and other liabilities.
Net cash provided by investing activities of $4.3 million for the six months ended June 30, 2008, resulted primarily from net sales of $9.2 million of available for sale investments, offset by $5.5 million in purchases of property, plant and equipment. Net cash used in investing activities of $50.4 million for the six months ended June 30, 2007, resulted primarily from net purchases of $44.1 million of available for sale investments.
Net cash used in financing activities of $97.5 million for the six months ended June 30, 2008, consisted primarily of repurchases of common stock of $101.9 million and $2.6 million in net payments on short-term borrowings, offset by $6.5 million in proceeds from the exercise of stock options and purchases under our employee stock purchase plan. Net cash provided by financing activities of $10.7 million for the six months ended June 30, 2007, consisted primarily of $39.0 million in proceeds from the exercise of stock options and purchases under our employee stock purchase plan, offset by repurchases of common stock of $31.7 million.
On February 12, 2007, our Board of Directors approved a share repurchase program (the "Program") for the repurchase of up to $300.0 million of our outstanding stock over two years. The repurchases may be made from time to time on the open market or through privately negotiated transactions. The timing and amount of any shares repurchased under the Program will depend on a variety of factors, including the price of our common stock, corporate and regulatory requirements, capital availability, and other market conditions. The Program may be discontinued at any time at the discretion of the Company and our Board of Directors. During the six months ended June 30, 2008, we repurchased 5.1 million shares of common stock for $101.9 million for an average price of $20.18 per share and during the six months ended June 30, 2007, we repurchased 1.2 million shares of common stock for $31.7 million for an average price of $26.42 per share.
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, stock repurchase program activity and planned capital expenditure requirements through at least the next 12 months. . . .