Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). In addition, certain statements in our future filings with the SEC, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services; (iii) statements of assumptions underlying such statements; (iv) statements regarding business relationships with vendors, customers or collaborators; and (v) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers. Words such as "believes," "anticipates," "expects," "intends," "targeted," "should," "potential," "goals," "strategy," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those factors described in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended September 27, 2008. Such important factors include:

• We may experience difficulty obtaining materials or components for our products

• We may experience difficulties obtaining the services of skilled employees

• We may not achieve our growth plans for the expansion of our business

• We are significantly international in scope, which poses multiple unique risks

• Our business could be adversely affected by product liability and commercial litigation

• Government regulation could impose significant costs and other constraints on our business

• We may fail to protect our intellectual property effectively, or may infringe upon the intellectual property of others

• The sales, delivery and acceptance cycle for many of our products is irregular and may not develop as anticipated

• Our customers are in cyclical industries

• Our business is subject to intense competition

• Interest rate fluctuations could adversely affect our results of operations

• Volatility in the global economy could adversely affect our results of operations

The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our reports on Forms 10-Q and 8-K to be filed by the Company in fiscal year 2009.

About MTS Systems Corporation

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

Summary of Financial Results

Three Months Ended June 27, 2009 ("Third Quarter of Fiscal 2009")

Highlights for the Third Quarter of Fiscal 2009 include:

• Orders decreased 30.8% to $80.7 million, compared to $116.7 million for the Third Quarter of Fiscal 2008, as sharply lower demand in worldwide industrial capital spending in the Company's markets had a negative impact on both the Test and Sensors segments. Backlog of undelivered orders was $163.3 million, including $12.3 million from SANS, a decrease of 6.9% from backlog of $175.4 million at March 28, 2009. Backlog at the end of the Third Quarter of Fiscal 2008 was $242.8 million.

• On a sequential basis, orders increased 16.7% compared to $69.2 million for the Second Quarter of Fiscal 2009, primarily driven by increased volume in the Test segment across all geographies. The increase in orders may be an indication that the global economic decline is beginning to bottom out however, the current uncertainty and volatility suggests the period of economic recovery will be long and slow.

• Revenue decreased 22.3% to $90.8 million, compared to $116.9 million in the Third Quarter of Fiscal 2008. This decrease was primarily driven by a 21.2% decline in the organic Test business (where "organic" as used throughout Item 2. is defined as "without the SANS acquisition") and a 38.4% decline in the Sensors segment, partially offset by a 5.6% benefit from SANS.

• In June 2009, the Company approved a plan for an additional workforce reduction, in response to the continued weakness in industrial capital spending. As a result of this action, the Company incurred severance and benefit costs totaling $1.2 million, of which $1.0 million and $0.2 million was reported in the Test and Sensors segments, respectively. Of the $1.2 million total costs, $0.6 million, $0.3 million, and $0.3 million were reported in Cost of Sales, Selling and Marketing, and General and Administrative expense, respectively. The Company anticipates further workforce and cost reduction actions in the Fourth Quarter of Fiscal 2009 related to materials sourcing and process and structure improvements. The Company estimates the combined workforce and other cost reduction actions taken during Fiscal 2009 will result in annual savings of $15-20 million for Fiscal 2010.

• Income from operations decreased 67.6% to $4.8 million, compared to $14.8 million for the Third Quarter of Fiscal 2008, as the unfavorable impact of the volume decline in the organic Test business and Sensors segment, as well as severance and benefit costs associated with the previously mentioned planned workforce reduction, more than offset reduced operating expenses in both the organic Test business and the Sensors segment. SANS broke even during the quarter.

• Earnings per diluted share from continuing operations decreased $0.45, or 70.3%, to $0.19, compared to $0.64 for the Third Quarter of Fiscal 2008. Lower income from operations and unfavorable net interest negatively impacted earnings per diluted share by $0.42 and $0.06, respectively.

• Earnings per diluted share from net income decreased $0.55, or 74.3%, to $0.19, compared to $0.74 for the Third Quarter of Fiscal 2008. During the Third Quarter of Fiscal 2008, the Company sold substantially all of the net assets of its Nano Instruments product line, which resulted in the recognition of a net gain from discontinued operations of $1.8 million, or $0.10 per diluted share.

• Cash and cash equivalents at the end of the quarter totaled $118.9 million, compared to $99.3 million at the end of the prior quarter. Cash flows from operations generated $21.2 million, primarily driven by lower working capital utilization. During the quarter, the Company invested $1.8 million in capital expenditures, paid $2.5 million in dividends, and purchased 126,000 shares of common stock for $2.7 million.

Nine Months Ended June 27, 2009 ("First Nine Months of Fiscal 2009")

Highlights for the First Nine Months of Fiscal 2009 include:

• On September 28, 2008 the Company acquired substantially all of the assets of SANS Group ("SANS") for $50.2 million. SANS has manufacturing facilities in both Shenzhen and Shanghai, China, and is headquartered in Shenzhen. SANS manufactures material testing solutions and offers a variety of products, including electromechanical and static-hydraulic testing machines. The results of operations for SANS have been included in the Company's results of operations since the date of the acquisition, and are reported in the Company's Test segment. Orders for SANS for the First Nine Months of Fiscal 2009 were $18.1 million. SANS reported a $3.5 million loss from operations during the First Nine Months of Fiscal 2009, on $14.4 million of revenue, driven by reduced gross profit resulting from the sale of inventory that was written up to fair value as part of the acquisition, as well as increased operating expenses associated with integration-related items.

• Orders decreased 33.7% to $245.3 million, compared to $370.1 million for the First Nine Months of Fiscal 2008, as sharply lower demand in worldwide industrial capital spending in the Company's markets had a negative impact on both the Test and Sensors segments.

• Revenue decreased 6.4% to $315.0 million, compared to $336.4 million in the First Nine Months of Fiscal 2008. This decrease was primarily due to a 2.3% decrease in the organic Test business and a 26.9% decline in the Sensors segment. SANS provided a 4.3% benefit for the First Nine Months of Fiscal 2009.

• In February 2009, the Company announced and initiated a workforce reduction, in order to align the Company's operating cost structure with changing market conditions. As previously mentioned, in June 2009, the Company approved a plan for an additional workforce reduction in response to continued weakness in industrial capital spending. As a result of these actions, the Company incurred severance and benefit arrangement costs totaling $4.0 million, of which $3.7 million and $0.3 million was reported in the Test and Sensors segments, respectively. Of the $4.0 million total costs, $1.8 million, $1.7 million, and $0.5 million were reported in Cost of Sales, Selling and Marketing, and General and Administrative expense, respectively.

• Income from operations decreased 30.0% to $28.5 million, compared to $40.7 million for the First Nine Months of Fiscal 2008, as the unfavorable impact of the volume decline in the organic Test business and Sensors segment, severance and benefit costs associated with the workforce reduction actions, as well as a $3.5 million operating loss from SANS, more than offset reduced variable compensation and other operating expenses in both the organic Test business and the Sensors segment.

• The effective tax rate was 26.5%, an increase of 1.8 percentage points compared to a tax rate of 24.7% for the First Nine Months of Fiscal 2008. This increase was primarily due to a $3.7 million tax benefit from the repatriation of earnings from Japanese affiliates in the First Nine Months of Fiscal 2008, partially offset by a $1.0 million tax benefit from the retroactive extension of U.S. R&D credits in the First Nine Months of Fiscal 2009.

• Earnings per diluted share from continuing operations decreased $0.63, or 34.2%, to $1.21, compared to $1.84 for the First Nine Months of Fiscal 2008. Lower income from operations, unfavorable net interest, and unfavorable losses on foreign currency transactions negatively impacted earnings per diluted share by $0.51, $0.12 and $0.03, respectively.

• Earnings per diluted share from net income decreased $0.75, or 74.3%, to $1.21, compared to $1.96 for the First Half of Fiscal 2008. During the First Half of Fiscal 2008, the Company sold substantially all of the net assets of its Nano Instruments product line, which resulted in the recognition of a net gain from discontinued operations of $2.0 million, or $0.12 per diluted share.

• Cash and cash equivalents at June 27, 2009 totaled $118.9 million, compared to $114.1 million at the end of Fiscal 2008. Cash flows from operations generated $36.9 million. During the First Nine Months of Fiscal 2009, the Company borrowed $16.0 million from its credit facility, paid an additional $21.9 million for the acquisition of SANS, invested $7.7 million in capital expenditures, and purchased 371,500 shares of common stock for $9.5 million.

Detailed Financial Results


 Total Company


Orders and Backlog

Third Quarter of Fiscal 2009 Compared to Third Quarter of Fiscal 2008

The following is a comparison of Third Quarter of Fiscal 2009 and Third Quarter
of Fiscal 2008 orders, separately identifying the impact of the SANS acquisition
as well as the impact of currency translation (in millions):


         Three Months                                                  Three Months
             Ended        Organic                                         Ended
           June 28,       Business        SANS          Currency         June 27,
             2008          Change      Acquisition     Translation         2009
Orders   $       116.7   $    (39.4 ) $         6.1   $        (2.7 ) $         80.7

Orders totaled $80.7 million, a decrease of $36.0 million, or 30.8%, compared to orders of $116.7 million for the Third Quarter of Fiscal 2008. This decrease is primarily due to lower order volume in both the organic Test business and Sensors segment across all geographies, partially offset by a $6.1 million increase from SANS. Orders from international customers for the Third Quarter of Fiscal 2009 represented 72.4% of total orders, compared to 61.4% for the Third Quarter of Fiscal 2008.

Backlog of undelivered orders at June 27, 2009 was $163.3 million, a decrease of 6.9% from backlog of $175.4 million at March 28, 2009. Backlog at the end of the Third Quarter of Fiscal 2009 included $12.3 million from SANS. Backlog at the end of the Third Quarter of Fiscal 2008 was $242.8 million. The Company seldom experiences order cancellations larger than $1.0 million; however, current economic conditions could have an adverse impact on order cancellations in the future.

Results of Operations

Third Quarter of Fiscal 2009 Compared to Third Quarter of Fiscal 2008

The following is a comparison of Third Quarter of Fiscal 2009 and Third Quarter
of Fiscal 2008 statements of operations (in millions, except per share data):


                                         Three Months Ended
                                      June 27,       June 28,
                                        2009           2008         Variance       % Variance
Revenue                              $      90.8    $     116.9    $     (26.1 )         -22.3 %
Cost of sales                               56.2           69.7          (13.5 )         -19.4 %
Gross profit                                34.6           47.2          (12.6 )         -26.7 %
Gross margin                                38.1 %         40.4 %         -2.3 %
Operating expenses:
Selling and marketing                       16.5           19.3           (2.8 )         -14.5 %
General administrative                       9.1            9.0            0.1             1.1 %
Research and development                     4.2            4.1            0.1             2.4 %
Total operating expenses                    29.8           32.4           (2.6 )          -8.0 %

Income from operations                       4.8           14.8          (10.0 )         -67.6 %

Interest expense                            (0.6 )         (0.2 )         (0.4 )         200.0 %
Interest income                              0.1            1.1           (1.0 )         -90.9 %
Other income (expense), net                  0.1           (0.4 )          0.5              NM
Income before income taxes and
discontinued operations                      4.4           15.3          (10.9 )         -71.2 %
Provision for income taxes                   1.3            4.3           (3.0 )         -69.8 %
Income before discontinued
operations                                   3.1           11.0           (7.9 )         -71.8 %

Income from discontinued
operations, net of tax                         -            1.8           (1.8 )            NM
Net income                           $       3.1    $      12.8    $      (9.7 )         -75.8 %
Diluted earnings per share           $      0.19    $      0.74          (0.55 )         -74.3 %

"NM" represents comparisons that are not meaningful to this analysis.

The following is a comparison of Third Quarter of Fiscal 2009 and Third Quarter of Fiscal 2008 results of operations, separately identifying the impact of the SANS acquisition as well as the impact of currency translation (in millions):

                          Three Months                                                       Three Months
                              Ended          Organic                                            Ended
                            June 28,        Business          SANS           Currency          June 27,
                              2008           Change        Acquisition      Translation          2009
Revenue                   $       116.9    $     (29.1 )  $         6.5    $        (3.5 )  $         90.8
Cost of sales                      69.7          (13.4 )            3.8             (3.9 )            56.2
Gross profit                       47.2          (15.7 )            2.7              0.4              34.6
                                   40.4 %                          41.1 %                             38.1 %
Operating expenses:
Selling and marketing              19.3           (2.8 )            0.8             (0.8 )            16.5
General administrative              9.0           (1.6 )            1.9             (0.2 )             9.1
Research and
development                         4.1            0.1                -                -               4.2
Total operating
expenses                           32.4           (4.3 )            2.7             (1.0 )            29.8

Income (loss) from
operations                $        14.8    $     (11.4 )  $           -    $         1.4    $          4.8

Revenue was $90.8 million, a decrease of $26.1 million, or 22.3%, compared to revenue of $116.9 million for the Third Quarter of Fiscal 2008. This decrease was primarily due to lower worldwide volume in the organic Test business and Sensors segment and an estimated $3.5 million unfavorable impact of currency translation, partially offset by $6.5 million from SANS. Revenue from international customers represented 65.3% of total revenue, compared to 63.1% for the Third Quarter of Fiscal 2008.

Gross profit was $34.6 million, a decrease of $12.6 million, or 26.7%, compared to gross profit of $47.2 million for the Third Quarter of Fiscal 2008. Gross profit as a percentage of revenue was 38.1%, a decrease of 2.3 percentage points from 40.4% for the Third Quarter of Fiscal 2008. This decrease was primarily due to the volume decline in both the organic Test business and the Sensors segment, as well as $0.5 million severance and benefit costs associated with an additional workforce reduction that was approved by the Company in the Third Quarter of Fiscal 2009. In addition, SANS positively impacted gross profit by 0.2 percentage points in the Third Quarter of Fiscal 2009.

Selling and marketing expensewas $16.5 million, a decrease of $2.8 million, or 14.5%, compared to $19.3 million for the Third Quarter of Fiscal 2008. This decrease was primarily due to lower compensation and benefits, resulting from a reduction in employees, lower commissions and sales incentives, and reduced discretionary spending in both the organic Test business and the Sensors segment. These decreases were partially offset by a $0.8 million increase from SANS, as well as $0.3 million severance and benefit costs associated with the previously mentioned workforce reduction. Selling and marketing expense as a percentage of revenue for the Third Quarter of Fiscal 2009 was 18.2%, compared to 16.5% for the Third Quarter of Fiscal 2008.

General and administrative expensewas $9.1 million, relatively flat compared to the Third Quarter of Fiscal 2008, as a $1.9 million increase from SANS and $0.3 million severance and benefits costs with the previously mentioned workforce reduction was substantially offset by lower compensation and benefits, resulting from a reduction in employees, and reduced discretionary spending in both organic Test business and Sensors segment. General and administrative expense as a percentage of revenue was 10.0%, compared to 7.7% for the Third Quarter of Fiscal 2008.

Research and development expensewas $4.2 million, relatively flat compared to the Third Quarter of Fiscal 2008. Research and development expense as a percentage of revenue was 4.6%, compared to 3.5% for the Third Quarter of Fiscal 2008.

Income from operationswas $4.8 million, a decrease of $10.0 million, or 67.6%, compared to income from operations of $14.8 million for the Third Quarter of Fiscal 2008, as the unfavorable impact of the volume decline in the organic Test business and Sensors segment, as well as severance and benefit costs associated with the previously mentioned workforce reduction, more than offset reduced operating expenses in both the organic Test business and the Sensors segment. Operating income as a percentage of revenue was 5.3%, compared to 12.7% for the Third Quarter of Fiscal 2008.

Interest expense was $0.6 million, an increase of $0.4 million compared to $0.2 million for the Third Quarter of Fiscal 2008, as the interest expense incurred on the higher level of short-term borrowings was partially offset by a reduction in fixed-rate long-term debt.

Interest income was $0.1 million, a decrease of $1.0 million compared to $1.1 million for the Third Quarter of Fiscal 2008, due to lower interest rates, primarily in Europe, applied to lower average cash and cash equivalent balances compared to the Third Quarter of Fiscal 2008.

Other income (expense), netwas $0.1 million of net other income, an increase of $0.5 million compared to $0.4 million of net other expense in the Third Quarter of Fiscal 2008. This increase was primarily due to net gains on foreign currency transactions compared to net losses on foreign currency transactions in the Third Quarter of Fiscal 2008.

Provision for income taxestotaled $1.3 million for the Third Quarter of Fiscal 2009, a decrease of $3.0 million, or 69.8%, compared to $4.3 million for the Third Quarter of Fiscal 2008, primarily due to decreased income before income taxes and discontinued operations. The effective tax rate for the Third Quarter of Fiscal 2009 was 29.9%, an increase of 1.6 percentage points compared to a tax rate of 28.3% for the Third Quarter of Fiscal 2008.

Net income was $3.1 million, a decrease of $9.7 million, or 75.8%, compared to $12.8 million for the Third Quarter of Fiscal 2008. The decrease was primarily driven by lower income from operations and unfavorable net interest, partially offset by decreased income tax expense. In addition, in the Third Quarter of Fiscal 2008, the Company sold substantially all of the net assets of its Nano Instruments product line, which resulted in the recognition of a net gain from discontinued operations of $1.8 million.

Segment Results


 Test Segment


Orders and Backlog

Third Quarter of Fiscal 2009 Compared to Third Quarter of Fiscal 2008

The following is a comparison of Third Quarter of Fiscal 2009 and Third Quarter
of Fiscal 2008 orders for the Test segment, separately identifying the impact of
the SANS acquisition as well as the impact of currency translation (in
millions):


          Three Months                                                  Three Months
             Ended         Organic                                         Ended
            June 28,       Business        SANS          Currency         June 27,
              2008          Change      Acquisition     Translation         2009
Orders   $         91.9   $    (30.2 ) $         6.1   $        (2.3 ) $         65.5

Orders totaled $65.5 million, a decrease of $26.4 million, or 28.7%, compared to orders of $91.9 million for the Third Quarter of Fiscal 2008, primarily due to lower volume in the organic business across all geographies resulting from sharply lower demand in worldwide industrial capital spending in the segment's markets, partially offset by $6.1 million from SANS. Third Quarter of Fiscal 2008 orders included one large order, in excess of $5 million, totaling approximately $10 million. There were no such large orders in the Third Quarter of Fiscal 2009. The Test segment accounted for 81.2% of total Company orders, compared to 78.7% for the Third Quarter of Fiscal 2008. Orders from international customers represented 72.4% of total orders, compared to 57.7% for the Third Quarter of Fiscal 2008.

Backlog of undelivered orders at the end of the quarter was $152.9 million, a decrease of 8.1% from backlog of $166.3 million at March 28, 2009. Backlog included $12.3 million from SANS. Backlog at the end of the Third Quarter of Fiscal Year 2008 was $229.8 million.

Results of Operations

Third Quarter of Fiscal 2009 Compared to Third Quarter of Fiscal 2008

The following is a comparison of Third Quarter of Fiscal 2009 and Third Quarter
of Fiscal 2008 results of operations for the Test segment, separately
identifying the impact of the SANS acquisition as well as the impact of currency
translation (in millions):


                                   Three Months                                                      Three Months
                                      Ended          Organic                                            Ended
                                     June 28,        Business         SANS           Currency          June 27,
                                       2008           Change       Acquisition      Translation          2009
Revenue                           $         92.4    $    (19.7 )  $         6.5    $        (2.7 )  $         76.5
Cost of sales                               58.8          (9.5 )            3.8             (3.5 )            49.6
Gross profit                                33.6         (10.2 )            2.7              0.8              26.9
                                            36.3 %                         41.1 %                             35.2 %
. . .