A significant portion of our net sales is to operations in international markets. International net sales include sales by our foreign subsidiaries, but exclude direct export sales. For the three months ended March 31, 2009 and full year ended December 31, 2008, international net sales accounted for approximately 50% and 43%, of net sales, respectively. A significant portion of our international net sales were sales in Japan. We expect that international net sales will continue to represent a significant percentage of our total net sales.
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, 2008. 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, 2008 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 March 31,
                                                       2009                2008

    Net revenues
    Product                                              81.4 %               88.8 %
    Services                                             18.6                 11.2

    Total net revenues                                  100.0                100.0
    Cost of revenues

    Cost of product revenues                             72.8                 50.5
    Cost of service revenues                             13.4                  7.2

    Total cost of revenues                               86.2                 57.7

    Gross profit                                         13.8                 42.3
    Research and development                             20.2                 10.0
    Selling, general and administrative                  37.1                 16.3
    Amortization of acquired intangible assets            2.1                  1.6
    Restructuring                                         7.3                    -

    Income (loss) from operations                       (52.9 )               14.4
    Interest income, net                                  1.3                  1.1
    Impairment of investments                               -                 (0.6 )

    Income (loss) before income taxes                   (51.6 )               14.9
    Provision (benefit) for income taxes                (30.1 )                4.4

    Net income (loss)                                   (21.5 )%              10.5 %

Net Revenue (dollars in millions)

                                          Three Months Ended March 31,
                                        2009           2008       % Change

                Net revenues
                Product               $  62.5        $ 171.7       (63.6 )%
                Service                  14.2           21.7       (34.3 )

                Total net revenues    $  76.7        $ 193.4       (60.3 )%

Product revenues decreased $109.2 million during the three months ended March 31, 2009 compared to the same period in 2008 mainly due to a decrease in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers. The decrease in demand from these customers is due to the challenging global economic conditions, which resulted in a decrease in revenues of $88.9 million or 78.7% for the three months ended March 31, 2009 compared to the same period for the prior year. Revenues related to other markets decreased by $20.3 million or 34.7% primarily due to the continued global economic crisis.
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 decreased $7.5 million during the three months ended March 31, 2009 compared to the same period for the prior year as customers delayed spending on these services due to the challenging global economic conditions.

Total international net revenues, including product and service, were $38.2 million for the three months ended March 31, 2009 or 49.8% of net revenues, compared to $70.4 million for the three months ended March 31, 2008 or 36.4% of net revenues, respectively. Although net revenues decreased across all geographies, net revenues from Europe decreased to a lesser extent due to a higher percentage of net revenues to non-semiconductor equipment and device manufacturer customers.

Gross Profit

                                                      Three Months Ended March 31,
                                                 2009          2008       % Points Change

Gross profit as percentage of net revenues
Product                                           10.6 %        43.2 %           (32.6 )%
Service                                           28.0          35.8              (7.8 )

Total gross profit percentage                     13.8 %        42.3 %           (28.5 )%

Gross profit on product revenues decreased 32.6 percentage points for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Our margin was negatively impacted by approximately 19.3 percentage points from lower revenue volumes since a portion of our overhead costs are fixed, 20.0 percentage points from excess and obsolete inventory related charges, partially offset by 4.1 percentage points due to decreased overhead spending and 2.2 percentage points from lower warranty charges. The excess and obsolete inventory related charge was primarily a result of a lower future production plan in response to the continued weakness in the markets we serve. The decrease in overhead costs is primarily related to decreases in compensation expense.
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 7.8 percentage points for the three months ended March 31, 2009 compared to the corresponding period of the prior year. The decrease relates to lower revenue volumes since a portion of our overhead costs are fixed.
Research and Development (dollars in millions)

Three Months Ended March 31, 2009 2008 % Change

Research and development expenses $ 15.5 $ 19.3 (20.1 )%

Research and development expense decreased $3.8 million during the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The decrease includes a $2.4 million decrease in compensation expense, a $0.6 million reduction in spending on project materials and a $0.4 million decrease in patent and other legal related costs. The decrease in compensation expense is partially due to the workforce reductions which were part of cost cutting measures that occurred in the third and fourth quarters of 2008. We initiated a restructuring program in the first quarter of 2009 which also decreased compensation expense.
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)

Selling, general and administrative expenses $ 28.5 $ 31.6 (10.0 )%

Selling, general and administrative expenses decreased $3.1 million for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The decrease includes a $4.0 million decrease in compensation expense and a $2.0 million decrease in consulting and professional fees in part related to lower IT infrastructure spending. These decreases were partially offset by a $2.7 million decrease in foreign exchange gains. The decrease in compensation expense is partially due to the workforce reductions which were part of cost cutting measures that occurred in the third and fourth quarters of 2008. We initiated a restructuring program in the first quarter of 2009 which also decreased compensation expense. The $2.7 million decrease in foreign exchange gains is a result of a $2.5 million foreign exchange gain in the first quarter of 2008 compared to foreign exchange losses of $0.2 million in the first quarter of 2009. The foreign exchange gains in 2008 were primarily attributable to the settlement of cash and intercompany loans at different foreign exchange rates related to a legal entity consolidation between some of our foreign subsidiaries.
Amortization of Acquired Intangible Assets (dollars in millions)

Three Months Ended March 31, 2009 2008 % Change

Amortization of acquired intangible assets $ 1.7 $ 3.1 (46.8 )%

Amortization expense for the three months ended March 31, 2009 decreased $1.4 million compared to the three months ended March 31, 2008 as certain acquired intangible assets became fully amortized during 2008. Restructuring (dollars in millions)

Three Months Ended March 31, 2009 2008 % Change

In light of the continued global financial crisis and its impact on our semiconductor equipment OEM customers and the other markets we serve, we initiated a restructuring plan in the first quarter of 2009. The plan included a reduction in our worldwide headcount of approximately 630 people, which represented approximately 24% of our global workforce.
In the first quarter of 2009, we recorded restructuring charges of $5.6 million primarily for severance and other charges associated with the reductions in workforce. As of March 31, 2009, the accrued restructuring costs totaled $2.0 million. These costs will be substantially paid by the end of the fourth quarter 2009. As a result of the workforce reductions, we expect annual compensation-related savings of approximately $40.0 million. The savings will be reflected in costs of revenues, research and development expenses and selling, general and administrative expenses.
Interest Income, Net (dollars in millions)

Three Months Ended March 31, 2009 2008 % Change

Interest income, net $ 1.0 $ 2.2 (53.6 )%

Interest income, net decreased $1.2 million mainly related to lower interest rates on lower average cash and cash equivalent balances for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. Impairment of Investments (dollars in millions)

Three Months Ended March 31, 2009 2008 % Change

Impairment of investments $ - $ 1.2 (100.0 )%

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 adverse market conditions that affected the value of their collateral and their ability to access short-term funding. These investments were not trading on active markets, and therefore, had no readily determinable market value. As a result of our evaluation as of December 31, 2007, we recorded a $1.5 million impairment charge to earnings.

During the first quarter of 2008, we determined that further declines in the value of these two investments were other-than-temporary. These investments were still not trading on active markets, and therefore, had no readily determinable market value. As a result of our evaluation as of March 31, 2008, we recorded an additional $1.2 million impairment charge to earnings based upon receiving contemporaneous quotes from established third-party pricing services. This resulted in a new cost basis for these securities of $3.1 million at March 31, 2008.
During the second quarter of 2008, we recorded additional impairment charges of $0.3 million on these two SIV investments due to further declines in value. In addition, we received a $0.5 million principal payment from one of these investments during the second quarter of 2008. During the third quarter of 2008, we liquidated our position in these two impaired investments, one by sale and the other by a structured payment, for a combined total of $2.9 million and as a result, we recorded a gain from the liquidation of $0.5 million. We did not have any other-than-temporary impaired investments at March 31, 2009. Provision (Benefit) for Income Taxes (dollars in millions)

Three Months Ended March 31, 2009 2008

Provision (benefit) for income taxes $ (23.1 ) $ 8.5

Our effective tax rate for the three months ended March 31, 2009 and 2008 was
(58.3)% and 29.4%, respectively. The first quarter 2009 effective tax rate and the related tax benefit is higher than the statutory tax rate. The increased benefit is primarily due to a $6.4 million release of tax reserves as a result of the close of a federal tax audit on the tax years 2005 and 2006. Our effective tax rate for the three months ended March 31, 2008, and the related income tax provision, 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. At December 31, 2008, the total amount of gross unrecognized tax benefits, which excludes interest and penalties discussed below, was approximately $14.7 million. If these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of approximately $11.8 million would impact our effective tax rate. The total amount of gross unrecognized tax benefits at March 31, 2009 was approximately $8.8 million. The net decrease from December 31, 2008 was primarily attributable to the release of reserves from the years 2003 to 2006 as a result of the close of the federal tax audit on the 2005 and 2006 tax years. MKS and its subsidiaries are subject to U.S. federal income tax as well as the income tax of multiple state and foreign jurisdictions. As a result of the close of a federal tax audit in the first quarter 2009, we have concluded all U.S. federal income tax matters for years through 2006. As of March 31, 2009, there were ongoing audits in various other tax jurisdictions. Within the next 12 months, it is reasonably possible that we may recognize $2.3 million to $2.7 million of previously unrecognized tax benefits related to various 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: 2007 and 2008, Germany: 2001 to 2008, Korea: 2004 to 2008, Japan:
2004 to 2008, and the United Kingdom: 2007 and 2008.
We accrue interest expense and, if applicable, penalties, for any uncertain tax positions. This interest and penalty expense is a component of income tax expense. At March 31, 2009 and December 31, 2008, we had $0.5 million and $1.7 million, respectively, accrued for interest on unrecognized tax benefits.
During the quarter ended December 31, 2008, the U.S. Research and Development Tax Credit was extended retroactively to amounts paid or incurred in 2008 through December 31, 2009. As a result, we estimated a tax benefit of approximately $0.8 million for the three months ended March 31, 2009. Because the law was not enacted at the time, we did not record a benefit for this credit in the three months ended March 31, 2008. Liquidity and Capital Resources
Cash, cash equivalents and short-term investments totaled $255.4 million at March 31, 2009 compared to $278.9 million at December 31, 2008. This decrease was mainly attributable to our net loss and net cash used in financing activities for payments on short-term borrowings.
Net cash used in operating activities of $5.8 million for the three months ended March 31, 2009, resulted mainly from a net loss of $16.5 million, an $11.7 million decrease in operating liabilities and a $6.9 million increase in net operating assets, partially offset by a $14.4 million provision for excess or obsolete inventory, non-cash charges of $5.4 million for depreciation and amortization and $4.8 million for stock-based compensation and related tax benefits. The net decrease in operating liabilities is mainly caused by a decrease of $6.0 million in non-current income taxes payable and a decrease of $2.9 million in accrued compensation. The decrease in accrued compensation is primarily as a result of the workforce reduction and mandatory time-off. The $6.9 million increase in operating assets consisted primarily of a $24.3

million increase in income taxes receivable as we expect to receive an income tax refund due to current operating losses and a $6.7 million increase in inventory, offset by a $24.7 million decrease in accounts receivable as a result of lower revenue.
Net cash provided by operating activities of $22.9 million for the three months ended March 31, 2008, resulted mainly from net income of $20.4 million, a $9.4 million increase in operating liabilities and non-cash charges of $6.7 million for depreciation and amortization and $2.5 million for stock-based compensation and related tax benefits, offset by an increase in net operating assets of $17.1 million. The net increase in operating liabilities is mainly caused by an increase of $5.8 million in income taxes payable and $2.9 million in accounts payable, primarily as a result of inventory procurement activities. The $17.1 million increase in operating assets consisted primarily of a $10.9 million increase in accounts receivable as a result of higher revenue and a $4.2 million increase in other current assets, mainly due to increases in value added tax, or VAT, receivables at foreign locations.
Net cash used in investing activities of $1.0 million for the three months ended March 31, 2009, resulted primarily from purchases of $1.3 million of property, plant and equipment. Net cash used in investing activities of $48.5 million for the three months ended March 31, 2008, resulted primarily from net purchases of $45.7 million of available for sale investments.
Net cash used in financing activities was $14.1 million for the three months ended March 31, 2009 and consisted primarily of $7.6 million in net payments on short-term borrowings and $6.1 million related to stock-based compensation. Net cash used in financing activities was $67.9 million for the three months ended March 31, 2008 and consisted primarily of repurchases of common stock of $65.3 million and $3.5 million in net payments on short-term borrowings.
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. During the three months ended March 31, 2008, we repurchased 3.5 million shares of common stock for $65.3 million for an average price of $18.81 per share. There were no shares repurchased in 2009 and the Program ended effective February 11, 2009.
On March 18, 2009, MKS Instruments, Inc., MKS Japan, Inc. and HSBC Bank USA, National Association entered into a fifth amendment to the Optional Advance . . .