MTS is a leading global supplier of mechanical test systems and high-performance industrial position sensors. The Company's testing solutions help customers accelerate and improve their design and development processes and are used for determining the mechanical behavior of materials, components, and structures. MTS' high-performance position sensors provide controls for a variety of industrial and mobile hydraulic applications. MTS had 1,660 employees and revenue of $461 million for the fiscal year ended September 27, 2008.

Fiscal Year
The Company's fiscal year ends on the Saturday closest to September 30. The fiscal years ended September 27, 2008, September 29, 2007 and September 30, 2006 consisted of 52 weeks.

Summary of Results
Orders for fiscal year 2008 increased 15.2%, to $485.3 million, compared to orders of $421.4 million for fiscal year 2007. In fiscal year 2006, orders totaled $366.6 million. The increase in orders in fiscal year 2008 from fiscal year 2007 represents growth of 14.4% and 18.2% in the Test and Sensors segment, respectively, and includes an estimated $21.1 million favorable impact of currency translation. The increase in orders in fiscal year 2007 from fiscal year 2006 represents growth of 13.4% and 22.1% in the Test and Sensors segments, respectively, and includes an estimated $9.1 million favorable impact of currency translation. Backlog of undelivered orders at September 27, 2008 increased 14.7%, to $234.7 million, compared to backlog of $204.6 million at September 29, 2007. Backlog at the end of fiscal year 2006 totaled $189.0 million.

Revenue of $460.5 million for fiscal year 2008 increased 12.3%, compared to revenue of $410.1 million for fiscal year 2007. Revenue for fiscal year 2006 totaled $387.9 million. The increase in revenue in fiscal year 2008 from fiscal year 2007 represents growth of 9.3% and 25.4% in the Test and Sensors segments, respectively, and includes an estimated $22.1 million favorable impact of currency translation. The increase in revenue in fiscal year 2007 from fiscal year 2006 represents growth of 2.9% and 19.8% in the Test and Sensors segments, respectively, and includes an estimated $11.6 million favorable impact of currency translation.

Gross profit for fiscal year 2008 was $190.3 million, an increase of 9.6% compared to gross profit of $173.6 million for fiscal year 2007. This increase included an estimated $7.2 million favorable impact of currency translation. The $5.4 million increase in fiscal year 2007 gross profit compared to $168.2 million of gross profit for fiscal year 2006 included an estimated $3.4 million favorable impact of currency translation. Gross profit as a percentage of revenue for fiscal year 2008 was 41.3%, a decrease of 1.0 percentage point compared to 42.3% for fiscal year 2007. Gross profit as a percentage of revenue for fiscal year 2006 was 43.4%. The decrease in the gross profit rate for fiscal year 2008 compared to fiscal year 2007 was driven by unfavorable product mix and higher custom project costs in the Test segment, partially offset by higher volume. The decrease in the gross margin rate for fiscal year 2007 compared to fiscal year 2006 was driven by higher custom project costs and unfavorable product mix in the Test segment.

Income from operations for fiscal year 2008 increased 14.4%, to $61.8 million, compared to $54.0 million for fiscal year 2007. Income from operations for fiscal year 2006 totaled $54.4 million. The increase in fiscal year 2008 from fiscal year 2007 was primarily due to higher gross profit and lower research and development expense, partially offset by planned increases in operating expenditures to support strategic initiatives. The decrease in fiscal year 2007 compared to fiscal year 2006 was primarily due to planned increases in sales, marketing, and research and development spending to support strategic initiatives, primarily offset by higher gross profit.

Income before discontinued operations for fiscal year 2008 increased 14.9%, to $47.1 million, compared to $41.0 million for fiscal year 2007. Income before discontinued operations for fiscal year 2006 totaled $38.0 million. The increase in fiscal year 2008 from fiscal year 2007 was primarily due to stronger operating performance in both segments, and $1.0 million favorable currency transaction gains, partially offset by higher income tax expense of $2.8 million. The higher income tax expense is primarily due to increased operating income. The increase in fiscal year 2007 from fiscal year 2006 was primarily due $3.8 million lower income tax expense, partially offset by $1.4 million of unfavorable currency transaction losses. The lower income tax expense resulted from the enactment of favorable tax legislation in Germany and the United States.

Net income was $49.2 million, or $2.80 per diluted share, for fiscal year 2008, an increase of 17.1% compared to $42.0 million, or $2.29 per diluted share, for fiscal year 2007, and increased from $39.3 million, or $2.04 per diluted share, for fiscal year 2006. The increase in net income in fiscal year 2008 from fiscal year 2007 was primarily the result of higher income before discontinued operations and $1.1 million increased income from discontinued operations associated with a gain on the sale of the Nano product line during fiscal year 2008. The increase in net income in fiscal year 2007 from fiscal year 2006 was primarily due to increased income before discontinued operations.

During fiscal year 2008, the Company purchased approximately 1.0 million shares of its common stock. The reduction in shares outstanding positively impacted the Company's earnings per share by $0.12 for fiscal year 2008.

Detailed Financial Results

Orders and Backlog


                                  2008        2007        2006

                                    (expressed in thousands)
Orders                          $ 485,274   $ 421,437   $ 366,626

Backlog of Undelivered Orders   $ 234,710   $ 204,558   $ 189,000

Orders for fiscal year 2008 totaled $485.3 million, an increase of $63.9 million, or 15.2%, compared to orders of $421.4 million for fiscal year 2007. In fiscal year 2006, orders totaled $366.6 million. The increase in orders in fiscal year 2008 from fiscal year 2007 is primarily driven by Test segment orders in Europe and North America, and worldwide growth in the Sensors segment, as well as an estimated $21.1 million favorable impact of currency translation. The increase in orders in fiscal year 2007 from fiscal year 2006 was primarily due to Test segment orders in Asia, continued worldwide growth in the Sensors segment, and an estimated $9.1 million favorable impact of currency translation.

Orders for the Test segment totaled $389.8 million for fiscal year 2008, an increase of $49.2 million, or 14.4%, compared to orders of $340.6 million for fiscal year 2007. Test segment orders for fiscal year 2006 totaled $300.4 million. The increase in orders in fiscal year 2008 from fiscal year 2007 was primarily due to increased volume in Europe and North America, and an estimated $14.1 million favorable impact of currency translation. During fiscal year 2008, the Company booked six large custom orders which aggregated to approximately $52 million. During fiscal year 2007, the Company booked five large custom orders which aggregated to approximately $41 million. The Company considers an individual order valued at an amount equal to or greater than $5 million a significant order. The increase in orders in fiscal year 2007 from fiscal year 2006 was primarily due to increased volume in Asia and an estimated $6.3 million favorable impact of currency translation. The Test segment booked 80.3% of total Company orders for fiscal year 2008, compared to 80.8% of total Company orders for fiscal year 2007 and 81.9% for fiscal year 2006.

Orders for the Sensors segment totaled $95.5 million for fiscal year 2008, an increase of $14.7 million, or 18.2%, compared to orders of $80.8 million for fiscal year 2007. Orders for the Sensors segment in fiscal year 2006 totaled $66.2 million. The increase in orders in fiscal year 2008 from fiscal year 2007 was primarily due to continued worldwide growth and an estimated $7.0 million favorable impact of currency translation. The increase in orders in fiscal year 2007 from fiscal year 2006 was primarily due to worldwide growth and an estimated $2.8 million favorable impact of currency translation. The Sensors segment booked 19.7% of total Company orders for fiscal year 2008, compared to 19.2% of total Company orders for fiscal year 2007 and 18.1% for fiscal year 2006.

Orders in the Americas totaled $176.2 million during fiscal year 2008, up $26.8 million, or 17.9%, compared to orders of $149.4 million for fiscal year 2007. Orders in the Americas during fiscal year 2006 totaled $149.9 million. Orders in Europe totaled $168.4 million during fiscal year 2008, an increase of $33.9 million, or 25.2%, compared to orders of $134.5 million for fiscal year 2007. Orders in Europe during fiscal year 2006 totaled $126.6 million. Orders in Asia totaled $140.2 million during fiscal year 2008, an increase of $3.2 million, or 2.3%, compared to orders of $137.0 million for fiscal year 2007. Orders in Asia during fiscal year 2006 totaled $89.9 million. Other international orders totaled $0.5 million, $0.5 million, and $0.2 million, respectively, for fiscal years 2008, 2007, and 2006.

Backlog of undelivered orders at September 27, 2008 totaled $234.7 million, an increase of approximately $30.1 million, or 14.7%, compared to backlog of $204.6 million at September 29, 2007. Backlog at the end of fiscal year 2006 totaled $189.0 million. The increase in backlog in fiscal year 2008 from fiscal year 2007 was primarily due to increased order volume in both segments, and an estimated $5.4 million favorable impact of currency translation. The increase in backlog in fiscal year 2007 from fiscal year 2006 was also primarily due to increased order volume in both segments. The Company believes backlog is not an absolute indicator of its future revenue because a substantial portion of the orders constituting this backlog could be cancelled at the customer's discretion. Historically, the Company seldomly has experienced cancellations of orders larger than $1.0 million. Based on anticipated production

schedules and other factors, the Company believes that approximately $204 million of the backlog at September 27, 2008 will be converted to revenue during fiscal year 2009.

Revenue

Revenue for fiscal year 2008 totaled $460.5 million, an increase of $50.4 million, or 12.3%, compared to revenue of $410.1 million for fiscal year 2007. Revenue for fiscal year 2006 totaled $387.9 million. The increase in revenue in fiscal year 2008 from fiscal 2007 was primarily due to an increase in custom business in the Test segment, continued growth in the Sensors segment, and an estimated $22.1 million favorable impact of currency translation. The increase in revenue in fiscal year 2007 from fiscal year 2006 was primarily due to increases in standard product and service business in the Test segment, growth in the Sensors segment, and an estimated $11.6 million favorable impact of currency translation.

Revenue for the Test segment totaled $364.1 million for fiscal year 2008, compared to revenue of $333.2 million for fiscal year 2007 and revenue of $323.7 million for fiscal year 2006. The increase in revenue for fiscal year 2008 from fiscal year 2007 was primarily due to an increase in custom business and an estimated $14.7 million favorable impact of currency translation. The increase in revenue for fiscal year 2007 was primarily due to an increase in standard product and service business and an estimated $8.7 million favorable impact of currency translation.

Revenue for the Sensors segment totaled $96.4 million for fiscal year 2008, compared to $76.9 million for fiscal year 2007 and $64.2 million for fiscal year 2006. The increase in revenue in fiscal year 2008 from fiscal year 2007 was primarily due to higher beginning backlog, increased worldwide order volume, and an estimated $7.4 million favorable impact of currency translation. The increase in revenue in fiscal year 2007 from fiscal year 2006 was primarily due to higher order volume, and an estimated $2.9 million favorable impact of currency translation.

Revenue of $168.6 million in the Americas for fiscal year 2008 increased $19.8 million, or 13.3%, compared to revenue of $148.8 million for fiscal year 2007. Revenue in the Americas for fiscal year 2006 totaled $132.5 million. Revenue in Europe of $152.0 million for fiscal year 2008 increased $4.5 million, or 3.1%, compared to $147.5 million for fiscal year 2007. Revenue in Europe for fiscal year 2006 totaled $139.9 million. Revenue of $139.5 million in Asia for fiscal year 2008 increased $26.2 million, or 23.1%, compared to $113.3 million for fiscal year 2007. Revenue in Asia for fiscal year 2006 totaled $115.1 million. Other international revenue totaled $0.4 million, $0.5 million, and $0.4 million, respectively, for fiscal years 2008, 2007, and 2006.

Although selective product price changes were implemented during each of the three fiscal years, the overall impact of pricing changes did not have a material effect on revenue.

Gross Profit


                 2008        2007        2006

                   (expressed in thousands)
Gross Profit   $ 190,253   $ 173,638   $ 168,235

% of Revenue        41.3 %      42.3 %      43.4 %

Gross profit as a percentage of revenue decreased to 41.3% for fiscal year 2008 from 42.3% for fiscal year 2007. Gross profit as a percentage of revenue was 43.4% for fiscal year 2006. The decrease in gross profit as a percentage of revenue for fiscal year 2008 from fiscal year 2007 was primarily due to unfavorable product mix and higher custom project costs in the Test segment, as well as a 0.5 percentage point unfavorable impact of currency translation, partially offset by increased volume. The decrease in gross profit as a percentage of revenue for fiscal year 2007 from fiscal year 2006 was primarily due to higher custom project costs and unfavorable product mix in the Test segment, as well

as a 0.3 percentage point unfavorable impact of currency translation, partially offset by increased operating efficiency in the Sensors segment.

Gross profit as a percentage of revenue for the Test segment was 37.3% for fiscal year 2008, a decrease from 39.3% for fiscal year 2007 and 41.3% for fiscal year 2006. The decrease in gross profit rate in fiscal year 2008 was primarily due to unfavorable product mix and higher custom project costs, as well as a 0.7 percentage point unfavorable impact of currency translation. The decrease in gross profit rate in fiscal year 2007 was primarily due to higher custom project costs and unfavorable product mix, as well as a 0.5 percentage point unfavorable impact of currency translation.

Gross profit as a percentage of revenue for the Sensors segment was 56.6% for fiscal year 2008, an increase from 55.6% and 53.6% for fiscal years 2007 and 2006, respectively. The gross profit rate increase in fiscal year 2008 was primarily due to increased volume. The gross profit rate increase in fiscal year 2007 was primarily due to increased volume and improved operational efficiency. There was no significant impact on gross profit rate due to currency translation in fiscal years 2008, 2007 or 2006.

Selling, Marketing, General and Administrative Expense


                             2008        2007        2006

                               (expressed in thousands)
Selling & Marketing        $  76,867   $  68,907   $ 63,901
General & Administrative      35,393      32,216     32,851

Total                      $ 112,260   $ 101,123   $ 96,752

% of Revenue                    24.4 %      24.7 %     24.9 %

Selling and marketing expense increased $8.0 million for fiscal year 2008, primarily due to $3.1 million increased compensation, benefits and commissions in the Test segment, driven by normal annual merit increases as well as increased order volume, $2.4 million planned investment in strategic sales and marketing initiatives in the Sensors segment, and an estimated $2.9 million unfavorable impact of currency translation, partially offset by a $0.4 million reduction in bad debt expense. Selling expense increased $5.0 million for fiscal year 2007, primarily due to $3.1 million increased compensation, benefits and commissions in the Test segment, driven by normal annual merit increases as well as increased order volume, $1.8 million planned investment in strategic sales and marketing initiatives in the Sensors segment, and an estimated $1.6 million unfavorable impact of currency translation, partially offset by a $1.5 million reduction in selling costs associated with the exit of the noise and vibration business.

General and administrative expense increased $3.2 million for fiscal year 2008, primarily due to $1.5 million of integration costs related to the acquisition of SANS Group ("SANS"), $0.7 million increase in compensation and benefits, $0.5 million increased legal fees, and an estimated $1.0 million unfavorable impact of currency translation, partially offset by $0.5 million reduction in various other expenses. The increase in legal expense primarily resulted from a $0.8 million settlement with the U.S. Department of Commerce and the U.S. Department of Justice, related to noncompliance with U.S. export control regulations. General and administrative expense decreased $0.6 million for fiscal year 2007, primarily due to $3.2 million decrease in consulting and professional fees, partially offset by a $2.0 million increase in compensation and benefits and an estimated $0.6 million unfavorable impact of currency translation.

Selling, marketing, general and administrative ("SG&A") expense for the Test segment increased to $83.5 million in fiscal year 2008 from $77.3 million and $77.2 million in fiscal years 2007 and 2006, respectively. The increase in SG&A in fiscal year 2008 was primarily due to a $3.2 million increase in compensation, benefits and commissions, $1.5 million of integration costs related to the acquisition of SANS, $0.5M increased legal fees, as well as an estimated $2.3 million unfavorable impact of currency translation in fiscal year 2008. These factors were partially offset by $0.4 million decreased bad debt expense, and a $0.9 million decrease in various other expenses. The increase in fiscal year 2007 was

primarily due to a $3.2 million increase in compensation, benefits and commissions, as well as an estimated $1.6 million unfavorable impact of currency translation in fiscal year 2007, mainly offset by $3.2 million decreased consulting and other professional fees, and $1.5 million reduced expense associated with the exited noise and vibration business.

SG&A expense for the Sensors segment increased to $28.8 million for fiscal year 2008 from $23.8 million and $19.6 million for fiscal years 2007 and 2006, respectively. The increase in SG&A expense for fiscal year 2008 was primarily due to $3.3 million increased compensation, benefits and other costs to support strategic initiatives, and an estimated $1.6 million unfavorable impact of currency translation. The increase in SG&A expense in fiscal year 2007 was primarily due to $3.5 million increased compensation, benefits and other costs to support strategic initiatives, and an estimated $0.7 million unfavorable impact of currency translation.

Research and Development Expense


                           2008        2007       2006

                            (expressed in thousands)
Research & Development   $  16,232   $ 19,285   $ 17,969

% of Revenue                   3.5 %      4.7 %      4.6 %

Research and development ("R&D") expense includes expenses for both equipment and software development in the Test and Sensors segments. R&D expense as a percentage of revenue decreased to 3.5% in fiscal year 2008, as the Company allocated certain of its resources towards capitalized software development activities in the Test segment. Total software development costs capitalized during the fiscal year ended September 27, 2008 were $4.2 million. R&D expense as a percentage of revenue increased slightly in fiscal year 2007, primarily due to a planned increase in expenditures for new product development in both the Test and Sensors segments.

During fiscal year 2008, approximately 68.1% of the Company's total R&D spending was in the Test Segment, compared to 78.0% and 79.5% in fiscal years 2007 and 2006, respectively.

Gain on Sale of Assets
Gain on sale of assets of $0.7 million for fiscal year 2007 resulted from the sale of assets associated with the Company's linear friction welding technology. Gain on sale of assets of $0.9 million for fiscal year 2006 resulted from the sale of assets of the Company's noise and vibration business.

Interest (Expense) Income


                     2008        2007       2006

                      (expressed in thousands)
Interest Expense   $  (1,083 ) $ (1,309 ) $ (1,716 )
Interest Income    $   4,033   $  3,899   $  3,595

Interest expense of $1.1 million for fiscal year 2008 decreased from $1.3 million and $1.7 million for fiscal years 2007 and 2006, respectively, due to reductions in outstanding long-term debt. Interest income of $4.0 million in fiscal year 2008 increased from $3.9 million and $3.6 million for fiscal years 2007 and 2006, respectively, as higher global interest rates more than offset declines in the Company's average balances of cash, cash equivalents, and short-term investments compared to previous fiscal years.

Other Income, net
Other income for fiscal year 2008 was $0.7 million, compared to other income of less than $0.1 million and other income of $1.0 million for fiscal years 2007 and 2006, respectively. Other income for fiscal 2008 included a net gain of $0.4 million related to currency transactions. Other income for fiscal 2007 included a $0.3 million favorable legal settlement involving intellectual property, as well as $0.4 million of other miscellaneous income, which was mainly offset by a net loss of $0.6 million related to currency

transactions. Other income for fiscal year 2006 primarily reflected a net gain of $0.8 million related to currency transactions.

Operating Results


                                             2008          2007          2006

                                                 (expressed in thousands)
Income from Operations                    $   61,761     $  53,972     $  54,386
Income Before Income Taxes and
Discontinued Operations                       65,460        56,590        57,306
% of Revenue                                    14.2 %        13.8 %        14.8 %

Effective Income Tax Rate                       28.0 %        27.5 %        33.7 %

Income Before Discontinued Operations     $   47,110     $  41,041     $  37,969

Income Before Discontinued Operations
per Diluted Share                         $     2.68     $    2.24     $    1.97

Income from operations for fiscal year 2008 increased 14.4%, to $61.8 million, compared to $54.0 million for fiscal year 2007. Income from operations for fiscal year 2006 totaled $54.4 million. The increase in fiscal year 2008 from fiscal year 2007 was primarily due to higher gross profit and lower research and development expense, and an estimated $3.1 million favorable impact of currency translation, partially offset by planned increases in operating expenditures to support strategic initiatives. The decrease in fiscal year 2007 compared to fiscal year 2006 was primarily due to planned increases in sales, marketing, and research and development spending to support strategic initiatives, partially offset by higher gross profit and an estimated $1.0 million favorable impact of currency translation.

Income from operations for the Test segment was $41.1 million for fiscal year 2008, an increase of $1.9 million, or 4.8%, compared to $39.2 million for fiscal year 2007. Income from operations for fiscal year 2006 was $43.3 million. Income from operations for fiscal year 2008 increased from fiscal year 2007 primarily due to increased gross profit, $4.0 million lower research and development expense, as the Company allocated certain of its resources towards capitalized software development activities aggregating $4.2 million, and an estimated $0.8 million favorable impact of currency translation. These factors were partially offset by $6.1 million planned increases in operating expenses in fiscal year 2008, and a $0.7 million gain on the sale of the noise and vibration business in fiscal year 2007. Income from operations for fiscal year 2007 decreased from fiscal year 2006 due to decreased gross profit and $2.7 million planned increases in operating expenses, partially offset by $1.5 million reduced operating expenses associated with the noise and vibration business, and an estimated $0.3 million favorable impact of currency translation.

Income from operations for the Sensors segment was $20.7 million for fiscal year 2008, an increase of $5.9 million, or 39.9%, compared to $14.8 million for fiscal year 2007. Income from operations for the Sensors segment totaled $11.1 million for fiscal year 2006. The increase in income from operations for fiscal year 2008 compared to fiscal year 2007 is primarily due to increased gross profit and an estimated $2.3 million favorable impact of currency translation, partially offset by $5.9 million planned increases in operating expenses to support strategic initiatives. The increase in income from operations for fiscal year 2007 compared to fiscal year 2006 is primarily due to increased gross profit and an estimated $0.7 million favorable impact of currency translation, partially offset by $4.7 million planned increases in operating expenses to support strategic initiatives.

Income before income taxes and discontinued operations totaled $65.5 million for fiscal year 2008, compared to $56.6 million for fiscal year 2007. Income before income taxes and discontinued operations for fiscal year 2006 was $57.3 million. The fiscal year 2008 increase compared to fiscal year 2007 was primarily due to higher operating income, $1.0 million favorable impact of foreign currency transaction gains, and an estimated $3.4 million favorable impact of currency translation. The fiscal year 2007 decrease compared to fiscal year 2006 was primarily due to lower operating income, as well as $1.4 million unfavorable impact of foreign currency transaction losses, partially offset by $0.7 million favorable net interest, and an estimated $1.2 million favorable impact of currency translation.

A historical level of inflation ranging from 2% to 4% has impacted the Company's . . .