10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 27, 2003

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _____________ to ______________

Commission File No. 0-2382

MTS SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)

Minnesota	41-0908057
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
14000 Technology Drive
Eden Prairie, MN	55344
(Address of Principal Executive Offices)	(Zip Code)

Registrant's telephone number, including area code: (952) 937-4000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.25 par value per share

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes x   No o

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $239,517,033.

As of December 5, 2003, the registrant had outstanding 20,940,003 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held January 27, 2004 are incorporated by reference into Part III of this Form 10-K, to the extent described in such Part.

PART I

Item 1.     Business

MTS Systems Corporation (hereafter called “MTS,” “the Company,” or “the Registrant”) is a global supplier of testing products that help customers accelerate and improve their design, development, and manufacturing processes. MTS products are used for determining the mechanical behavior of materials, products, and structures and include computer-based testing and simulation systems, modeling and testing software, and consulting services. The Company is also a leading manufacturer of industrial position sensors. The Company’s mission is to help its customers design, develop, and produce their products faster, with higher quality, and at a lower cost. The Company was incorporated on September 12, 1967.

MTS’s business approach is based on a set of building-block technologies and business processes. Technologies include sensors for measuring machine and process parameters, control technologies for test and process automation, hydraulic and electric servodrives for precise actuation, and application software to tailor a test or automation system to a specific customer’s needs and to analyze results. In combination, these technologies and manufacturing processes provide integrated solutions to customers in a variety of markets. The Company’s manufacturing capability includes the production of low to medium volume standard and custom products and systems.

Customers and Products by Business Segment

The Company’s operations are organized into two business segments: the Test segment and the Industrial segment. The operational alignment of these segments allows the Company to maintain a strategic focus on markets having different product and market applications for the Company’s technologies.

Test Segment: Customers of this segment use the Company’s products, systems, software, and services for research, product development, and quality control to determine the mechanical properties and performance of materials, products, and structures. In addition to standard products, the Company offers highly customized systems for simulation and testing. These systems frequently contain “first of kind” advances that are new to a specific application. Products include rolling road simulators, friction stir welding machines, and earthquake simulation systems. Many of the segment’s products and services support its customers’ mechanical design automation processes. The Test segment serves customers in the following industries:

Ground Vehicles: This market consists of automobile, truck, motorcycle, construction, agricultural equipment, and off-road vehicle manufacturers and their suppliers. Equipment, software, and consulting services are used to test vehicular safety, noise, vibration and harshness, durability, performance, powertrain, and materials. This represents the largest market segment within the Test segment.

Aerospace: These customers use the Company’s products, systems, and software for full-scale structural tests on aircraft and aerospace vehicles and components, subsystems, and materials. Aircraft manufacturers of commercial, military, and general aviation airplanes and their suppliers, including engine manufacturers, are included in the customer base.

Infrastructure: Customers in this market segment include construction and mineral/petroleum production companies and test laboratories owned and/or operated by universities or governmental entities. Equipment, software, & consulting services are used to test effects of seismic activity, effects of forces on structures, characteristics of materials, and biomechanical properties.

These customers also use the Company’s nanomechanical, biomechanical, and servo-hydraulic material testing products and systems in research and product development where a high degree of precision quality control is required during research and production. The nanomechanical test products address the needs of the highly precise semiconductor industry. Biomechanical applications include implants,

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prostheses, and other medical and dental devices and materials. Material producers include metal, ceramic, composite, paper, and plastic manufacturers.

The Test segment typically represents approximately 85% of the Company’s total revenue and provides the principal markets for the Company’s technology.

Industrial Segment: Customers of the Industrial segment use the Company’s measurement and control instrumentation products to measure process variables and to automate production processes. Typical customers include injection molding manufacturers, mobile equipment producers, sawmill manufacturers, and semiconductor and medical equipment companies. Products in the Industrial segment include:

Displacement Position and Liquid Level Sensors based on Magnetostrictive Technology: Displacement sensors accurately measure position and are often used where accurate positioning and continuous control are critical, such as in discrete (piece part) manufacturing machinery, mobile equipment, process control elements and continuous measurement devices. Major applications include injection molding machines, servo-hydraulic cylinders, equipment presses, and sawmills.

Displacement sensors are also used in high-volume applications requiring low-cost position feedback. MTS has the capability of manufacturing low-cost sensor products in various lengths and configurations, while maintaining an extremely high degree of accuracy.

Liquid level sensors accurately measure the level of liquids in tanks and other vessels. These sensors are marketed to control continuous processes in chemical, pharmaceutical, biotechnology, and related markets. The need for highly reliable, accurate measurement of one or more fluid levels is common in most of these applications. These types of products are marketed to the ultimate end users, such as chemical-producing companies, and to original equipment manufacturers that design level measurement or leak detection into their control systems or accessories for remote indication.

Titanium Part Formation: The Company, through its wholly owned subsidiary AeroMet Corporation, has developed an innovative, laser-directed metal deposition process for manufacturing parts made of titanium and other metals. This computer-driven process uses a laser to fuse titanium powder or powder of other metals, layer-by-layer, into solid structures. The process significantly reduces the time and cost required to produce complex parts used in the aircraft and aerospace industries.

The Industrial segment typically represents approximately 15% of the Company’s total revenue.

Common Technologies

MTS produces systems and products by combining 37 years of application engineering knowledge with common technology building-block components that generally consist of measuring and actuation devices, electronic controls, and application software. The components are designed and configured into products and systems to meet the customer’s application specifications. Frequently, special-purpose software is developed to meet a customer’s unique requirements.

Services offered to customers include on-site installation, training of customer personnel, and after-market support and maintenance. Proprietary products include sensors, process controls, motors, actuators, process software, and hardware. Although MTS typically sells its products and systems under fixed-price contracts, certain complex systems development and applied research studies are undertaken on a “cost-plus-fixed-fee” contract basis.

Product Development Highlights for Fiscal 2003

MTS invests in product, system, and application development. A combination of internal and customer funding enables MTS to advance the application of its existing technology and develop new capabilities. Additional product development-related information is included in the Research and Development section of the report. Selected highlights of product developments that were in progress or completed during fiscal 2003 include the following:

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• The Crash Simulator product for the ground vehicles industry has been enhanced to test vehicle and restraint system performance during extremely low acceleration amplitudes. In addition, productivity and utility of the control software has been expanded to enable remote test definition and analysis through network connectivity.

• Component RPC^® Pro software is a new product for application in automotive durability testing. It integrates with MTS hardware to enable faster lab testing of components and subassemblies than the testing that comes from the proving grounds. This product provides customers with more accurate durability test results in less testing time.

• The NanoVision™ product option is a new option for Nano Indenter®XP and XPW test systems that couples software and hardware solutions, enabling nanoscale positioning as well as imaging of small volumes of material. This option combines the accuracy of a closed-loop nanopositioning stage and the power of Test Works® 4 software to provide a quantitative means of sample imaging for research and product development customers. NanoVision™ supplements results obtained in instrumented indentation testing with an illustration of a material’s response.

• Virtual Indenter™ software has been introduced as a finite-element modeling software product for application in research and product development testing across a wide range of industries. The product performs finite-element simulations of nanoindentation experiments. Through animation of simulations, Virtual Indenter™ software provides a tool to explain core fundamentals of contact mechanics in classroom and laboratory environments. It also can be used to evaluate the analytical models for nanoscale contact mechanics.

• Technological advances were achieved in the Tsunami Wave Simulator system. The wave simulator creates tsunami waves in a wave tank that can be programmed for multiple sizes and shapes and periodic waveforms. The systems are used for hydrological test research in the infrastructure industry.

• A new Roadway Simulator (RWS) was introduced for the ground vehicles industry. This unique system performs multiple tests on a wide range of vehicles. The RWS includes many advances in MTS hardware and software simulation technology. In addition, it provides customers with operating cost savings, repeatability, and increased safety for test engineers.

• Significant technological progress was made in developing components for high-performance dynamometers. These components can be applied to demanding applications in racecar applications and passenger car development. Examples include high-fidelity simulation of engine fire impulses and road or tread features for laboratory ride and comfort evaluation.

• Several advances were made in the Friction Stir Welding (FSW) product family in fiscal 2003. Products include standardized component modules that can be integrated into larger systems. Technology improvements were made to weld heads, control and application software, controllers, and manipulation techniques. The FSW systems are used to seamlessly weld physically large and complex structures in the ground vehicle, aerospace, and infrastructure industries.

• The G-Series Temposonics^® modular architecture was introduced for sensor products. The architecture consolidates current modular product lines into a new platform for traditional and new market application. New features include PDA programmability and new visual diagnostic facilities, together with improved stability and accuracy. The

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primary markets include forest product processing, plastic molding machines, hydraulic power applications, and medical and other discrete manufacturing machinery.

• The Temposonics CSP low-cost product line was introduced for application in mobile equipment and medical applications. The low-cost and small size improves the efficiency of mobile equipment control and the reliability and accuracy of medical machines.

• The Industrial segment introduced the EP2 line of Temposonics sensors. In addition, software enhancements to existing smart sensors for precision machinery control included velocity output.

MTS, RPC, Nano Indenter, Test Works and Temposonics are registered trademarks and Nanovision and Virtual Indenter are trademarks of MTS Systems Corporation.

Characteristics of Sales

The Company’s systems and products are sold worldwide to a large variety of industrial companies, government agencies, and academic and other institutions. MTS is generally not dependent on any single customer for a significant portion of its business. However, approximately 50% of the Company’s revenue is associated with the ground vehicles industry. Approximately, 50% of the Company’s revenue is from customers outside the United States.

Test segment products and services range in price from less than $20,000 to over $20 million. The majority of Test segment revenue is generated by contracts valued at less than $10 million. The timing and volume of contracts valued at $10 million or greater may produce volatility in orders, backlog, and quarterly operating results. The majority of customer orders are based on fixed-price quotations and typically have an average sales cycle of six to nine months due to the technical nature of the products and systems. The production cycle for a typical system ranges from one to twelve months, depending on the complexity of the system and the availability of components. The production cycle for larger, more complex systems may be up to three years.

Industrial segment products are sold in quantity at unit prices ranging from $500 to $10,000. Production cycles generally vary from several days to several months, depending on the degree of product customization and manufacturing capacity.

During fiscal 2003, the Company’s products were shipped to North America, Europe, Asia, and Latin America. The Company’s foreign operations and revenue derived from customers located in foreign countries may be affected by local political conditions, export licensing issues and restrictions, and foreign currency exchange rates and volatility.

Sales Channels: The Company sells its products, systems, and services through a direct sales force, independent sales representatives, and, to a much lesser extent, via the Internet and catalog. The sales channels for the Test and Industrial segments are separate from one other. The direct sales force is generally staffed by engineers or highly skilled technicians who are trained to sell MTS equipment, software, and services. The direct sales force is compensated through salary and sales incentives programs, while independent sales representatives are paid on a commission basis.

A list of major domestic and international sales offices for the Company is as follows:

Domestic Sales Offices:

Akron, Ohio	Los Angeles, California
Austin, Texas	Milwaukee, Wisconsin
Baltimore, Maryland	Minneapolis, Minnesota
Boston, Massachusetts	Newark, New Jersey
Charlotte, North Carolina	Philadelphia, Pennsylvania
Chicago, Illinois	Pittsburgh, Pennsylvania
Cincinnati, Ohio	Raleigh, North Carolina
Dallas, Texas	Rockford, Illinois
Dayton, Ohio	San Francisco, California
Denver, Colorado	Seattle, Washington
Detroit, Michigan	Washington, D.C
International Sales Offices:
Beijing, Hong Kong, and Shanghai,	Paris, France
People’s Republic of China	Seoul, South Korea
Berlin and other cities, Germany	Tokyo and other cities, Japan
Gloucester, United Kingdom	Turin, Italy
Gothenburg, Sweden

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The Company also has sales and service representative organizations in nearly all industrialized countries of the world and in many of the developing countries of Latin America, Asia, Africa, and the Middle East. The Company offers a mail-order catalog of standard material testing components, accessories, and products.

For additional information regarding the Company’s operations by geographic area, see Note 4 to the Consolidated Financial Statements, “Business Segment Information,” appearing under Item 8 of this Form 10-K.

Export Licensing: During the fiscal year ended September 27, 2003 and in prior years, MTS made various shipments to Europe, Asia, and other regions throughout the world that required the Company to obtain export approval from the United States government. Although the Company typically does not undertake manufacturing on custom systems or projects until it is assured that the appropriate governmental units will grant export approval, initial design and development work may be performed on certain systems concurrent with the license approval process. Changes in political relations between the United States and foreign countries and/or specific potential customers for which export licenses may be required, as well as various other factors, can adversely affect the Company’s ability to complete a shipment should a previously issued license be unexpectedly withdrawn. Political activities in various regions of the world may result in dramatic changes in export control regulations and restrictions within a relatively short period of time. In addition, the United States government maintains multilateral controls in its agreements with allies and unilateral controls based on U.S. initiatives and foreign policy that may, in certain situations, cause delays or cancellations of the Company’s planned orders or shipments.

Backlog

The Company’s revenue backlog, defined as firm orders from customers that remain unfilled, totaled approximately $159 million, $170 million, and $146 million at September 27, 2003, September 28, 2002, and September 30, 2001, respectively. Based on anticipated production schedules and other factors, the Company believes that approximately $125 million of the backlog at September 27, 2003 will become revenue during fiscal 2004. Delays may occur as a result of technical difficulties, export licensing or other approvals, changes in scope, manufacturing capacity, or the availability of the customer installation sites. Such delays may affect the period in which the backlog is recognized as revenue. The Company’s backlog is subject to order cancellations.

Competition

Test Segment: Equipment, software, and services produced by the Test segment are produced by several other companies throughout the world. The product availability and the intensity of competition vary by product line and by geographic area. The Company’s major competitors include, among others, Instron, FCS Test Systems BV, Saganomia, Schenck, and AVL. Customers will consider such factors, among others, as engineering capabilities, quality, technical features of the equipment, overall responsiveness to customer needs, service, and price as they evaluate supplier options.

Alternatively, in lieu of purchasing equipment, software, or services from MTS or its competitors, customers may elect to contract with testing laboratories, including those operated by certain universities

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and/or governmental units, or they may choose to construct their own testing equipment from commercially available components.

Industrial Segment: The Company competes directly with small-to-medium sized specialty suppliers and also with divisions of large companies specializing in measurement and control instrumentation products. Competitors include Balluff Inc., Ametek Inc., and Novotechnic.

Manufacturing and Engineering

The Company conducts a significant portion of its manufacturing and engineering activities for the Test segment from its Corporate headquarters Eden Prairie, Minnesota. The Test segment also has manufacturing plants in Ann Arbor, Michigan and Oak Ridge, Tennessee. In addition, engineering, project management, final systems assembly, and service may be performed in Berlin, Germany; Tokyo, Japan; Paris, France; Turin, Italy; Gloucester, United Kingdom; and Gothenberg, Sweden. Manufacturing and engineering in the Industrial Segment are located in Cary, North Carolina; Minneapolis, Minnesota; and Ludenscheid, Germany.

Patents and Trademarks

Although the Company’s overall business is not dependent upon any single patent, license, trademark, or copyright, it holds a number of patents, patent applications, licenses, trademarks, and copyrights that the Company considers, in the aggregate, to constitute a valuable asset. In addition to these intellectual properties, the Company relies on its engineering and technological capabilities to maintain its overall position in the marketplace.

Research and Development

MTS generally does not perform basic research, but it does invest in significant product, system, and software application developments. Costs associated with these development programs are expensed as incurred, and aggregated $15.6 million, $15.5 million, and $18.7 million for the years ended September 27, 2003, September 28, 2002, and September 30, 2001, respectively. From time to time, the Company also contracts with its customers to advance the state of technology and increase product functionality.

Executive Officers

The Executive Officers of the Registrant on the date of this report are:

Name	Office	Officer Since	Age
Sidney W. Emery, Jr.	Chairman, President and Chief Executive Officer	1998	57
Laura B. Hamilton	Senior Vice President Test	2000	42
Susan E. Knight	Vice President and Chief Financial Officer	2001	49
Douglas E. Marinaro	Vice President Software and Consulting	2002	42
Kathie M. Staby	Vice President Human Resources	2000	57
Joachim Hellwig	Vice President Sensors	2003	54

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Executive Officers serve at the discretion of and are elected annually by the Company’s Board of Directors. Business experience of the Executive Officers (consisting of positions with the Company, unless otherwise indicated) for the last five years, at a minimum, is as follows:

Officer	Business Experience
S. W. Emery, Jr.	Chairman since January 1999. President and Chief Executive Officer since March,
	1998. Various management and executive positions with Honeywell International
	from 1985 to 1997 (Area Vice President, Western and Southern Europe, from 1994
	to 1997; Group Vice President, Military Avionics Systems, from 1989 to 1994;
	Vice President and General Manager, Space Systems Division, from 1988 to 1989;
	Vice President Operations, Process Controls Division, from 1985 to 1988).
L. B. Hamilton	Senior Vice President of Test since May 2003, Vice President, Material Testing,
	Aerospace, and Manufacturing Operations from 2001 to 2003. Vice President,
	Material Testing and Aerospace Divisions, from 2000 to 2001. Director of
	Re-engineering from 1999 to 2000. Prior thereto, Vice President of Anatomic
	Pathology Business for Quest Diagnostics (a division of Corning, Inc.) from 1997
	to 1999. Executive Director Revenue Services, Quest Diagnostics, from 1995 to
	1997.
S. E. Knight	Vice President and Chief Financial Officer since October 2001. Prior thereto,
	various management and executive positions with Honeywell International from
	1977 to 2001 (Chief Financial Officer of the Home and Building Control global
	business unit from 2000 to 2001; Chief Financial Officer of the North American
	Home and Building Control business unit from 1995 to 2000, and prior to 1995,
	various other management positions, including Corporate Director of Financial
	Planning and Analysis).
D. E. Marinaro	Vice President of Software and Consulting since November 2002. Prior thereto,
	Vice President, Marketing of Toolwire, Inc. from 2000 to 2002. Various
	management positions at MSC Software from 1990 to 1999 (Director Sales/Marketing
	and Business Development for Engineering-e.COM in 1999, Director CAE Data
	Management from 1996 to 1998, and Manager MVISION Business Unit/PDA Engineering
	from 1990 to 1996).
K. M. Staby	Vice President of Human Resources since 2000. Prior thereto, various management
	positions at Medtronic, Inc. from 1974 to 1999 (Vice President, Human Resources
	for Cardiac Rhythm Management from 1991 to 1999 and for Worldwide Distribution
	from 1989 to 1991).
J. Hellwig	Vice President of Sensors since January 2003, Vice President and General
	Manager, Sensor Technologie Europe, from 1993 to January 2003. General Manager,
	Sensor Technologie Europe, from 1989 to 1993. Prior thereto, Co-Owner of Hellwig
	GmbH from 1980 to 1989 and Sales and Development Engineer at Hellwig GmbH from
	1976 to 1980.

Employees

MTS had 1,630 employees at September 27, 2003, including approximately 440 employees located outside the United States. None of the Company’s employees in the United States are currently covered by collective bargaining agreements. In the past, the Company has not experienced any work stoppages at any of its U.S. locations.

Sources and Availability of Raw Materials and Components

A major portion of products and systems delivered to customers may consist of equipment and component parts purchased from third-party vendors. The Company promotes a partnership-type relationship with its vendors, with an emphasis on continuous improvement in a number of critical areas including, but not limited to, quality, performance and technological advances. The Company is dependent, in certain situations, on a limited number of vendors to provide computing hardware and

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software devices and raw materials. However, MTS has not experienced significant problems or issues in procuring any essential materials, parts, or components needed in its production process.

Since the Company generally sells its products based on fixed price contracts, fluctuations in the cost of materials or components between the date of order and the delivery date, may impact the expected profitability of any project. Except for the effect of changes in foreign currency rates, the Company believes that such fluctuations in the cost of raw materials and components have not had a material effect on reported operating results.

Available Information

MTS’ web site address is www.mts.com. MTS has available on its web site annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practical after it electronically files such material with, or furnishes it to, the SEC.

Environmental Matters

Management believes that the Company’s operations are in compliance with federal, state, and local provisions relating to the protection of the environment.

Item 2.     Properties

Properties Located in the United States:

The Company’s Corporate headquarters and major Test segment manufacturing, assembly, and research facility, occupying 420,000 square feet, is located on 56 acres of land in the City of Eden Prairie, Minnesota, a suburb of Minneapolis, Minnesota. Since the original plant was placed in service in 1967, six additions of various sizes, with the most recent addition being completed in 1997, have occurred. At the current time, approximately 50% of this facility is used for manufacturing and assembly, while the remainder is used as general office space.

The Industrial segment has a Company-owned 65,000 square foot, combination office and light manufacturing facility in Cary, North Carolina, a suburb of Raleigh, North Carolina. This facility was originally constructed in 1988 and was expanded in 1992.

In addition to the Eden Prairie, Minnesota facility, the Test Segment has five other domestic locations. The Company leases 29,000 square feet in two facilities located in Madison Heights, Michigan and Milford, Ohio. The lease agreements for these facilities terminate in 2004. The Company owns a 57,200 square foot facility in Ann Arbor, Michigan and has an additional 13,000 square feet in Ann Arbor under lease through 2004. MTS owns a 27,000 square foot facility in Cary, North Carolina. The property was vacated in 2002, and it is currently listed for sale. The Company also leases 71,000 square feet in two facilities located in Oak Ridge, Tennessee. The lease agreements for these facilities terminate in 2004.

The Company also has a five-year lease agreement that terminates in 2006 for a 90,000 square foot office, light manufacturing, and warehousing facility in Montgomeryville, Pennsylvania, a suburb of Philadelphia. This facility was used by the Company’s Automation division, which was sold in fiscal 2003. The Company is currently subleasing a portion of this facility to a third party.

MTS also leases space in various other cities in the United States that serve primarily as sales and service offices. Neither the amount of leased space nor the rental obligations are significant individually or in the aggregate. The agreements pertaining to each of its leased facilities in the United States contain conventional operating lease terms.

International Facilities:

MTS has manufacturing, assembly, warehousing, and/or office facilities in several European countries to support its international operations:

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Berlin, Germany – an 80,000 square foot Company-owned Test segment facility, of which a portion is leased to non-MTS entities. This facility is situated on land leased from the city government. The lease expires in 2052.

Paris, France – a 22,000 square foot leased Test segment facility used for warehousing, service, and administrative functions. The lease expires in 2009.

Lüdenschied, Germany – a 35,000 square foot leased Industrial segment facility located on six acres of land and used for light manufacturing and administrative functions. The lease expires in 2009.

The Company also leases small office and general-purpose space for its sales and service subsidiaries in Gloucester, United Kingdom; Gothenburg, Sweden; Turin, Italy; Seoul, South Korea; Tokyo and other cities in Japan; and Beijing and other cities in the People’s Republic of China. No manufacturing is conducted at these locations.

The Company considers its current facilities adequate to support its operations during fiscal 2004.

Item 3.     Legal Proceedings

From time to time, the Company is party to various claims, legal actions, and complaints arising in the ordinary course of business. Management believes the final resolution of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

Item 4.     Submission of Matters to a Vote of Security Holders

No matters were submitted for a vote of stockholders during the fourth quarter of the fiscal year ended September 27, 2003.

PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters

Shares of the Company’s common stock are traded on The Nasdaq Stock Market’s National Market under the symbol “MTSC.”

The following table sets forth the high and low sales prices for the periods indicated:

Quarter Ended	Low *		High *
December 31, 2001	$	9.10	$	12.35
March 31, 2002	$	8.90	$	11.50
June 30, 2002	$	9.50	$	13.17
September 28, 2002	$	9.60	$	13.20
December 28, 2002	$	8.30	$	12.00
March 29, 2003	$	9.87	$	11.92
June 28, 2003	$	9.75	$	15.25
September 27, 2003	$	12.88	$	15.75
*  Source: The Nasdaq Stock Market, Inc. Summary of Activity Report

At December 5, 2003, there were 1,851 holders of record of the Company’s common stock. This number does not reflect shareholders who hold their shares in the name of broker dealers or other nominees.

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The Company has historically paid quarterly cash dividends and expects to continue such dividends in the future. During each of the past three years, the Company has paid quarterly cash dividends of $.06 per share to holders of its common stock.

Under the terms of the Company’s revolving credit agreement, certain covenants require net worth, as defined, to exceed a defined minimum amount. At September 27, 2003, net worth, as defined, exceeded the minimum requirement by $32.4 million.

Item 6.     Selected Financial Data

The table below provides selected historical financial data for the Company, which should be read in conjunction with the consolidated financial statements, the notes to the consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report. The statement of income data for each of the three years ended September 27, 2003, September 28, 2002, and September 30, 2001 and the balance sheet data at September 27, 2003 and September 28, 2002, are derived from the audited consolidated financial statements included elsewhere in this report. The statement of income data for the years ended September 30, 2000 and 1999 and balance sheet data at September 30, 2001, 2000, and 1999 are derived from the financial statements of the Company that are not included in this report. All amounts have been restated to reflect the sale of the discontinued Automation business, as discussed in Note 2 to the consolidated financial statements.

	2003			2002			2001			2000			1999
Operations
Revenue	$	340,087		$	327,185		$	355,859		$	342,631		$	350,836
Gross profit		127,297			125,823			131,314			114,067			135,713
Gross profit as a % of revenue		37.4	%		38.5	%		36.9	%		33.3	%		38.7	%
Research and development expenses	$	15,583		$	15,491		$	18,659		$	21,111		$	23,062
Research and development as a % of revenue		4.6	%		4.7	%		5.2	%		6.2	%		6.6	%
Effective income tax rate		35	%		32	%		35	%		31	%		31	%
Income before cumulative effect of
accounting changes1	$	20,313		$	18,003		$	13,106		$	3,170		$	11,132
Return on sales2		6.0	%		5.5	%		3.7	%		0.9	%		3.2	%
Net income	$	20,313		$	4,282		$	10,614		$	3,170		$	11,132
Net income as a % of revenue		6.0	%		1.3	%		3.0	%		0.9	%		3.2	%
Dilutive earnings per share of common stock
before accounting changes3	$	0.95		$	0.84		$	0.62		$	0.15		$	0.53
Dilutive earnings per share of common stock	$	0.95		$	0.20		$	0.50		$	0.15		$	0.53
Weighted average dilutive shares
outstanding during the year4		21,474			21,433			21,070			20,935			21,183
Net interest expense	$	(1,452	)	$	(3,002	)	$	(4,691	)	$	4,852		$	4,629
Depreciation and amortization		9,772			9,971			12,180			13,590			12,527

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	2003			2002			2001			2000			1999
Financial Position
Current assets	$	264,713		$	259,101		$	255,071		$	246,959		$	248,512
Current liabilities		109,174			112,756			111,178		$	109,114			106,156
Current ratio		2.4:1			2.3:1			2.3:1			2.3:1			2.3:1
Net working capital	$	155,539		$	146,345		$	143,893		$	137,845		$	142,356
Property and equipment, net		56,204			56,884			61,834			66,088			67,864
Total assets		330,378			325,571			337,443			333,653			338,829
Interest-bearing debt		37,709			51,992			59,305			75,712			71,637
Total shareholders’ investment		176,106			162,265			160,738			153,629			159,088
Interest-bearing debt as a % of
shareholders’ investment		21.4	%		32.0	%		36.9	%		49.3	%		45.0	%
Return on equity5		12.5	%		11.2	%		8.5	%		2.0	%		7.4	%
Return on equity using net income6		12.5	%		2.7	%		6.9	%		2.0	%		7.4	%
Shareholders’ investment per share7		8.20			7.57			7.63			7.34			7.51
Other Statistics
Number of common shareholders of
record at year-end8		1,907			2,058			2,086			2,229			2,055
Number of employees at year-end		1,630			1,698			1,993			2,088			2,220
New orders received	$	324,237		$	351,583		$	341,663		$	359,297		$	315,163
Backlog of orders at year-end		159,252			169,993			146,157			145,281			138,411
Cash dividends paid per share		0.24			0.24			0.24			0.24			0.24

¹ Fiscal 2002 excludes the negative impact, net of tax, of the cumulative effect of the adoption of Statement of Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets,” of $13,721 (of which $9,198 and $4,523 were associated with discontinued operations and continuing operations, respectively) or $0.64 per diluted share. Fiscal 2001 excludes the negative impact of the cumulative effect of the adoption of Staff Accounting Bulleting (SAB) No. 101, “Revenue Recognition in Financial Statements,” of $2,492 (all of which was associated with continuing operations) or $0.12 per diluted share. Management believes this non-GAAP financial measure provides useful information to investors because, compared to net income, the most directly comparable financial measure prepared in accordance with GAAP, it more accurately reflects the differences in operating results between fiscal years. Net income, computed by including the cumulative effect of the accounting changes, was $4,282 and $10,614 for fiscal 2002 and 2001, respectively.

² Calculated by dividing income before cumulative effect of accounting changes (see footnote 1) by revenue. Management believes this non-GAAP financial measure provides useful information to investors because, compared to net income as a percent of revenue, net income being the most directly comparable financial measure prepared in accordance with GAAP, it more accurately reflects differences in operating results between fiscal years. Using net income rather than income before cumulative effect of accounting changes in this calculation produces a ratio of 1.3% and 3.0% for fiscal 2002 and 2001, respectively.

³ Calculated by dividing income before cumulative effect of accounting changes (see footnote 1) by weighted average dilutive shares outstanding during the year. Management believes this non-GAAP financial measure provides useful information to investors because, compared to diluted earnings per share of common stock, the most directly comparable financial measure prepared in accordance with GAAP, it more accurately reflects the differences in operating results between fiscal years. Using net income rather than income before cumulative effect of accounting changes in the calculation results in $0.20 and $0.50 per share for fiscal 2002 and 2001, respectively.

⁴ Assumes the conversion potentially converted common shares using the treasury stock method.

⁵ Calculated by dividing income before cumulative effect of accounting changes (see footnote 1) by beginning shareholders’ investment. Management believes this non-GAAP financial measure provides useful information to investors because, compared to return on equity calculated by dividing net income by beginning shareholders’ investment, net income being the most directly comparable financial measure prepared in accordance with GAAP, it more accurately reflects the differences in operating results between fiscal years. Management believes this ratio measures the return management is generating on shareholder investment and the efficient use of Company assets and/or the utilization of financial or trade credit to leverage shareholder investment. Management also believes this ratio is useful in comparing the Company’s results with a broader range of investments and, thus, believes it is better to use income before cumulative effect of accounting changes than net income. Using net income rather than income before cumulative effect of accounting changes produces a ratio of 2.7% and 6.9% for fiscal 2002 and 2001, respectively.

⁶ Calculated by dividing net income by beginning shareholders’ investment.

⁷ Calculated by dividing ending shareholders’ investment by weighted average dilutive shares outstanding during the year.

⁸ Does not include shareholders whose stock is held in the name of broker dealers or other nominees.

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Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies:

Fiscal Year
Effective with fiscal year 2002, the Company changed its fiscal year end to the Saturday closest to September 30. For the years ended September 27, 2003 and September 28, 2002, the Company's fiscal year consisted of 52 weeks. Effective with fiscal 2003, the Company changed its fiscal quarter ends to the Saturday closest to December 31, March 31, and June 30. This change had no material impact on comparability of the Company’s financial statements.

Revenue Recognition
The Company implemented the revenue recognition principles of Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as of October 1, 2000. The cumulative effect adjustment of the change in accounting for all periods through September 30, 2000 was a reduction in net income of $2.5 million (net of income taxes of $1.6 million), or $0.12 per diluted share, which was accounted for as a change to the financial results for the first quarter of fiscal 2001. During the fiscal years ended September 28, 2002 and September 30, 2001, the Company recognized $0.4 million and $10.0 million of revenues, respectively, which were previously recognized prior to the Company's adoption of SAB 101.

For orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocol, revenue is recognized when systems are shipped and title has passed to the customer, less the greater of the fair value associated with installation or the amount of consideration that is contingent upon installation, which is deferred until customer acceptance. In cases where special acceptance protocols exist, the Company recognizes revenue upon the completion of installation and fulfillment of obligations specific to the terms of the customer’s contract. Revenue on contracts requiring longer delivery periods, generally longer than six months (long-term contracts), is recognized using the percentage-of-completion method based on the cost incurred to date relative to estimated total cost of the contract. In most cases, orders with complex installations and/or unusual acceptance protocols involve long-term contracts for custom systems that follow the percentage-of-completion method of revenue recognition through customer acceptance.

The Company enters into long-term contracts for customized equipment sold to its customers. Under the terms of such contracts, revenue recognized using the percentage-of-completion method may not be invoiced until completion of contractual milestones, upon shipment of the equipment, or upon installation and acceptance by the customer. Unbilled amounts for these contracts appear in the Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable.

Revenue for services is recognized as the service is performed and ratably over a defined contractual period for service maintenance contracts.

In light of EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocol are considered to involve separable elements. Sufficient evidence of fair value of these elements exists to allow revenue recognition for these systems upon shipment, less the greater of the fair value associated with installation and training (if applicable) or the amount of revenue that is deemed contingent upon these elements, which is deferred until customer acceptance. In cases where special acceptance protocols exist, installation and training are not considered to be separable from the other elements of the arrangement. Accordingly, revenue for these systems is recognized upon the completion of installation and fulfillment of obligations specific to the terms of the arrangement.

For contracts that involve delivery periods generally longer than six months, due to the complexity of installation and acceptance terms, the design, manufacture and installation elements of such arrangements, in aggregate, fall within the scope of accounting literature prescribing percentage-of-completion accounting through customer acceptance. However, in light of EITF 00-21, when elements that would not separately fall within the scope of accounting literature prescribing percentage-of-

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completion accounting are included in an arrangement, the fair value of these elements is separated from the arrangement and accounted for as such services are provided.

Inventories
Inventories at September 27, 2003 and September 28, 2002 are as follows:

		2003		2002
	(expressed in thousands)
Customer projects in
various stages of
completion	$	12,260	$	14,331
Components,
assemblies and parts		22,449		25,914
Total	$	34,709	$	40,245

Inventories consist of material, labor, and overhead costs and are stated at the lower of cost or market, determined under the first-in, first-out accounting method.

Warranty Obligations
Sales of the Company’s products and systems are subject to limited warranty guarantees that are included in customer contracts. For sales that include installation services, warranty guarantees typically extend for a period of twelve months from the date of either shipment or acceptance. Product guarantees typically extend for a period of twenty-four months from the date of purchase. Under the terms of these warranties, the Company is obligated to repair or replace any components or assemblies it deems defective due to workmanship or materials. The Company reserves the right to reject warranty claims where it determines that failure is due to normal wear, customer modifications, improper maintenance, or misuse. The Company records warranty provisions monthly based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects historical warranty incidence over the preceding twelve-month period. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. Warranty provisions and claims for the years ended September 27, 2003 and September 28, 2002 were as follows:

		2003			2002
	(expressed in thousands)
Beginning balance	$	4,482		$	4,324
Warranty provisions		5,927			4,443
Warranty claims		(5,850	)		(4,378	)
Translation adjustment		303			93
Ending balance	$	4,862		$	4,482

Management Discussion and Analysis:

Customer Orders and Backlog

		2003		2002		2001
	(expressed in thousands)
Customer Orders	$	324,237	$	351,583	$	341,663
Backlog of
Undelivered Orders	$	159,252	$	169,993	$	146,157

New orders from customers during fiscal 2003 totaled $324.2 million, a decrease of $27.4 million, or 7.8%, compared to customer orders of $351.6 million booked in fiscal 2002. In fiscal 2001, customer orders totaled $341.7 million. The negative trend in the last year is the result of continued weakness in North American and Asian Test segment markets, partially offset by increased volume in Europe. At this time, the Company does not anticipate a significant change in these economies in the near term. In fiscal 2003, the Company received one order in excess of $10 million, compared to three such orders in

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fiscal 2002 and one in fiscal 2001, all of which were within the Test segment. The Company has been notified of the potential cancellation of a customer order for $10.4 million. This order was included in year-end backlog in both fiscal 2003 and 2002. Orders increased as a result of the translation of foreign-denominated currency orders into U.S. dollars by $12.2 million in fiscal 2003. Excluding the impact of currency, fiscal 2003 orders would have been $312.0 million.

Orders for the Test segment totaled $274.7 million in fiscal 2003, a decrease of $33.5 million, or 10.9%, compared to customer orders of $308.2 million for fiscal 2002. Test segment orders for fiscal 2001 totaled $303.6 million. The Test segment booked 84.7% of total Company orders in fiscal 2003, compared to 87.7% for fiscal 2002 and 88.8% for fiscal 2001. Orders for the Test segment in the Americas and Asia were significantly down, while orders in Europe increased compared to fiscal 2002. The growth in Europe is largely due to continued demand for ground vehicle products. During fiscal 2003, the Company experienced reduced order demand in the global aerospace and infrastructure markets as customer restrictions on new capital spending continued. Fiscal 2002 orders were also higher due to a large project order with the Japanese government, which did not repeat in fiscal 2003.

Customer orders for the Industrial segment totaled $49.5 million for fiscal 2003, an increase of $6.1 million, or 14.1%, compared to customer orders during fiscal 2002 of $43.4 million. New customer orders for the Industrial segment in fiscal 2001 totaled $38.1 million. The increase reflects increased Sensors business volume in Europe from new markets and customer inventory replenishment. This segment accounted for 15.3% of total Company orders during fiscal 2003, compared to 12.3% and 11.2% in fiscal 2002 and fiscal 2001, respectively. During fiscal 2001, the Industrial segment experienced weak orders worldwide for sensors.

On a geographic basis, orders from customers located in the Americas totaled $146.7 million during fiscal 2003, down $28.5 million, or 16.3%, compared to orders of $175.2 million for fiscal 2002. Orders received in the Americas during fiscal 2001 totaled $169.5 million. International orders received during fiscal 2003 of $177.5 million increased by $1.1 million, or 0.6%, compared to orders received during fiscal 2002 of $176.4 million. International orders in fiscal 2001 totaled $172.2 million. The backlog of undelivered orders at September 27, 2003 totaled $159.3 million, a decrease of approximately $10.7 million, or 6.3%, compared to backlog of $170.0 million at September 28, 2002. Backlog at the end of fiscal 2001 totaled $146.2 million. The decrease in backlog is attributable to a decrease in long-cycle versus short-cycle orders in fiscal 2003. A reduction in large custom project orders accounted for the majority of the decrease in backlog. 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 customers’ discretion.

Revenue

		2003		2002		2001
	(expressed in thousands)
Revenue	$	340,087	$	327,185	$	355,859

Revenue of $340.1 million for fiscal 2003 increased $12.9 million, or 3.9%, compared to $327.2 million for fiscal 2002. Revenue for fiscal 2001 totaled $355.9 million. On a segment basis, revenue for the Test segment in fiscal 2003 totaled $292.0 million, comparing favorably to revenue of $287.0 million for fiscal 2002 and unfavorably to revenue of $316.1 million for fiscal 2001. The increase in revenue for fiscal 2003 was principally due to an increase in beginning backlog, partially offset by the timing of large custom projects. The decrease in revenue for fiscal 2002 was principally driven by the decline in capital spending in worldwide industrial and ground vehicles markets. The shorter cycle businesses, particularly those related to the ground vehicle markets, experienced the largest decline in revenue. Revenue in the Industrial segment totaled $48.1 million for fiscal 2003, compared to $40.2 million for fiscal 2002 and $39.8 million for fiscal 2001. Revenue in the Industrial segment increased in fiscal 2003 compared to fiscal 2002 largely due to sales into new markets as well as customer inventory replenishment in the European Sensors business and increased development revenues in the AeroMet business. Fiscal 2002 was negatively impacted by worldwide economic factors, which resulted in a significant drop in demand from fiscal 2001. Translating foreign-denominated revenue into U.S. dollars resulted in an increase in

14

revenue in fiscal 2003 of approximately $17.6 million. Excluding the impact of currency, revenue in fiscal 2003 would have decreased by approximately $4.7 million compared to fiscal 2002.

Revenue of $157.3 million in the Americas for fiscal 2003 was flat compared to revenue of $157.9 million for fiscal 2002. Revenue in the Americas for fiscal 2001 totaled $169.3 million. Revenue in Europe of $119.4 million for fiscal 2003 increased $27.1 million, or 29.4%, compared to $92.3 million for fiscal 2002 and $95.2 million for fiscal 2001. Revenue of $60.5 million in Asia for fiscal 2003 decreased $16.1 million, or 21.0%, compared to $76.6 million for fiscal 2002 and $90.9 million for fiscal 2001. Other miscellaneous international revenue totaled $2.9 million, $0.4 million, and $0.5 million, respectively, for fiscal 2003, 2002, and 2001.

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 reported revenue.

Gross Profit

		2003		2002		2001
	(expressed in thousands)
Gross Profit	$	127,297	$	125,823	$	131,314
% of Revenue		37.4%		38.5%		36.9%

Gross profit as a percentage of revenue decreased to 37.4% for fiscal 2003 from 38.5% for fiscal 2002 and increased from 36.9% for fiscal 2001. The gross profit rate for the Test segment was 35.7% for fiscal 2003, down from 37.5% for fiscal 2002 and up from 35.2% for fiscal 2001, while the gross profit rate in the Industrial segment was 48.0% in fiscal 2003, roughly flat compared to 47.7% in fiscal 2002 and down from 49.7% in fiscal 2001. Gross profit in the Test segment decreased during fiscal 2003, primarily due to product mix. In addition, fiscal 2002 gross profit reflected high margins in the aerospace market, resulting from a large high-margin project which did not repeat in fiscal 2003. Unfavorable product mix in the Industrial segment was offset by increased sales volume, resulting in a flat gross margin rate for fiscal 2003 compared to fiscal 2002.

Translating foreign denominated revenue into U.S. dollars resulted in an increase in gross profit in fiscal 2003 of approximately $5.2 million. Excluding the impact of currency, gross profit in fiscal 2003 would have decreased by approximately $3.7 million compared to fiscal 2002.

Selling, General, and Administrative Expenses

		2003		2002		2001
	(expressed in thousands)
Selling	$	52,210	$	51,120	$	54,072
General &   Administrative		26,388		27,924		32,173
Total	$	78,598	$	79,044	$	86,245
% of Revenue		23.1%		24.2%		24.2%

Selling, general and administrative (“SG&A”) expenses as a percentage of revenue decreased 1.1 percentage points in fiscal 2003 compared to fiscal 2002. Selling expense increased in fiscal 2003 consistent with the fiscal 2003 increase in revenue, partially offset by the benefit of headcount reductions made in late fiscal 2002. General & administrative expenses decreased during fiscal 2003, principally due to $0.8 million of non-recurring audit and related fees associated with the Company’s fiscal 2002 and prior year restatement activity as well as the fiscal 2003 recovery of $0.5 million in bad debt previously written off. Over the past several years, the Company has focused on several initiatives in both the Test and Industrial segments aimed at overall cost control and the alignment of resources with current and anticipated economic conditions and with markets having the greatest potential.

SG&A expense in the Test segment decreased to $62.7 million in fiscal 2003 from $64.9 million and $72.7 million in fiscal 2002 and 2001, respectively. The reduction in fiscal 2003 was primarily due to

15

fiscal 2002 non-recurring audit and related expenses, as well as the fiscal 2003 recovery of bad debt, which are both discussed above. In fiscal 2001, general and administrative expenses of the Test segment included a provision of $1.8 million related to the restructuring of the Company’s manufacturing facility located in France. The Company also recorded $0.6 million of expenses associated with the closure of its laboratory instruments business that was acquired as part of its acquisition of DSP Technology, Inc. (“DSP”).

SG&A expense in the Industrial segment in fiscal 2003 increased to $15.9 million from $14.1 million in fiscal 2002 and $13.5 million in fiscal 2001. The increase is primarily due to an increase in selling expense consistent with the increase in revenue in the Sensors business. Selling expense as a percentage of revenue decreased to 18.3% in fiscal 2003 from 19.7% in fiscal 2002 due to the benefit of headcount reductions in fiscal 2002.

Research and Development Expenses

		2003		2002		2001
	(expressed in thousands)
Research & Development	$	15,583	$	15,491	$	18,659
% of Revenue		4.6%		4.7%		5.2%

The Company provides research and development (R&D) funds for equipment and software application development in the Test and Industrial segments. During fiscal 2003, approximately 80.0% of R&D spending was in the Test Segment, compared to 81.7% and 84.4%, respectively, in fiscal 2002 and 2001.

The overall decrease in R&D spending as a percentage of revenue over the three-year period is primarily due to management initiatives to focus spending on developments that have the greatest market potential and the highest return opportunity. As a result of these initiatives and management’s planned cutback in spending, R&D spending as a percentage of revenue decreased to 4.6% and 4.7% in fiscal 2003 and 2002, respectively, compared to 5.2% in fiscal 2001.

Interest Income (Expense)

		2003			2002			2001
	(expressed in thousands)
Interest Expense	$	(3,621	)	$	(4,203	)	$	(5,063	)
Interest Income		2,169			1,201			372

Interest expense of $3.6 million in fiscal 2003 decreased compared to interest expense of $4.2 million and $5.1 million in fiscal 2002 and 2001, respectively, primarily due to reduced long-term debt obligations throughout the three-year period. Interest income of $2.2 million in fiscal 2003 increased compared to interest income of $1.2 million and $0.3 million in fiscal 2002 and 2001, respectively, resulting from interest earned on increased short-term investment balances in fiscal 2003 and 2002.

Gain on Investment
During fiscal 2002 the Company liquidated its investment in Mechanical Dynamics, Inc. The Company sold securities and recorded proceeds from the sale of $4.9 million, which produced a gain on sale of $2.6 million. This transaction represented the entire amount of the holdings.

Other Income, net
Other income for fiscal 2003 primarily derived from non-recurring proceeds from penalties associated with a canceled customer contract, partially offset by the negative impact of foreign currency exchange on the settlement of transactions. Other income for fiscal 2002 and 2001 primarily derived from the positive impact of foreign currency exchange on settlement of transactions.

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Operating Results

		2003		2002		2001
Income Before Income Taxes, Discontinued   Operations, and Cumulative Effect of   Accounting Changes	$	32,516	$	32,883	$	23,844
% of Revenue		9.6%		10.1%		6.7%
Effective Income Tax Rate		35%		32%		35%
Income Before Discontinued Operations and   Cumulative Effect of Accounting Changes	$	21,291	$	22,270	$	15,556
Income Before Discontinued Operations and Cumulative   Effect of Accounting Changes Per Diluted Share	$	1.00	$	1.04	$	0.74

Income before income taxes, discontinued operations, and cumulative effect of accounting changes totaled $32.5 million for fiscal 2003, compared with $32.9 million for fiscal 2002, as increased revenue and income from operations in fiscal 2003 was more than offset by the impact of the one-time gain on sale of an investment recorded in fiscal 2002. Income before income taxes, discontinued operations, and cumulative effect of accounting changes for fiscal 2001 included a charge of $1.9 million (of which $1.3 million is reflected as an increase to Cost of Sales and $0.6 million as an increase to General and Administrative expense) related to the closure of its laboratory instruments business acquired as part of its acquisition of DSP Technology, Inc. (“DSP”). In addition, the Company also recorded a charge of $2.3 million in fiscal 2001 as a result of its decision to restructure operations in France. Translating foreign-denominated operating profit into U.S. dollars resulted in an increase in operating profit in fiscal 2003 of approximately $2.2 million. Excluding the impact of currency, operating profit in fiscal 2003 would have decreased by approximately $2.6 million compared to fiscal 2002.

Income from operations for the Test segment was $29.1 million in fiscal 2003, flat compared to $29.0 million for fiscal 2002, as lower gross margins were mitigated by reduced general and administrative expenses. Income from operations for the Test segment totaled $23.8 million in 2001. The significant increase from fiscal 2001 to fiscal 2002 was the result of improvements in the project management of large, complex custom projects, favorable product mix, and the benefit of cost and productivity initiatives. Income from operations for the Industrial segment increased to $4.0 million for fiscal 2003 from $2.2 million for fiscal 2002, primarily due to increased revenue. Income from operations for the Industrial segment totaled $2.6 million in fiscal 2001.

The effective tax rate for each of the years presented is impacted by the geographic mix of income, with foreign income generally taxed at higher rates than domestic income. In addition, the effective tax rate is favorably impacted by the Company’s foreign exports and qualified R&D costs. A greater percentage of the Company’s income was earned in foreign jurisdictions in fiscal 2003 compared to fiscal 2002 and 2001. Additionally, in fiscal 2002, the Company’s foreign exports were proportionately higher than in fiscal years 2003 and 2001, increasing the favorable rate impact of related tax deductions.

In fiscal 2003, income before discontinued operations and the cumulative effect of accounting changes, net of tax decreased to $21.3 million ($1.00 per diluted share), from $22.3 million ($1.04 per diluted share) for fiscal 2002 and increased from $15.6 million ($0.74 per diluted share) for fiscal 2001.

Discontinued Operations

During the second and third quarters of fiscal 2003, the Company sold its Automation division, which was based in New Ulm, Minnesota and also maintained operations in Montgomeryville, Pennsylvania and Freiburg and Straslund, Germany. On March 31, 2003, the Company sold substantially all of the net assets and intellectual property associated with the Automation division’s gradient amplifier product line. On April 11, 2003, the Company sold all the remaining net assets of the North American Automation division, based in New Ulm, Minnesota and on April 30, 2003 sold, to the same buyer, its stock in the Automation division’s German operations, which completed the sale of the Company’s entire Automation division and its exit from the motor and amplifier business. In March 2003, the Company discontinued

17

the custom military business of its Automation division. As a result of these sales, the Company recorded a loss of $1.2 million, net of taxes.

The Automation division was historically included in the Company’s Industrial segment for financial reporting, and the results of the operations of the Automation division have been reported as discontinued operations.

Following are the operating results of the discontinued operations included in the Company’s results for the respective periods:

		2003		2002			2001
	(expressed in thousands)
Revenue	$	15,756	$	28,686		$	41,500
Income (loss) on discontinued operations before   taxes, loss on sale and cumulative effect of   accounting change	$	353	$	(6,961	)	$	(4,013	)

At September 28, 2002, assets of discontinued operations consisted primarily of inventory, accounts receivable and property and equipment of $6.6 million, $4.7 million, and $2.7 million, respectively, and liabilities of discontinued operations of $1.8 million consisted primarily of accounts payable and accrued payroll and related costs.

Cash Flows
Overall cash flow has significantly improved from fiscal 2001 due to the Company’s focus on working capital improvement initiatives. During fiscal 2003, cash and cash equivalents increased by $11.7 million, and short-term investments increased by $23.5 million.

Cash flows from operating activities provided cash of $55.3 million during fiscal 2003, compared to $84.3 million generated in fiscal 2002 and $38.1 million generated in fiscal 2001. The decrease in cash provided by operating activities during fiscal 2003 compared to fiscal 2002 was principally due to significant improvements in accounts receivable and inventory made during fiscal 2002. The impact of these actions resulted in accounts receivables and inventory balances, in the aggregate, decreasing by $26.5 million more in fiscal 2002 than in fiscal 2003.

 Investing activities consumed cash of $17.4 million during fiscal 2003, compared to cash usages of $35.3 million in fiscal 2002 and $8.1 million in fiscal 2001. During fiscal 2003, the Company invested $84.6 million in short-term investments and $6.6 million for additions to property and equipment, partially offset by realized proceeds of $61.1 million and $12.6 million from the maturity of short-term investments and the sale of businesses, respectively. During fiscal 2002, the Company invested $35.1 million in short-term investments and $5.1 million in property and equipment, and realized proceeds of $4.9 million from the sale of its investment in Mechanical Dynamics, Inc. stock. During fiscal 2001, cash invested was used for additions to property and equipment.

 Cash flows from financing activities required the use of cash of $29.9 million during fiscal 2003, primarily as a result of the repurchases of the Company’s common stock of $16.5 million, repayment of interest-bearing debt of $15.4 million, and payment of cash dividends of $5.1 million, partially offset by $7.0 million received in connection with employees’ exercise of stock options and purchases under the Company’s stock purchase plan. During fiscal 2002, the Company used $11.5 million of cash for financing activities, primarily for the net repayment of interest-bearing debt of $7.0 million, payment of cash dividends of $5.1 million, and repurchases of its common stock of $1.5 million, partially offset by funds received in connection with employees’ exercise of stock options and purchases under the Company’s stock purchase plan. During fiscal 2001, the Company used cash of $19.9 million for financing activities, primarily for the net repayment of interest-bearing debt of $16.6 million, payment of cash dividends of $5.0 million, and repurchases of its common stock of $2.7 million, partially offset by funds received in connection with employees’ exercise of stock options and stock purchases.

18

Liquidity and Capital Resources
The Company believes that its anticipated operating cash flow, funds available from cash equivalents and short-term investments totaling $132.7 million at September 27, 2003, and unused financing sources are adequate to fund ongoing operations, capital expenditures, and share repurchases, as well as to fund opportunities to grow its business organically and through business acquisitions.

At September 27, 2003, the Company’s contractual obligations are as follows:

			Payments Due by Period (in thousands of dollars)
Contractual Obligations	Total		Less than 1 year		1 – 3 years		4 – 5 years		More than 5 years
Notes Payable to Banks	$	383	$	383	$	–	$	–	$	–
Long-Term Debt Obligations		37,326		6,839		13,563		14,616		2,308
Capital Lease Obligations		262		95		133		34		–
Operating Lease Obligations		16,018		3,937		6,403		2,599		3,079
Total	$	53,989	$	11,254	$	20,099	$	17,249	$	5,387

The Company had no amounts outstanding on its primary $25 million revolving bank credit facility during fiscal 2003. The Company’s primary foreign subsidiaries also have committed and uncommitted bank facilities available on either a freestanding basis or with guarantees from the Company. At September 27, 2003, the Company was in compliance with the financial terms and conditions of each of its debt and credit facility agreements.

Total interest-bearing debt at September 27, 2003 was $37.7 million, down from $52.0 million at September 28, 2002. Operating leases are primarily for office space related to sales and service offices. Letters of credit and guarantees are primarily issued to secure advance payments received and performance on project contracts. At September 27, 2003, the Company had letters of credit outstanding totaling $ 48.1 million and guarantees totaling $11.6 million.

Shareholders’ Investment increased by $13.8 million during fiscal 2003, to $176.1 million. The change in Shareholders’ Investment during fiscal 2003 was primarily the result of profitable operating results, foreign currency translation gains of $7.3 million, funds and related tax benefits received from the exercise of employee stock options, and employee purchases of the Company’s stock under its stock purchase plan of $8.1 million. This increase was partially offset by $16.5 million in repurchases of the Company’s stock and $5.1 million in payment of cash dividends.

Changes in Foreign Currency Exchange Rates
The Company conducts business in countries outside the United States and is exposed to market risk from changes in foreign currency exchange rates that can affect its operating results and financial condition. To minimize this risk, the Company manages exposure to changes in foreign currency rates, principally through forward currency exchange contracts to set the dollar value of expected foreign currency-denominated assets, liabilities, and transactions. Gains and losses on these contracts offset gains and losses on the assets, liabilities, and transactions being hedged.

Historically, approximately 50-55% of the Company’s revenue results from shipments to customers outside the United States, and about 65% of this revenue (approximately 30% of the Company’s total revenue) is denominated in currencies other than the U.S. dollar. As a result, a strengthening of the U.S. dollar relative to foreign currencies decreases the foreign currency-denominated revenue and earnings when they are translated to U.S. dollars. Conversely, a weakening of the U.S. dollar has the reverse effect on revenue and earnings. Gains and losses attributed to translating the financial statements for all non-U.S. subsidiaries are included in the currency translation adjustments.

The gains and losses on foreign currency transactions and on the translation of current foreign currency-denominated assets and liabilities are included in Other Income, net in the accompanying consolidated statements of income. Mark-to-market gains or losses on transactions designated as exposures in the

19

Company’s currency hedging program, as well as on the translation of non-current assets and liabilities, are reported in Other Comprehensive Income on the balance sheet.

Restructuring and Other Charges
During fiscal 2003, the Company had no significant restructuring activities related to business consolidation other than the discontinuation of its Automation division (see Note 2 to the Consolidated Financial Statements).

During fiscal 2002, the Company consolidated its Electromechanical Testing Division into Eden Prairie, Minnesota from Raleigh, North Carolina. The physical move of the business and the facility closure were completed during fiscal 2002. As a result of the consolidation, the Company recorded a $0.4 million charge for severance-related costs and a $0.6 million charge to write down inventory. Substantially all of the severance costs were paid during fiscal 2002.

During fiscal 2001, the Company recorded a restructuring charge of $2.3 million as a result of the closure of its manufacturing operations in France and the transfer of this product line to its Electromechanical Testing Division in North Carolina. Substantially all the necessary cash outlays were completed during fiscal 2001. These costs were financed primarily with funds from continuing operations and borrowings under the Company’s bank line of credit. In addition, during fiscal 2001 the Company recorded a restructuring charge of $1.9 million related to the discontinuation of a line of data acquisition products acquired as part of its 1999 acquisition of DSP Technology, Inc. (“DSP”) in 1999. This included a provision for severance costs of $0.8 million, the write-off of leasehold improvements and production and other equipment of $0.3 million, and other costs of $0.8 million associated with closure of the facility, the wind-down of the related product line, excess and obsolete inventory, uncollectible receivables and the write-off of fixed assets. Of the total $1.9 million, $1.3 million was charged to Cost of Sales and $0.6 million was charged to General and Administrative Expense. The activity related to the provision was materially complete at September 30, 2001, and no additional charges were incurred during fiscal 2002.

For the three years ended September 27, 2003, September 28, 2002, and September 30, 2001, the reserve for restructuring is as follows:

Year	Beginning Balance		Provision		Write-off			Ending Balance
			(expressed in thousands)
2001	$	–	$	4,193	$	(3,972	)	$	221
2002		221		1,019		(1,219	)		21
2003		21		–		(21	)		–

Recent Accounting Pronouncements

In November 2002, the Emerging Issues Task Force finalized its tentative consensus on EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which provides guidance on the timing of revenue recognition for sales undertakings to deliver more than one product or service. The Company adopted EITF 00-21 on transactions occurring in fiscal periods beginning after June 15, 2003, as required.

In light of EITF 00-21, orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocol are considered to involve separable elements. Sufficient evidence of fair value of these elements exists to allow revenue recognition for these systems upon shipment, less the greater of the fair value associated with installation and training (if applicable) or the amount of revenue that is deemed contingent upon these elements, which is deferred until customer acceptance. In cases where special acceptance protocols exist, installation and training are not considered to be separable from the other elements of the arrangement. Accordingly, revenue for these

20

systems is recognized upon the completion of installation and fulfillment of obligations specific to the terms of the arrangement.

For contracts that involve delivery periods generally longer than six months, due to the complexity of installation and acceptance terms, the design, manufacture and installation elements of such arrangements, in aggregate, fall within the scope of accounting literature prescribing percentage-of-completion accounting through customer acceptance. However, in light of EITF 00-21, when elements that would not separately fall within the scope of accounting literature prescribing percentage-of-completion accounting are included in an arrangement, the fair value of these elements is separated from the arrangement and accounted for as such services are provided.

The adoption of EITF 00-21 did not have a material effect on the Company’s fiscal 2003 financial statements.

In April 2003, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging,” which amends and clarifies financial accounting and reporting for derivative instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company has concluded there will be no material impact of its adoption.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 was adopted by the Company in fiscal 2003. The Company does not have any activities that are subject to the requirements of SFAS No. 150.

Dividends and Other Stock Matters
The Company’s dividend policy is to maintain a target payout ratio of 25% of earnings per share over the long term. The Company paid quarterly dividends of $0.06 per share during fiscal 2003, 2002 and 2001.

During fiscal 2003, the Company repurchased 1.2 million shares of its common stock at an average cost of $13.21 per share. Pursuant to plans adopted by its Board of Directors during May 2001 and 2002, the Company has authorization to repurchase an additional 0.7 million shares of its common stock. The Company repurchased 0.1 million shares of its common stock at an average cost of $10.23 per share in fiscal 2002 and 0.2 million shares in fiscal 2001 at an average cost of $8.19 per share. The primary objective of the share repurchase program is to offset the dilutive effect of shares of common stock issued in connection with its employee stock option and employee stock purchase programs. During the three years ended September 27, 2003. September 28, 2002, and September 30, 2001, the Company issued approximately 0.8 million, 0.3 million, and 0.6 million shares, respectively, of its common stock under the stock option and stock purchase programs.

Quarterly Stock Activity and Financial Information⁽¹⁾
Revenue and operating results reported on a quarterly basis do not necessarily reflect changes in demand for the Company’s products or its operating efficiency. Revenue and operating results in any quarter can be significantly affected by customer shipment and/or installation timing or the timing of the completion of one or more systems where revenue is recognized upon shipment or customer acceptance rather than on the percentage-of-completion accounting method. The Company’s use of the percentage-of-completion revenue recognition method for large, long-term projects generally has the effect of smoothing significant fluctuations from quarter to quarter. See Note 1 to the Consolidated Financial Statements for additional information on the Company’s revenue recognition policy. Quarterly earnings also vary as a result of the use of estimates including, but not limited to, the rates used in recording federal, state, and foreign income tax expense. See Notes 1 and 6 to the Consolidated Financial Statements for additional information on the Company’s use of estimates and income tax related matters.

Quarterly stock information for the fiscal years ended September 27, 2003 and September 28, 2002 is as follows:

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			2003						2002
	Price						Price
	High		Low		Shares Traded		High		Low		Shares Traded
1st Quarter	$	12.00	$	8.30	$	2,137	$	12.35	$	9.10	$	2,447
2nd Quarter	$	11.92	$	9.87	$	2,355	$	11.50	$	8.90	$	3,048
3rd Quarter	$	15.25	$	9.75	$	7,452	$	13.17	$	9.50	$	4,642
4th Quarter	$	15.75	$	12.88	$	5,905	$	13.20	$	9.60	$	2,995
(1) Source: The Nasdaq Stock Market

Selected quarterly financial information for the fiscal years ended September 27, 2003 and September 28, 2002 is as follows:

	First Quarter			Second Quarter			Third Quarter		Fourth Quarter		Total Year
	(expressed in thousands except per share data)
2003
Revenue	$	84,439		$	93,236		$	79,312	$	83,100	$	340,087
Gross profit		31,306			33,320			30,739		31,932		127,297
Income before income taxes and discontinued
operations		8,467			9,566			6,097		8,386		32,516
Income before discontinued operations		5,700			6,382			4,085		5,124		21,291
Discontinued Operations:
(Loss) income from discontinued operations,
net of tax		(203	)		(17	)		419		–		199
(Loss) gain on sale of discontinued
businesses, net of tax		–			(2,402	)		1,225		–		(1,177	)
Discontinued Operations, net of tax		(203	)		(2,419	)		1,644		–		(978	)
Net income	$	5,497		$	3,963		$	5,729	$	5,124	$	20,313
Earnings per share
Basic
Income before discontinued operations	$	0.27		$	0.30		$	0.20	$	0.24	$	1.01
Discontinued Operations:
(Loss) income from discontinued operations,
net of tax		(0.01	)		–			0.02		–		0.01
(Loss) gain on sale of discontinued
businesses, net of tax		–			(0.11	)		0.05		–		(0.06	)
Discontinued Operations, net of tax		(0.01	)		(0.11	)		0.07		–		(0.05	)
Earnings per share	$	0.26		$	0.19		$	0.27	$	0.24	$	0.96
Diluted
Income before discontinued operations	$	0.27		$	0.30		$	0.19	$	0.24	$	1.00
Discontinued Operations:
(Loss) income from discontinued operations,
net of tax		(0.01	)		–			0.02		–		0.01
(Loss) gain on sale of discontinued
businesses, net of tax		–			(0.12	)		0.06		–		(0.06	)
Discontinued Operations, net of tax		(0.01	)		(0.12	)		0.08		–		(0.05	)
Earnings per share	$	0.26		$	0.18		$	0.27	$	0.24	$	0.95

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2002
Revenues	$	79,598		$	84,665		$	79,695		$	83,227		$	327,185
Gross profit		30,616			32,450			30,823			31,934			125,823
Income before income taxes, discontinued
operations, and cumulative effect of accounting
change		7,264			11,685			5,041			8,893			32,883
Income before discontinued operations and
cumulative effect of accounting change		4,886			7,771			3,464			6,149			22,270
Discontinued Operations:
Loss from discontinued operations, net of tax		(1,173	)		(2,608	)		(205	)		(281	)		(4,267	)
Cumulative effect of accounting change,
net of tax		(9,198	)		–			–			–			(9,198	)
Discontinued Operations, net of tax		(10,371	)		(2,608	)		(205	)		(281	)		(13,465	)
(Loss) income before cumulative effect of
accounting change on continuing operations		(5,485	)		5,163			3,259			5,868			8,805
Cumulative effect of accounting change,
net of tax		(4,523	)		–			–			–			(4,523	)
Net (loss) income	$	(10,008	)	$	5,163		$	3,259		$	5,868		$	4,282
Earnings (loss) per share
Basic
Income before discontinued operations and
cumulative effect of accounting change	$	0.24		$	0.37		$	0.16		$	0.29		$	1.06
Discontinued Operations:
Loss from discontinued operations, net of tax		(0.06	)		(0.12	)		(0.01	)		(0.01	)		(0.20	)
Cumulative effect of accounting change,
net of tax		(0.44	)		–			–			–			(0.44	)
Discontinued Operations, net of tax		(0.50	)		(0.12	)		(0.01	)		(0.01	)		(0.64	)
(Loss) income before cumulative effect of
accounting change on continuing operations		(0.27	)		0.25			0.15			0.28			0.41
Cumulative effect of accounting change,
net of tax		(0.21	)		–			–			–			(0.21	)
(Loss) Earnings per share	$	(0.48	)	$	0.25		$	0.15		$	0.28		$	0.20
Diluted
Income before discontinued operations and
cumulative effect of accounting change	$	0.23		$	0.37		$	0.16		$	0.28		$	1.04
Discontinued Operations:
Loss from discontinued operations, net of tax		(0.05	)		(0.13	)		(0.01	)		(0.01	)		(0.20	)
Cumulative effect of accounting change,
net of tax		(0.44	)		–			–			–			(0.44	)
Discontinued Operations, net of tax		(0.49	)		(0.13	)		(0.01	)		(0.01	)		(0.64	)
(Loss) income before cumulative effect of
accounting change on continuing operations		(0.26	)		0.24			0.15			0.27			0.40
Cumulative effect of accounting change,
net of tax		(0.20	)		–			–			–			(0.20	)
(Loss) Earnings per share	$	(0.46	)	$	0.24		$	0.15		$	0.27		$	0.20

Forward-Looking Statements

Statements included or incorporated by reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this Form 10-K, in the Company’s 2003 Annual Report to Shareholders, in the proxy statement for the annual meeting to be held in January 2004, and in the Company’s press releases and oral statements made with the approval of an

23

authorized executive officer, which are not historical or current facts are “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. The following important factors, among others, could affect the Company’s actual results in the future and could cause the Company’s actual financial performance to differ materially from that expressed in any forward-looking statements:

(i) With regard to the Company’s new product developments, there may be uncertainties currently unknown to the Company concerning the expected results. In addition, the Company may not be aware of the introduction of new products or product enhancements by its competitors.

(ii) Possible significant volatility in backlog and/or quarterly operating results may result from the timing of individual large, fixed-price orders in connection with sales of Test segment systems.

(iii) Order volumes and other operating considerations may be directly or indirectly impacted by economic conditions generally and/or in various geographic areas in which the Company operates.

(iv) Export controls based on U.S. initiatives and foreign policy, as well as import controls imposed by foreign governments, may cause delays for certain shipments or the rejection of orders by the Company. Such delays could create material fluctuations in quarterly operating results and could have a material adverse effect on results of operations. Local political conditions and/or currency restrictions may also affect foreign revenue.

(v) Delays in realization of backlog orders may occur due to technical difficulties, export licensing approval, or the customer’s preparation of the installation site, any of which can affect the quarterly or annual period when backlog is recognized as revenue and could materially affect the results of any such period.

(vi) The Company experiences competition on a worldwide basis. Customers may choose to purchase equipment from the Company or from its competitors. For certain of the Company’s products, customers may contract with testing laboratories or construct their own testing equipment from commercially available components. Factors that may influence a customer’s decision include price, service or required level of technology.

(vii) The Company is exposed to changes in foreign currency exchange rates, which can affect its results from operations and financial condition.

(viii) The Company’s short-term borrowings carry interest rate risk that is generally related to either LIBOR or the prime rate. The Company has minimal earnings and cash flow exposure due to market risks on its long-term debt obligations as a result of the primarily fixed-rate nature of the debt.

The foregoing list is not exhaustive, and the Company disclaims any obligation to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risks from changes in foreign exchange and interest rates. Additional information relative to these risks is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 19 and in Note 1 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

24

Foreign Currency Exchange Rates

The Company is directly exposed to the financial impact of market changes in currency exchange rates on orders, revenue, and net income, as well as on the translated U.S. dollar value of foreign currency-denominated assets and liabilities. This is in addition to the indirect impact of changes in currency exchange rates on interest rates and overall business activity.

Currency gains and losses from the settlement of foreign currency-denominated transactions and changes in the translation of current assets and liabilities denominated in foreign currency are reported as part of “Other income, net” in the Consolidated Statements of Income included in Item 8 of this Form 10-K. Currency gains and losses on specifically identified and hedged transactions, as well as changes in the translated value of long-term assets and liabilities denominated in foreign currency, are reported directly in Other Comprehensive Income on the balance sheet.

For illustrative purposes, the following table restates financial results utilizing currency exchange rates from the prior year to hypothetically isolate the impact of currency on the following financial items:

	(expressed in thousands)
	2003			2002		2001
(Increase) Decrease from currency translation on:
New Orders	$	(12,245	)	$	1,213	$	(2,173	)
Revenue		(17,563	)		765		(13,247	)
Net Income		(1,073	)		69		(930	)
Transaction (loss) gain
included in “Other income, net”	$	(740	)	$	1,974	$	1,091

A weakening of the U.S. dollar relative to foreign currencies increases the value of foreign currency-denominated revenue and earnings translated into U.S. dollars. Conversely, strengthening of the U.S. dollar decreases the value of foreign currency-denominated revenue and earnings. During fiscal 2003, the U.S. dollar was generally weaker against other major currencies, declining by approximately 15% against the Euro and 8.9% against the Yen. Gains and losses attributed to translating the financial statements for all non-U.S. subsidiaries are included in the currency translation adjustments.

A hypothetical 10% appreciation in foreign currencies against the U.S. dollar, assuming all other variables were held constant, would have resulted in an increase in fiscal 2003 revenues and asset balances of approximately $13.2 million. A hypothetical 10% depreciation in foreign currencies against the U.S. dollar, assuming all other variables were held constant, would have resulted in a decrease to fiscal 2003 revenues and asset balances of approximately $13.2 million.

The Company regularly assesses its exposure to changes in market currency rates and employs certain practices to protect against possible adverse effects of this risk. The Company utilizes forward currency exchange contracts to hedge the U.S. dollar value of foreign currency-denominated transactions, assets and liabilities. See Note 1 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

Interest Rates

The Company is directly exposed to changes in market interest rates on monetary assets and liabilities such as cash, short-term investments, and debt, as well as indirectly exposed to the impact of market rates on currency rates and overall business activity.

On floating-rate investments, increases and decreases in market interest rates will increase or decrease future interest income, respectively. On floating-rate debt, increases or decreases in market rates will increase or decrease future interest expense, respectively. On fixed-rate investments, increases or decreases in market interest rates do not impact future interest income but may decrease or increase the fair market value of the investment, respectively. For fixed-rate debt or other interest-bearing

25

obligations, increases or decreases in market interest rates do not impact future interest expense, but may decrease or increase the fair market value of the debt, respectively.

At September 27, 2003, the Company had floating-rate cash equivalent and short-term financial investments of $45.7 million. A hypothetical increase or decrease of 100 basis points, or 1%, in market interest rates could increase or decrease interest income by $0.5 million per annum. The Company had an insignificant amount of short-term debt outstanding at the end of fiscal 2003 and therefore would not be materially impacted by increases or decreases in market interest rates on interest expense.

The Company had $68.4 million in fixed-rate financial investments at the end of fiscal 2003. A hypothetical 100 basis point, or 1%, increase or decrease in market rates would increase or decrease the fair market value of these investments by $0.7 million.

A discount rate of 5.5% and an expected rate of increase in future compensation levels of 3.1% were used in the calculation of the accrued pension liability related to one of the Company’s international subsidiary’s non-contributory, unfunded retirement plan.

Item 8.     Financial Statements and Supplementary Data

The Company’s audited financial statements and notes thereto described in Item 15(a) of this report on Form 10-K and appearing on pages F-1 through F-23 of this report are incorporated by reference herein. See also “Quarterly Financial Data” appearing in the Management Discussion and Analysis under Item 7 of this 10-K, which is incorporated herein by reference.

Item 9.     Changes in and disagreements with accountants on accounting and financial disclosures

On June 7, 2002, the Company filed a Current Report on Form 8-K reporting that on May 31, 2002, the Company’s Board of Directors dismissed Arthur Anderson LLP and engaged KPMG LLP as the Company’s independent public accountants for the Company’s fiscal year ended September 28, 2002.

Item 9A.   Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”) as of September 27, 2003. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There have been no changes in internal control over financial reporting during the fiscal quarter ended September 27, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part III

Item 10.    Directors and Executive Officers of Registrant

The required information with respect to the directors of the Registrant and information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the information set forth under the headings “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on January 27, 2004. Information regarding the Company’s executive officers is contained under Item 1 of this annual report.

26

Item 11.    Executive Compensation

The information required by this Item is incorporated herein by reference to the information set forth under heading “Executive Compensation” (except as expressly set forth therein) in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on January 27, 2004.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated herein by reference to the information set forth under headings “Security Ownership of Principal Shareholders and Management” and “Equity Compensation Plan Information” in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on January 27, 2004.

Item 13.    Certain Relationships and Related Transactions

None.

Item 14.    Auditor Fees and Services

The information required by this Item is incorporated by reference to the information set forth under the heading “Approval of Auditors — Audit Fees” in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on January 27, 2004.

PART IV

Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

The following documents are filed as part of this report:

(a)  Financial Statements:

27

Independent Auditors' Report

Consolidated Balance Sheets – September 27, 2003 and September 28, 2002

Consolidated Statements of Income for the Years Ended September 27, 2003, September 28, 2002, and September 30, 2001

Consolidated Statements of Shareholders’ Investment for the Years Ended September 27, 2003, September 28, 2002, and September 30, 2001

Consolidated Statements of Cash Flows for the Years Ended September 27, 2003, September 28, 2002, and September 30, 2001

Notes to Consolidated Financial Statements

Financial Statement Schedule

(b)  Reports on Form 8-K:

On July 22, 2003, MTS furnished to the SEC a current report on Form 8-K to report under Item 12 its results of operations for the third fiscal quarter.

On November 20, 2003, MTS furnished to the SEC a current report of Form 8-K to report under Item 12 its results of operations for the fourth fiscal quarter and fiscal year-end.

(c)  Exhibits:

Exhibit Number	Description
3.a	Restated and Amended Articles of Incorporation, incorporated by reference from Exhibit 3.a. of Form 10-K for the fiscal year ended September 30, 1996
3.b	Restated Bylaws (Filed herewith).
10.a	Management Variable Compensation Plan, dated October 2003 (Filed herewith)
10.b	1994 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.e. of the Registrant's Form 10-K filed for the fiscal year ended September 30, 1996
10.c	1997 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.p. of the Registrant's Form 10-K filed for the fiscal year ended September 30, 1999
10.d	2002 Employee Stock Purchase Plan, incorporated herein by reference to Exhibit 99.1 of the Registrant's Form S-8, File No. 333-82582
10.e	Severance Agreement, dated March 24, 1998, between the Registrant

28

	and Mauro G. Togneri, as amended, incorporated herein by reference to Exhibit 10.n. of the Registrant's Form 10-K for the fiscal year ended September 30, 1998
10.f	Severance Agreement, dated March 16, 1998, between the Registrant and Sidney W. Emery, Jr., incorporated herein by reference to Exhibit 10.r. of the Registrant's Form 10-K filed for the fiscal year ended September 30, 1998.
10.g	Severance Agreement, dated March 14, 1998, between the Registrant and James M. Egerdal incorporated herein by reference to Exhibit 10.ab. of the Registrant's Form 10-K filed for the fiscal year ended September 30, 1998.
10.h	Severance Agreement dated January 3, 2000, between the Registrant and Kathleen M. Staby incorporated herein by reference to Exhibit 10.x. of the Registrant's Form 10-K filed for the fiscal year ended September 30, 2000.
10.i	Change in Control Agreement, dated April 17, 2002, between the Registrant and Kathleen M. Staby incorporated herein by reference to Exhibit 10.i of the Registrant's Form 10-Q/A for the fiscal quarter ended June 30, 2002.
10.j	Change in Control Agreement, dated April 17, 2002, between the Registrant and Mauro G. Togneri incorporated herein by reference to Exhibit 10.j of the Registrant's Form 10-Q/A for the fiscal quarter ended June 30, 2002.
10.k	Change in Control Agreement, dated April 18, 2002, between the Registrant and Susan E. Knight incorporated herein by reference to Exhibit 10.k of the Registrant's Form 10-Q/A for the fiscal quarter ended June 30, 2002.
10.l	Change in Control Agreement, dated April 22, 2002, between the Registrant and Sidney W. Emery, Jr. incorporated herein by reference to Exhibit 10.l of the Registrant's Form 10-Q/A for the fiscal quarter ended June 30, 2002.
10.m	Change in Control Agreement, dated April 22, 2002, between the Registrant and Laura B. Hamilton incorporated herein by reference to Exhibit 10.m of the Registrant's Form 10-Q/A for the fiscal quarter ended June 30, 2002.
10.n	Change in Control Agreement, dated April 23, 2002, between the Registrant and Larry D. Moulton incorporated herein by reference to Exhibit 10.n of the Registrant's Form 10-Q/A for the fiscal quarter ended June 30, 2002.
10.o	Change in Control Agreement, dated June 1, 2002, between the Registrant and Donald G. Krantz incorporated herein by reference to Exhibit 10.p of the Registrant's Form 10-Q/A for the fiscal quarter ended June 30, 2002.
10.p	Change in Control Agreement, dated April 18, 2002, between the Registrant and James M. Egerdal incorporated herein by reference to Exhibit 10.q of the Registrant's Form 10-Q/A for the fiscal quarter ended June 30, 2002.

29

10.q	Description of the terms of employment of Susan E. Knight, pursuant to an offer letter, incorporated by reference to Exhibit 10.r of the Registrant's Form 10-Q/A for the fiscal quarter ended December 31, 2001.
10.r	Description of the terms of employment of Sidney W. Emery, pursuant to an offer letter dated March 3, 1998 incorporated by reference to Exhibit 10.s of the Registrant's Form 10-K for the fiscal year ended September 28, 2002.
10.s	Change in Control Agreement, dated January 28, 2003, between the Registrant and Douglas E. Marinaro (Filed herewith).
10.t	Description of terms of employment of Douglas E. Marinaro, pursuant to an offer letter dated November 6, 2002 (Filed herewith).
21	Subsidiaries of the Registrant (Filed herewith).
23	Consent of Independent Public Accountants (Filed herewith).
31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
32.1	Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
32.2	Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

(d)  Financial Statement Schedules:

See accompanying Index to Financial Statements on page F-1.

30

SIGNATURES

Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MTS SYSTEMS CORPORATION
By:		/s/   Sydney W. Emery, Jr.
	Sydney W. Emery, Jr. Chairman, President and Chief Executive Officer

Date:  December 12, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated:

Signatures	Title	Date
/s/   Sidney W. Emery, Jr	Chairman, President and	December 12, 2003
	Chief Executive Officer
Sidney W. Emery Jr
/s/   Susan E. Knight	Vice President and	December 12, 2003
	Chief Financial Officer
Susan E. Knight
/s/   Dugald K. Campbell	Director	December 12, 2003
Dugald K. Campbell
/s/   Jean Lou Chameau	Director	December 12, 2003
Jean Lou Chameau
/s/   Merlin E. Dewing	Director	December 12, 2003
Merlin E. Dewing
/s/   Brendan Hegarty	Director	December 12, 2003
Brendan Hegarty
/s/   Barb J. Samardzich	Director	December 12, 2003
Barb J. Samardzich
/s/   Linda Hall Whitman	Director	December 12, 2003
Linda Hall Whitman

31

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MTS Systems Corporation and Subsidiaries

Index to Financial Statements

	Page
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report	F-2
Consolidated Balance Sheets – September 27, 2003
and September 28, 2002	F-3
Consolidated Statements of Income for the Years Ended
September 27, 2003, September 28, 2002 and
September 30, 2001	F-4
Consolidated Statements of Shareholders' Investment
for the Years Ended September 27, 2003, September
28, 2002 and September 30, 2001	F-5
Consolidated Statements of Cash Flows for the
Years Ended September 27, 2003, September 28, 2002
and September 30, 2001	F-6
Notes to Consolidated Financial Statements	F-7 through F-23
Financial Statement Schedule

Schedule	Description
II	Summary of Consolidated Allowances For Doubtful Accounts and Restructuring Reserves	S-1

F-1

Independent Auditors’ Report

The Board of Directors and Shareholders
MTS Systems Corporation:

We have audited the accompanying consolidated balance sheets of MTS Systems Corporation and subsidiaries as of September 27, 2003 and September 28, 2002 and the related consolidated statements of income, shareholders’ investment and cash flows for each of the fiscal years in the three-year period ended September 27, 2003. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MTS Systems Corporation and subsidiaries as of September 27, 2003 and September 28, 2002 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended September 27, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue recognition in fiscal year 2001. Also as discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill in fiscal year 2002.

/S/   KPMG LLP

Minneapolis, Minnesota,
November 14, 2003

F-2

Consolidated Balance Sheets
(September 27 and September 28, respectively)

Assets	2003			2002
	(expressed in thousands)
Current Assets:
Cash and cash equivalents	$	74,183		$	62,456
Short-term investments		58,560			35,094
Accounts receivable, net of allowance for doubtful accounts of
$1,783 and $2,432, respectively		59,637			59,943
Unbilled contracts and retainage receivable		21,939			32,276
Inventories		34,709			40,245
Prepaid expenses		3,928			5,018
Current deferred tax asset		9,682			8,739
Other current assets		2,075			19
Assets of discontinued operations		—			15,311
Total current assets		264,713			259,101
Property and Equipment:
Land		3,247			3,247
Buildings and improvements		47,031			44,723
Machinery and equipment		84,834			79,679
Accumulated depreciation		(78,908	)		(70,765	)
Total property and equipment, net		56,204			56,884
Goodwill		4,383			4,268
Other assets		2,562			3,725
Non-current deferred tax asset		2,516			1,593
Total assets	$	330,378		$	325,571
Liabilities and Shareholders’ Investment
Current Liabilities:
Notes payable to banks	$	383		$	598
Current maturities of long-term debt		6,839			8,605
Accounts payable		10,483			12,688
Accrued payroll-related costs		24,742			20,421
Advance payments from customers		40,456			37,650
Accrued warranty costs		4,862			4,482
Accrued income taxes		5,571			11,120
Other accrued liabilities		15,838			15,399
Liabilities of discontinued operations		—			1,793
Total current liabilities		109,174			112,756
Deferred tax liability		6,265			1,519
Long-term debt, less current maturities		30,487			42,789
Other long-term liabilities		8,346			6,242
Total liabilities		154,272			163,306
Shareholders’ Investment:
Common stock, 25¢ par value; 64,000 shares authorized:
20,720 and 21,208 shares issued and outstanding		5,180			5,302
Additional paid-in capital		1,534			9,770
Retained earnings		162,076			146,857
Accumulated other comprehensive income		7,316			336
Total shareholders’ investment		176,106			162,265
Total liabilities and shareholders’ investment	$	330,378		$	325,571

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-3

Consolidated Statements of Income
(For the Years Ended September 27, September 28, and September 30, respectively)

	2003			2002			2001
	(expressed in thousands except per share data)
Revenue	$	340,087		$	327,185		$	355,859
Cost of Sales		212,790			201,362			224,545
Gross Profit		127,297			125,823			131,314
Operating Expenses:
Selling		52,210			51,120			54,072
General and administrative		26,388			27,924			32,173
Research and development		15,583			15,491			18,659
Income From Operations		33,116			31,288			26,410
Interest expense		(3,621	)		(4,203	)		(5,063	)
Interest income		2,169			1,201			372
Gain on sale of investment		—			2,630			—
Other income, net		852			1,967			2,125
Income Before Income Taxes, Discontinued Operations, and
Cumulative Effect of Accounting Changes		32,516			32,883			23,844
Provision for Income Taxes		11,225			10,613			8,288
Income Before Discontinued Operations and Cumulative Effect
of Accounting Changes		21,291			22,270			15,556
Discontinued Operations:
Income (loss) from discontinued operations, net of tax		199			(4,267	)		(2,450	)
Loss on sale of discontinued businesses, net of tax		(1,177	)		—			—
Cumulative effect of accounting change, net of tax		—			(9,198	)		—
Loss from discontinued operations, net of tax		(978	)		(13,465	)		(2,450	)
Income Before Cumulative Effect of Accounting Changes on
Continuing Operations		20,313			8,805			13,106
Cumulative effect of accounting changes on continuing
operations, net of tax		—			(4,523	)		(2,492	)
Net Income	$	20,313		$	4,282		$	10,614
Earnings Per Share
Basic:
Income Before Discontinued Operations and Cumulative
Effect of Accounting Changes	$	1.01		$	1.06		$	0.75
Discontinued Operations:
Income (loss) from discontinued operations, net of tax		0.01			(0.20	)		(0.12	)
Loss on sale of discontinued businesses, net of tax		(0.06	)		—			—
Cumulative effect of accounting change, net of tax		—			(0.44	)		—
Loss from Discontinued Operations, net of tax		(0.05	)		(0.64	)		(0.12	)
Income Before Cumulative Effect of Accounting Change on
Continuing Operations		0.96			0.42			0.63
Cumulative effect of accounting changes on continuing
operations, net of tax		—			(0.22	)		(0.12	)
Earnings Per Share	$	0.96		$	0.20		$	0.51
Diluted:
Income Before Discontinued Operations and Cumulative
Effect of Accounting Changes	$	1.00		$	1.04		$	0.74
Discontinued Operations:
Income (loss) from discontinued operations, net of tax		0.01			(0.20	)		(0.12	)
Loss on sale of discontinued businesses, net of tax		(0.06	)		—			—
Cumulative effect of accounting change, net of tax		—			(0.43	)		—
Loss from Discontinued Operations, net of tax		(0.05	)		(0.63	)		(0.12	)
Income Before Cumulative Effect of Accounting Changes on
Continuing Operations		0.95			0.41			0.62
Cumulative effect of accounting changes on continuing
operations, net of tax		—			(0.21	)		(0.12	)
Earnings Per Share	$	0.95		$	0.20		$	0.50

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-4

Consolidated Statements of Shareholders' Investment

	Common Stock
	Shares Issued			Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Investment
Balance, September 30, 2000		20,748		$	5,187		$	7,072		$	142,009		$	(639	)	$	153,629
Net income		—			—			—			10,614			—			10,614
Foreign currency translation		—			—			—			—			(391	)		(391	)
Derivative instruments		—			—			—			—			115			115
Unrealized loss on investment, net of tax		—			—			—			—			(283	)		(283	)
Total comprehensive income		—			—			—			10,614			(559	)		10,055
Exercise of stock options		410			103			3,275			—			—			3,378
Tax benefit from exercise of stock option		—			—			368			—			—			368
Issuance for employee stock purchase plan		150			38			917			—			—			955
Common stock repurchased and retired		(264	)		(67	)		(2,592	)		—			—			(2,659	)
Cash dividends, $0.24 per share		—			—			—			(4,988	)		—			(4,988	)
Balance, September 30, 2001		21,044			5,261			9,040			147,635			(1,198	)		160,738
Net income		—			—			—			4,282			—			4,282
Foreign currency translation		—			—			—			—			1,419			1,419
Derivative instruments		—			—			—			—			22			22
Unrealized gain on investment, net of tax		—			—			—			—			93			93
Total comprehensive income		—			—			—			4,282			1,534			5,816
Exercise of stock options		214			54			1,364			—			—			1,418
Tax benefit from exercise of stock option		—			—			182			—			—			182
Issuance for employee stock purchase plan		96			24			677			—			—			701
Common stock repurchased and retired		(146	)		(37	)		(1,493	)		—			—			(1,530	)
Cash dividends, $0.24 per share		—			—			—			(5,060	)		—			(5,060	)
Balance, September 28, 2002		21,208			5,302			9,770			146,857			336			162,265
Net income		—			—			—			20,313			—			20,313
Foreign currency translation		—			—			—			—			7,284			7,284
Derivative instruments		—			—			—			—			(304	)		(304	)
Total comprehensive income		—			—			—			20,313			6,980			27,293
Exercise of stock options		681			170			6,004			—			—			6,174
Tax benefit from exercise of stock option		—			—			1,127			—			—			1,127
Issuance for employee stock purchase plan		97			24			803			—			—			827
Common stock repurchased and retired		(1,266	)		(316	)		(16,170	)		—			—			(16,486	)
Cash dividends, $0.24 per share		—			—			—			(5,094	)		—			(5,094	)
Balance, September 27, 2003		20,720		$	5,180		$	1,534		$	162,076		$	7,316		$	176,106

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-5

Consolidated Statements of Cash Flows
(For the Years Ended September 27, September 28, and September 30, respectively)

	2003			2002			2001
Cash flows from Operating Activities:
Net income	$	20,313		$	4,282		$	10,614
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash cumulative effect of accounting change on continuing operations		—			4,523			2,492
Non-cash cumulative effect of accounting change on discontinued operations		—			9,198			—
(Income) loss from discontinued operations		(199	)		4,267			2,450
Loss on sale of discontinued businesses		1,177			—			—
Gain on sale of investment		—			(2,630	)		—
Depreciation and amortization		9,772			9,971			12,180
Deferred income taxes		2,354			(3,563	)		(2,452	)
Bad debt provision		184			712			673
Changes in operating assets and liabilities, net of effects of
businesses divested:
Accounts, unbilled contracts, and retainage receivables		15,536			37,590			(4,265	)
Inventories		8,335			11,104			(1,028	)
Prepaid expenses		1,232			1,038			1,715
Other assets		(1,616	)		2,023			(678	)
Accounts payable		(2,576	)		(796	)		(6,364	)
Accrued payroll-related costs		4,274			(12,170	)		6,449
Advance payments from customers		154			4,976			9,759
Accrued warranty costs		185			113			47
Other current liabilities		(3,783	)		13,702			6,509
Net Cash Provided by Operating Activities		55,342			84,340			38,101
Cash Flows from Investing Activities:
Additions to property and equipment		(6,573	)		(5,148	)		(8,055	)
Proceeds from maturity of short-term investments		61,144			—			—
Proceeds from sale of short-term investments		—			4,920			—
Purchases of short-term investments		(84,610	)		(35,094	)		—
Net proceeds from sale of businesses		12,621			—			—
Net Cash Used in Investing Activities		(17,418	)		(35,322	)		(8,055	)
Cash Flows from Financing Activities:
Net (repayments) borrowings under notes payable to banks		(264	)		187			(11,452	)
Repayments of long-term debt		(15,093	)		(7,822	)		(5,544	)
Proceeds from issuance of long-term debt		—			589			423
Cash dividends		(5,074	)		(5,067	)		(4,988	)
Proceeds from exercise of stock options and employee stock purchase plan		7,001			2,119			4,333
Payments to purchase and retire common stock		(16,486	)		(1,530	)		(2,659	)
Net Cash Used in Financing Activities		(29,916	)		(11,524	)		(19,887	)
Net Cash Provided (Used) by Discontinued Operations		183			7,407			(648	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		3,536			219			(96	)
Cash and Cash Equivalents
Increase during the year		11,727			45,120			9,415
Balance, beginning of year		62,456			17,336			7,921
Balance, end of year	$	74,183		$	62,456		$	17,336
Supplemental Disclosures of Cash Flows Information:
Cash paid during the year for:
Interest	$	3,504		$	3,951		$	5,724
Income taxes		12,356			5,050			6,516

The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-6

Notes to Consolidated Financial Statements

1.     Summary of Significant Accounting Policies:

Fiscal Year
Effective with fiscal year 2002, the Company changed its fiscal year end to the Saturday closest to September 30. For the year ended September 27, 2003 and September 28, 2002, the Company’s fiscal year consisted of 52 weeks. This change had no material impact on comparability of the Company’s financial statements.

Consolidation
The consolidated financial statements include the accounts of MTS Systems Corporation and its wholly and majority owned subsidiaries (the “Company”). Significant intercompany balances and transactions have been eliminated.

Revenue Recognition
The Company implemented the revenue recognition principles of Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as of October 1, 2000. The cumulative effect adjustment of the change in accounting for all periods through September 30, 2000 was a reduction in net income of $2.5 million (net of income taxes of $1.6 million), or $0.12 per diluted share, which was accounted for as a change to the financial results for the first quarter of fiscal 2001. During the fiscal years ended September 28, 2002 and September 30, 2001 the Company recognized $0.4 million and $10.0 million of revenues, respectively, which were previously recognized prior to the Company’s adoption of SAB 101.

For orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocol, revenue is recognized when systems are shipped and title has passed to the customer, less the greater of the fair value associated with installation or the amount of consideration that is contingent upon installation, which is deferred until customer acceptance. In cases where special acceptance protocols exist, the Company recognizes revenue upon the completion of installation and fulfillment of obligations specific to the terms of the customer’s contract. Revenue on contracts requiring longer delivery periods, generally longer than six months (long-term contracts), is recognized using the percentage-of-completion method based on the cost incurred to date relative to estimated total cost of the contract. In most cases, orders with complex installations and/or unusual acceptance protocols involve long-term contracts for custom systems that follow the percentage-of-completion method of revenue recognition through customer acceptance.

The Company enters into long-term contracts for customized equipment sold to its customers. Under the terms of such contracts, revenue recognized using the percentage-of-completion method may not be invoiced until completion of contractual milestones, upon shipment of the equipment, or upon installation and acceptance by the customer. Unbilled amounts for these contracts appear in the Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable.

Revenue for services is recognized as the service is performed and ratably over a defined contractual period for service maintenance contracts.

See also “Recent Accounting Pronouncements” below.

Foreign Currency Translation
The financial position and results of operations of the Company’s foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities are translated using period-end exchange rates and statements of income are translated using average exchange rates for the fiscal year, with the resulting translation adjustments recorded as a separate component of shareholders’ investment. The Company recorded gains on foreign currency translation in Comprehensive Income of $7.3 million and $1.4 million for fiscal 2003 and fiscal 2002, respectively, and a loss on foreign currency translation of $0.4 million for fiscal 2001.

F-7

Cash Equivalents
Cash equivalents represent short-term, highly liquid investments maturing in three months or less at the time of purchase and are recorded at cost, which approximates fair value. Cash is invested in a money market fund, highly rated tax-exempt securities, obligations of the United States government and its agencies, and highly rated corporate obligations.

Short-Term Investments
The Company classifies its debt securities as either held-to-maturity or available-for-sale investments. Held-to-maturity securities are carried at amortized cost, which approximates market value. All investments in available-for-sale securities are carried at fair value and unrealized gains and losses are reported as a component of Other Comprehensive Income. There were no substantive unrealized gains or losses from the investment in held-to-maturity and available-for-sale securities as of the fiscal years ended September 27, 2003 and September 28, 2002. All held-to-maturity securities mature within the next twelve months, and the available-for-sale securities mature in fiscal years 2005 through 2011. At September 27, 2003 and September 28, 2002, the Company had no investments in equity securities. Any future investments in equity securities would be classified as available-for-sale. The investments in held-to-maturity securities mature within twelve months, and the investments in available-for-sale securities mature after two years through eight years.

Short-term investments at September 27, 2003 and September 28, 2002 consisted of the following:

	2003		2002
(expressed in thousands)
Held-to-maturity:
U. S. government obligations	$	1,997	$	8,000
Bank deposits		3,909		2,000
Corporate obligations		29,020		23,094
Total held-to-maturity		34,926		33,094
Available-for-sale:
U. S. government obligations		23,634		2,000
Total available-for-sale		23,634		2,000
Total short-term investments	$	58,560	$	35,094

Accounts Receivable and Long-Term Contracts
The Company grants credit to its customers but generally does not require collateral or other security from domestic customers. When deemed appropriate, receivables from customers located outside the United States are supported by letters of credit from financial institutions. The Company enters into long-term contracts for customized equipment sold to its customers. Under the terms of such contracts, revenue recognized using the percentage-of-completion method may be invoiced upon completion of contractual milestones, shipment to the customer, or installation and acceptance by the customer. Unbilled or retained amounts relating to these contracts are reflected as Unbilled Contracts and Retainage Receivable in the accompanying Consolidated Balance Sheets. Amounts unbilled or retained at September 27, 2003 are expected to be invoiced during fiscal 2004.

Warranty Obligations
Sales of the Company’s products and systems are subject to limited warranty guarantees that are included in customer contracts. For sales that include installation services, warranty guarantees typically extend for a period of twelve months from the date of either shipment or acceptance. Product guarantees typically extend for a period of twenty-four months from the date of purchase. Under the terms of these warranties, the Company is obligated to repair or replace any components or assemblies it deems defective due to workmanship or materials. The Company reserves the right to reject warranty claims where it determines that failure is due to normal wear, customer modifications, improper maintenance, or misuse. The Company records warranty provisions monthly based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects historical warranty incidence over the preceding twelve-month period. Both the experience percentage

F-8

and the warranty liability are evaluated on an ongoing basis for adequacy. Warranty provisions and claims for the years ended September 27, 2003 and September 28, 2002 were as follows:

	2003			2002
(expressed in thousands)
Beginning balance	$	4,482		$	4,324
Warranty provisions		5,927			4,443
Warranty claims		(5,850	)		(4,378	)
Translation adjustment		303			93
Ending balance	$	4,862		$	4,482

Research and Development
Research and product development costs associated with new products are charged to operations as incurred.

Inventories
Inventories consist of material, labor, and overhead costs and are stated at the lower of cost or market value, determined under the first-in, first-out accounting method. Inventories at September 27, 2003 and September 28, 2002 were as follows:

	2003		2002
(expressed in thousands)
Customer projects in
various stages of
completion	$	12,260	$	14,331
Components,
assemblies and parts		22,449		25,914
Total	$	34,709	$	40,245

Property and Equipment
Property and equipment is stated at cost. Additions, replacements and improvements are capitalized at cost, while maintenance and repairs are charged to operations as incurred. Depreciation is provided over the following estimated useful lives of the property:

Buildings and improvements:    10 to 40 years.

Machinery and equipment:    3 to 15 years.

Building and equipment additions are generally depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income tax reporting purposes.

The Company reviews the carrying value of long-lived assets when events or changes in circumstances such as market value, asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable. When the review indicates that the carrying value of the asset or group of assets representing the lowest level of identifiable cash flows exceeds the sum of the expected future cash flows (undiscounted and without interest charges), the Company recognizes an asset write-down charge against operations. The amount of the impairment loss is the amount by which the carrying value exceeds the fair value of the impaired asset or group of assets.

Derivative Financial Instruments
The Company periodically enters into forward currency exchange contracts with financial institutions to hedge the U.S. dollar value of estimated cash flows from foreign currency transactions. These contracts generally mature within one year and are designed to limit the Company’s exposure to fluctuations in currency exchange rates. On the date the forward exchange contract is established, it is designated as a foreign currency cash flow hedge. Subsequent changes in the fair value of a contract are recorded in Other Comprehensive Income on the Balance Sheet until they are recognized in earnings at the time the

F-9

forecasted transaction occurs. The Company formally documents all relationships between hedging contracts and hedged transactions, as well as its objectives for undertaking the hedges. The Company assesses, both at the hedges’ inception and on an ongoing basis, whether the contracts that are used in hedging transactions are effective in offsetting changes in cash flows of hedged items. When it is determined that a forward currency contract is not highly effective as a hedge, the Company discontinues hedge accounting prospectively. When hedge accounting is discontinued, any related gains or losses that were accumulated in Other Comprehensive Income on the Balance Sheet will be recognized immediately in earnings, and any future changes in the fair value of the contract will be recognized in current period earnings.

The Company also uses forward currency exchange contracts to hedge the U.S. dollar value of specific assets and liabilities on the balance sheet denominated in foreign currencies. The related gains and losses are included in Other Income on the income statement. Results of these contracts offset the gains and losses related to valuations of foreign currency-denominated assets and liabilities on the balance sheet. The Company does not use derivative financial instruments for speculative or trading purposes.

At September 27, 2003 and September 28, 2002 the Company had outstanding foreign currency forward contracts with U.S. dollar notional equivalent amounts of $21.0 million and $36.5 million, respectively. At September 27, 2003 and September 28, 2002, the fair value of the foreign currency forward contracts was ($0.8) million and ($0.1) million, respectively. The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was not material for fiscal years 2003, 2002 and 2001. At September 27, 2003, approximately ($0.9) million was projected to be reclassified from Other Comprehensive Income into earnings in the next 12 months. At September 28, 2002, approximately ($0.1) million was projected to be reclassified from Other Comprehensive Income into earnings in the next 12 months. The maximum original maturity of any derivative was 1.75 years at September 27, 2003 and 1.3 years at September 28, 2002.

Goodwill
Goodwill represents the excess of acquisition costs over the fair value of the net assets of businesses acquired and, prior to fiscal 2002, was amortized on a straight-line basis over periods up to 40 years. In July 2001 the Financial Accounting Standards Board issued two new statements, Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 141, all business combinations after June 30, 2001 are accounted for under the purchase method. SFAS No. 142 includes requirements to test goodwill for impairment using a fair value approach, rather than amortizing the cost of goodwill over future periods. See note 3 to the Consolidated Financial Statements for additional information regarding the impact of SFAS No. 141 and SFAS No. 142.

Other Assets
Other assets primarily consist of patents and other intellectual property. Other intangible assets are amortized on a straight-line basis over the expected period benefited by future cash inflows, up to 25 years. The Company periodically evaluates the recoverability of the carrying amount of other intangible assets when events or changes in circumstances indicate the carrying amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value and are recognized in operating earnings. The Company also continually evaluates the estimated useful lives of all intangible assets and periodically revises such estimates based on current events.

Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.

F-10

Earnings Per Share
Basic net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the applicable periods. Diluted net earnings per share includes the potentially dilutive effect of common shares issued in connection with outstanding stock options using the treasury stock method. Options to acquire 1.4 million, 1.7 million, and 1.7 million weighted common shares have been excluded from the diluted weighted shares outstanding calculation for fiscal years 2003, 2002 and 2001, respectively, because the exercise price was more than the weighted average market value. The dilutive effect of common shares issued in connection with outstanding stock options is determined based on income before discontinued operations and cumulative effect of accounting changes. A reconciliation of these amounts is as follows:

	2003			2002			2001
(expressed in thousands)
Income before discontinued operations and
cumulative effect of accounting changes	$	21,291		$	22,270		$	15,556
Discontinued operations:
Income (loss) from discontinued operations,
net of tax		199			(4,267	)		(2,450	)
Loss on sale of discontinued businesses, net of tax		(1,177	)		–			–
Cumulative effect of accounting change, net of tax		–			(9,198	)		–
Loss from discontinued operations, net of tax		(978	)		(13,465	)		(2,450	)
Income before cumulative effect of accounting
changes on continuing operations		20,313			8,805			13,106
Cumulative effect of accounting changes on
continuing operations, net of tax		–			(4,523	)		(2,492	)
Net income	$	20,313		$	4,282		$	10,614
Weighted average common shares outstanding		21,119			21,100			20,751
Dilutive potential common shares		355			333			319
Total dilutive common shares		21,474			21,433			21,070
Earnings per share:
Basic:
Income before discontinued operations and
cumulative effect of accounting changes	$	1.01		$	1.06		$	0.75
Discontinued operations:
Income (loss) from discontinued operations, net
of tax		0.01			(0.20	)		(0.12	)
Loss on sale of discontinued businesses, net of tax		(0.06	)		–			–
Cumulative effect of accounting change		–			(0.44	)		–
Loss from discontinued operations, net of tax		(0.05	)		(0.64	)		(0.12	)
Income before cumulative effect of accounting
changes on continuing operations		0.96			0.42			0.63
Cumulative effect of accounting changes on continuing
operations, net of tax		–			(0.22	)		(0.12	)
Earnings per share	$	0.96		$	0.20		$	0.51
Diluted:
Income before discontinued operations and
cumulative effect of accounting changes	$	1.00		$	1.04		$	0.74
Discontinued operations:
Income (loss) from discontinued operations, net
of tax		0.01			(0.20	)		(0.12	)

F-11

Loss on sale of discontinued businesses, net of tax		(0.06	)		–			–
Cumulative effect of accounting change		–			(0.43	)		–
Loss from discontinued operations, net of tax		(0.05	)		(0.63	)		(0.12	)
Income before cumulative effect of accounting
changes on continuing operations		0.95			0.41			0.62
Cumulative effect of accounting changes on continuing
operations, net of tax		–			(0.21	)		(0.12	)
Earnings per share	$	0.95		$	0.20		$	0.50

Stock-Based Compensation
The Company elects to follow Accounting Principles Board Opinion No. 25, (“APB 25”), “Accounting for Stock Issued to Employees,” in accounting for its employee stock-based compensation. Under APB 25, no compensation expense for stock-based compensation is recognized for shares granted at or above market value. Had the Company determined compensation cost based on the fair value at the grant date for stock options and the fair value of the discount related to the employee stock purchase plan under Statement of Financial Standards No. 123 (“SFAS 123”), the Company’s net income would have been reported as shown below:

	2003			2002			2001
Net Income
As Reported	$	20,313		$	4,282		$	10,614
Deduct: fair value of employee stock-based
compensation expense, net of tax		(2,865	)		(2,678	)		(2,390	)
Pro Forma	$	17,448		$	1,604		$	8,224
Basic Earnings Per Share
As Reported	$	0.96		$	0.20		$	0.51
Pro Forma		0.83			0.08			0.40
Diluted Earnings Per Share
As Reported	$	0.95		$	0.20		$	0.50
Pro Forma		0.81			0.07			0.39

See Note 7 to the Consolidated Financial Statements for additional information regarding stock-based compensation.

Comprehensive Income (Loss)
Comprehensive Income (Loss) consists of net income, unrealized gains or losses on investments classified as available-for-sale, derivative instrument gains or losses, and foreign currency translation adjustments and is presented as a component of Shareholders’ Investment. There were no substantive unrealized gains or losses from available-for-sale securities as of September 28, 2002 and for the fiscal year ended September 27, 2003.

The accumulated balances for each component of accumulated Other Comprehensive Income (Loss) are as follows:

F-12

	Derivative Financial Instrument Unrealized Gain (Loss)			Unrealized Gain (Loss) on Investments			Foreign Currency Translation Adjustment			Total Accumulated Other Comprehensive Income (Loss)
(expressed in thousands)
Balances at September 30, 2001	$	(29	)	$	(146	)	$	(1,023	)	$	(1,198	)
Foreign currency rate charges		–			–			1,419			1,419
Change in unrealized gain
(loss), net of tax		583			–			–			583
Change in unrealized gain
(loss), net of tax of $1.1 million		–			1,750			–			1,750
Realized (gain) loss, net of tax		(614	)		–			–			(614	)
Realized (gain) loss, net of tax of $1.0 million		–			(1,604	)		–			(1,604	)
Balances at September 28, 2002		(60	)		–			396			336
Foreign currency rate charges		–			–			7,284			7,284
Change in unrealized gain
(loss), net of tax		(672	)		–			–			(672	)
Realized (gain) loss, net of tax		368			–			–			368
Balances at September 27, 2003	$	(364	)	$	–		$	7,680		$	7,316

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates. The Company frequently undertakes significant technological innovation on certain of its long-term contracts involving performance risk that may result in delayed delivery of product and/or recognition of revenue and gross profit variation resulting from changes in the estimate of the ultimate cost of such contracts.

Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force finalized its tentative consensus on EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which provides guidance on the timing of revenue recognition for sales undertakings to deliver more than one product or service. The Company adopted EITF 00-21 on transactions occurring in fiscal periods beginning after June 15, 2003, as required.

In light of EITF 00-21, orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocol are considered to involve separable elements. Sufficient evidence of fair value of these elements exists to allow revenue recognition for these systems upon shipment, less the greater of the fair value associated with installation and training (if applicable) or the amount of revenue that is deemed contingent upon these elements, which is deferred until customer acceptance. In cases where special acceptance protocols exist, installation and training are not considered to be separable from the other elements of the arrangement. Accordingly, revenue for these systems is recognized upon the completion of installation and fulfillment of obligations specific to the terms of the arrangement.

For contracts that involve delivery periods generally longer than six months, due to the complexity of installation and acceptance terms, the design, manufacture and installation elements of such arrangements, in aggregate, fall within the scope of accounting literature prescribing percentage-of-completion accounting through customer acceptance. However, in light of EITF 00-21, when elements that would not separately fall within the scope of accounting literature prescribing percentage-of-completion accounting are included in an arrangement, the fair value of these elements is separated from the arrangement and accounted for as such services are provided.

The adoption of EITF 00-21 did not have a material effect on the Company’s fiscal 2003 financial statements.

F-13

In April 2003, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging,” which amends and clarifies financial accounting and reporting for derivative instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company has concluded there will be no material impact of its adoption.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 was adopted by the Company in fiscal 2003. The Company does not have any activities that are subject to the requirements of SFAS No. 150.

Reclassifications
Certain amounts included in the prior year consolidated financial statements, including the impact of the Company’s discontinued operations, have been reclassified in prior years to conform to the current year presentation. These reclassifications had no effect on previously reported Shareholders’ Investment or Net Income.

2.     Discontinued Operations:

During the second and third quarters of fiscal 2003, the Company sold its Automation division, which was based in New Ulm, Minnesota and also maintained operations in Montgomeryville, Pennsylvania and Freiburg and Straslund, Germany. On March 31, 2003, the Company sold substantially all of the net assets and intellectual property associated with the Automation division’s gradient amplifier product line. On April 11, 2003, the Company sold all the remaining net assets of the North American Automation division, based in New Ulm, Minnesota and on April 30, 2003 sold, to the same buyer, its stock in the Automation division’s German operations, which completed the sale of the Company’s entire Automation division and its exit from the motor and amplifier business. In March 2003, the Company discontinued the custom military business of its Automation division. As a result of the sales, the Company recorded a loss of $1.2 million, net of taxes.

The Automation division was historically included in the Company’s Industrial segment for financial reporting, and the results of the operations of the Automation division have been reported as discontinued operations.

Following are the operating results of the discontinued operations included in the Company’s results for the respective periods:

	2003		2002			2001
(expressed in thousands)
Revenue	$	15,756	$	28,686		$	41,500
Income (loss) on discontinued operations before
taxes, loss on sale and cumulative effect of
accounting change	$	353	$	(6,961	)	$	(4,013	)

At September 28, 2002, assets of discontinued operations consisted primarily of inventory, accounts receivable and property and equipment of $6.6 million, $4.7 million and $2.7 million, respectively, and liabilities of discontinued operations of $1.8 million consisted primarily of accounts payable and accrued payroll and related costs.

3.     Goodwill and Other Intangible Assets:

Upon the Company’s adoption of Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets,” effective October 1, 2001, annual goodwill amortization of $2.2 million ceased. Under SFAS No. 142, the Company assessed the recoverability of goodwill using a discounted cash flow methodology. An evaluation of the

F-14

Automation division (reported as discontinued operations) and Vehicle Testing Systems reporting unit (included in the Company’s Test segment) indicated that $10.7 million and $7.3 million of goodwill, respectively, was impaired. The performance in these acquired businesses did not meet management’s original expectations due to ongoing weakness in the worldwide industrial manufacturing and ground vehicle markets. The Company’s adoption of SFAS No. 142 resulted in a non-cash transition charge to income in the first quarter of its fiscal year ended September 28, 2002 of $13.7 million, or ($.64) per diluted share, for impairment of goodwill, net of tax. The Company determined there was no impairment of its goodwill at September 27, 2003. Goodwill activity, inclusive of activity associated with discontinued operations, for each of the fiscal years in the three-year-period ending September 27, 2003 was:

	Goodwill
	(expressed in thousands)
Year	Beginning Balance		Amortization			Write-off			Translation			Ending Balance
2001	$	24,558	$	(3,023	)	$	–		$	1,010		$	22,545
2002		22,545		–			(18,038	)		(239	)		4,268
2003		4,268		–			–			115			4,383

Annual amortization of other intangible assets was $1.1 million in both fiscal 2003 and 2002. The anticipated amortization expense related to other intangible assets for the next five fiscal years is as follows:

	Fiscal Year
	2004		2005		2006		2007		2008
Amortization of intangible assets	$	517	$	517	$	287	$	3	$	3

For the fiscal year ended September 30, 2001, goodwill amortization, adjusted net income, and basic and diluted earnings per share are as follows:

	2001
	(expressed in thousands)
Income before cumulative effect of accounting change
on continuing operations	$	13,106
Add back: Goodwill amortization, net of taxes		1,489
Adjusted net income before cumulative effect of
accounting change on continuing operations		14,595
Cumulative effect of accounting change, net of taxes		(2,492	)
Adjusted net income	$	12,103
Basic earnings per share before cumulative effect of accounting
change on continuing operations	$	0.63
Add back: Goodwill amortization, net of taxes		0.07
Basic adjusted earnings per share before cumulative effect of
accounting change on continuing operations		0.70
Cumulative effect of accounting change, net of taxes		(0.12	)
Adjusted earnings per share	$	0.58

F-15

Diluted earnings per share before cumulative effect of accounting
change on continuing operations	$	0.62
Add back: Goodwill amortization, net of taxes		0.07
Diluted adjusted earnings per share before cumulative effect of
accounting change on continuing operations		0.69
Cumulative effect of accounting change, net of taxes		(0.12	)
Adjusted earnings per share	$	0.57

4.     Business Segment Information:

The Company’s Chief Executive Officer and its management regularly review the available financial information for the Company’s discrete business units. Based on similarities in economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution, and regulatory environments, the operating units have been aggregated for financial statement purposes into two reportable segments called Test (formerly “MT&S”) and Industrial (formerly “Factory Automation”). The Test segment provides testing equipment, integrated software, and consulting services to the ground vehicles, aerospace, and infrastructure markets. The Industrial segment provides component solutions, such as position sensors, that automate machines and machine tools.

In evaluating each segment’s performance, management focuses on income from operations. This measurement excludes interest income and expense, income taxes, and other non-operating items. Corporate expenses, including costs associated with various support functions such as human resources, information technology, finance and accounting, and general and administrative costs, are allocated to the reportable segments primarily on the basis of revenue.

Financial information by reportable segment is as follows:

	2003		2002		2001
	(expressed in thousands)
Revenue by Segment
Test	$	292,037	$	286,979	$	316,110
Industrial		48,050		40,206		39,749
Total Revenue	$	340,087	$	327,185	$	355,859
Income from Operations by Segment
Test	$	29,079	$	29,041	$	23,787
Industrial		4,037		2,247		2,623
Total Income from Operations	$	33,116	$	31,288	$	26,410
Identifiable Assets by Segment
Test	$	274,218	$	256,486		238,543
Industrial		56,160		53,774		54,921
Discontinued Operations		–		15,311		38,479
Total Assets	$	330,378	$	325,571	$	331,943
Other Segment Data
Test:
Capital expenditures	$	4,635	$	3,279	$	3,951
Depreciation and amortization		8,257		8,664		10,685
Industrial:
Capital expenditures	$	1,938	$	1,869	$	4,104
Depreciation and amortization		1,515		1,307		1,495

F-16

Geographic segment information is as follows:

	2003		2002		2001
	(expressed in thousands)
Total Revenue
United States	$	146,607	$	145,982	$	147,965
Europe		119,382		92,269		95,167
Asia		60,506		76,584		90,852
Other		13,592		12,350		21,875
Total Revenue	$	340,087	$	327,185	$	355,859
Total Property and Equipment, Net
United States	$	44,121	$	46,209	$	51,496
Europe		11,469		10,110		10,012
Asia		614		565		288
Other		–		–		38
Total Property and Equipment, Net	$	56,204	$	56,884	$	61,834

Revenue by geographic area is presented based on the customer’s location. No country other than the United States has revenue in excess of 15% of the Company’s total revenue. No single customer accounted for 10% or more of consolidated revenue during any of the periods presented.

5.     Financing:

Long-term debt at September 27, 2003 and September 28, 2002 is as follows:

	2003			2002
(expressed in thousands)
6.6% Notes, unsecured, due in annual installments of $4,375 beginning in July 2001	$	21,875		$	26,250
7.5% Note, unsecured, due in semi-annual installments of $1,153 beginning in July 2003		13,846			15,000
Variable Rate Note, paid in full in fiscal 2003, collateralized by building		–			2,575
5.4% Mortgage, paid in full in fiscal 2003, collateralized by building		–			4,948
6.0% Puttable Note, unsecured, due in 2008		1,250			1,500
Other		355			1,121
Total Long-Term Indebtedness	$	37,326		$	51,394
Less Current Maturities of Long-Term Debt		(6,839	)		(8,605	)
Total Long-Term Debt	$	30,487		$	42,789

Aggregate annual maturities of long-term debt for the next five fiscal years and thereafter are as follows:

Year	Maturity
	(expressed in thousands)
2004	$	6,839
2005		6,855
2006		6,708
2007		6,683
2008		7,933
Thereafter		2,308
	$	37,326

The holder of the 6.0% Puttable Note has the option to put all or a portion of that note for payment to the Company at any time upon specified one-year notice. The 6.6% and 7.5% Notes have pre-payment penalties that make early pay-off disadvantageous for the Company based on current market interest rates. The Company estimates that

F-17

the fair market value of its long-term debt portfolio exceeds carrying value by $2.0 million at September 27, 2003, due to lower market interest rates relative to interest rates at the time of issuance.

The Company is subject to financial covenants, among other restrictions, under the 6.6% and 7.5% Notes. At September 27, 2003, the Company was in compliance with these financial covenants. Under the covenants the Company is required, among other matters, to maintain certain financial notes and to meet certain indebtedness and restricted payment tests.

Information on short-term borrowings for the years ended September 27, 2003, September 28, 2002 and September 30, 2001 is as follows:

	2003		2002
(expressed in thousands)
Balance outstanding at year-end	$	383	$	598
Interest rate at year-end		2.0%		3.4%
Weighted-average interest rate during the year		1.5%		1.6%

The Company had no amounts outstanding on its primary $25 million revolving bank credit facility during fiscal 2003. On December 16, 2002, the Company amended its $50 million revolving bank credit agreement, reducing the facility to $25 million and extending its maturity to January 2005. The Company is required, among other restrictions, to maintain certain financial covenants under the $25 million revolving bank facility. At September 27, 2003 the Company was in compliance with these financial covenants.

At September 27, 2003, the Company had letters of credit outstanding totaling $48.1 million.

6.     Income Taxes:

The components of income before income taxes for the fiscal years ended September 27, 2003, September 28, 2002 and September 30, 2001 are as follows:

	2003		2002		2001
	(expressed in thousands)
Income before income taxes, discontinued operations and
cumulative effect of accounting changes:
Domestic	$	16,243	$	26,048	$	13,625
Foreign		16,273		6,835		10,219
Total	$	32,516	$	32,883	$	23,844

The provision for income taxes from continuing operations before cumulative effect of accounting changes for the fiscal years ended September 27, 2003, September 28, 2002 and September 30, 2001 is as follows:

	2003		2002			2001
	(expressed in thousands)
Current provision (benefit):
Federal	$	6,054	$	6,921		$	5,583
State		794		630			700
Foreign		2,850		3,542			4,212
Deferred		1,527		(480	)		(2,207	)
Total provision	$	11,225	$	10,613		$	8,288

A reconciliation from the federal statutory income tax rate to the Company’s effective rate for continuing operations before cumulative effect of accounting changes for the fiscal years ended September 27, 2003, September 28, 2002 and September 30, 2001, is as follows:

F-18

	2003			2002			2001
Statutory income tax rate		35	%		35	%		35	%
Tax benefit of export sales		(4	)		(6	)		(5	)
Foreign provision in excess of U.S. tax rate		4			4			4
State income taxes, net of federal benefit		2			2			1
Research and development tax credits		(3	)		(4	)		(4	)
Meals and entertainment and other permanent items		1			1			1
Goodwill amortization		–			–			1
Other, net		–			–			2
Effective income tax rate		35	%		32	%		35	%

A summary of the deferred tax assets and liabilities for the fiscal years ended September 27, 2003, September 28, 2002 and September 30, 2001, is as follows:

	2003			2002			2001
	(expressed in thousands)
Deferred Tax Asset:
Accrued compensation and benefits	$	3,345		$	3,621		$	2,918
Inventory reserves		3,650			5,305			6,048
Intangibles		2,718			3,292			–
Allowance for doubtful accounts		367			371			347
Other assets		274			(87	)		897
Net operating loss carryovers		1,343			–			–
Capital loss carryovers		608			–			–
Research and foreign tax credits		6,008			4,671			3,303
Less valuation allowance		(723	)		–			–
Total Deferred Tax Asset	$	17,590		$	17,173		$	13,513
Deferred Tax Liability:
Property and equipment	$	6,949		$	8,360		$	8,171
Foreign deferred revenue and other		4,708			–			–
Total Deferred Tax Liability	$	11,657		$	8,360		$	8,171
Net Deferred Tax Asset	$	5,933		$	8,813		$	5,342

At September 27, 2003, the Company had research credit carryovers for federal and state purposes of approximately $4.8 million that will expire between the years 2014 and 2018 if not utilized. The Company also has foreign tax credit carryovers of approximately $1.2 million, which, if not utilized, will expire between the years 2005 and 2007. The Company’s French subsidiary has a $3.5 million net operating loss carryover that will not expire under French law.

At September 28, 2002 and September 30, 2001, the amount of the research credit carryover for federal and state purposes was $4.0 million and $2.8 million, respectively. The amount of the foreign tax credit carryover was $0.6 million and $0.1 million, respectively. Additionally, a $1.1 million net operating loss carryover subject to an annual Internal Revenue Code Section 382 limitation, attributable to an acquired subsidiary, was fully utilized during the fiscal year ended September 28, 2002.

The Company has assessed its taxable earnings history and prospective future taxable income. Based on this assessment, the Company has determined that it is more likely than not that its net deferred tax assets will be realized in future periods. The Company has also determined that it is not more likely than not that the Company will be able to utilize its net operating loss carryover in Italy of $0.3 million and its $1.6 million U.S. capital loss

F-19

carryover. Accordingly, the Company has determined that a valuation allowance is appropriate for the full amount of the Italian net operating loss and the U.S. capital loss carryover. The Italian net operating loss carryover expires in 2007, and the U.S. capital loss carryover expires in 2008.

According to APB 23, “Accounting for Income Taxes – Special Areas,” U.S. income taxes are not provided on undistributed earnings of international subsidiaries, which are permanently reinvested. At September 27, 2003, undistributed earnings permanently reinvested in international subsidiaries were approximately $46 million. The Company has not provided U.S. income taxes on these earnings. If these earnings were repatriated, the U.S. income taxes would be substantially offset by foreign tax credits.

In fiscal 2003, 2002, and 2001, the Company recognized tax benefits of $1.1 million, $0.2 million, and $0.4 million, respectively, relating to the Company’s stock option plan. These benefits were directly allocated to shareholders’ investment.

7.     Stock Plans:

The Company compensates officers, non-employee directors, and key employees with stock-based compensation under two stock plans approved by the Company’s shareholders and under supervision of the Board of Directors. During the year ended September 27, 2003, the Company awarded incentive stock options, non-qualified stock options, and restricted stock grants under these plans. Stock option awards are granted at exercise prices equal to market value on the date of grant. Generally, options vest proportionally over three years, beginning one year after grant date, and expire five years from the grant date. A status of the Company’s stock option plans is summarized below (in thousands, except per share amounts):

	2003					2002					2001
	Shares			WAEP*		Shares			WAEP*		Shares			WAEP*
Options outstanding at beginning of year		3,022		$	11.27		3,081		$	11.12		3,626		$	9.98
Granted		699		$	14.29		728		$	10.50		728		$	12.30
Exercised		(681	)	$	9.44		(214	)	$	6.57		(410	)	$	8.00
Forfeited or expired		(555	)	$	14.75		(573	)	$	11.26		(863	)	$	8.81
Options outstanding at year-end		2,485		$	11.84		3,022		$	11.27		3,081		$	11.12
Options subject to exercise at year-end		1,043		$	10.38		1,684		$	11.90		1,418		$	11.58
*Weighted-Average Exercise Price

The following summarizes information concerning stock options outstanding at September 27, 2003 (in thousands, except per share amounts):

Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Subject to Exercise
$6.375-$10.30		456		1.91	$	7.57		414
$10.51		501		3.72	$	10.51		146
$10.53-$12.93		543		2.96	$	12.56		321
$13.00-$14.55		435		1.97	$	13.20		160
$14.81		550		4.68	$	14.81		2
Total		2,485		3.13	$	11.84		1,043

The Company awarded two officers with restricted stock grants totaling 12,000 shares with an aggregate grant date fair value of $0.1 million in fiscal 2003. The grants vest over three years.

At September 27, 2003, a total of 1,636,433 shares were available for future grant under the two stock plans.

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According to the Black-Scholes multiple option model, the estimated fair value of employee stock options granted at market price during fiscal 2003, 2002, and 2001 averaged $5.61, $3.69, and $4.20, respectively. The fair value of options granted under stock-based compensation has been estimated at the date of each grant using a Black-Scholes multiple option valuation model. The multiple option form of the model separately values each vesting increment of the stock grant. This form yields a lower valuation than other forms of the model, but allocates proportionately more of the resulting cost to early vesting periods. In general, the fair value of a grant will increase or decrease based on certain assumptions used for the stock grants summarized as follows:

	2003		2002		2001
Expected life (in years)		2.7		2.4		3.5
Risk-free interest rate		1.6%		2.9%		2.9%
Expected volatility		0.65		0.65		0.54
Dividend yield		1.7%		2.3%		2.1%

In fiscal 2002, the Company’s shareholders authorized a new Employee Stock Purchase Plan, whereby 750,000 shares of the Company’s common stock were reserved for purchase by employees. At September 27, 2003, 652,798 shares remain reserved for issuance. Purchases are funded by payroll deduction over six-month periods. The final purchase price is 85% of the lower of the market price at either the beginning or end of the period. The shares must be held by the employee for at least one year subsequent to the purchase. Two purchase periods closed in fiscal 2003 with the purchase of 97,000 shares for an average price of $8.51. Approximately 96,000 shares and 150,000 shares were issued in 2002 and 2001, respectively, under an employee stock purchase plan that terminated in fiscal 2002.

See Note 1 to the Consolidated Financial Statements for the pro forma impact of stock-based compensation on net income.

8.     Employee Benefit Plans:

The Company offers a retirement plan that has two components — a 401(k) component with a Company match and a fiscal year Company contribution.

The 401(k) plan allows eligible U.S. employees to contribute a portion of their pre-tax income each pay period. The Company matches 50% of employees’ pre-tax contributions up to 6% of compensation, subject to limitations imposed by federal law. In fiscal 2002 and 2001, the Company match was limited to $500 per employee. Employees are fully vested in their voluntary contributions and Company match. The Company’s matching contribution was $1.8 million in fiscal 2003, $0.6 million in fiscal 2002, and $0.6 million in fiscal 2001. Employees may also contribute a percentage of their salary on an after-tax basis.

The Company also provides an annual fiscal year contribution to the retirement plan for eligible U.S. and certain international employees. Employees who have been paid for 1,000 hours or more of service during a plan year are eligible for a fiscal year contribution. After three years as a participant, employees have a vested interest equal to one-third of the total Company contributions. The vested interest increases each additional year by one-third of the total balance, until total vesting is reached after five years of participation.

The Company contribution plan provides for a minimum fiscal year contribution of 3% of participant compensation below the Social Security taxable wage base and 6% of participant compensation in excess of the Social Security taxable wage base, up to the maximum contribution allowed by federal law. In fiscal 2002 and 2001, the fiscal year contributions were 4% of participant compensation below the Social Security taxable wage base and 8% of participant compensation in excess of the Social Security taxable wage base. The Company’s Board of Directors approves any changes to the contribution levels under the plan. The Company’s contributions under the Company contribution plan totaled $2.7 million in fiscal 2003 and $4.2 million in both fiscal 2002 and fiscal 2001.

One of the Company’s international subsidiaries has a non-contributory, unfunded defined benefit retirement plan for eligible employees. This plan provides benefits based on the employee’s years of

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service and compensation during the years immediately preceding retirement, early retirement, termination, disability, or death, as defined in the plan.

The cost for the plan includes the following components:

	2003		2002		2001
	(expressed in thousands)
Service cost-benefit earned during the period	$	237	$	183	$	195
Interest cost on projected benefit obligation		361		278		243
Net amortization and deferral		17		15		15
Net Periodic Retirement Cost	$	615	$	476	$	453

The following summarizes the change in benefit obligation and the change in plan assets:

	2003			2002
	(expressed in thousands)
Change in benefit obligation:
Projected benefit obligation, beginning of year	$	5,482		$	4,774
Service cost		237			183
Interest cost		361			278
Translation change		1,016			44
Actuarial loss		393			257
Benefits paid		(76	)		(54	)
Projected benefit obligation, end of year	$	7,413		$	5,482
Change in plan assets:
Fair value of plan assets, beginning of year	$	–		$	–
Actual return on plan assets		–			–
Employer contributions		76			54
Benefits paid		(76	)		(54	)
Fair value of plan assets, end of year	$	–		$	–

The funded status of the Company’s pension retirement plan at September 27, 2003, and September 28, 2002, respectively, is as follows:

	2003			2002
(expressed in thousands)
Funded status	$	(7,413	)	$	(5,482	)
Unrecognized net gain		736			271
Unrecognized net liability being amortized		73			72
Required adjustment to recognize minimum liability		6			11
Accrued Pension Liability	$	(6,598	)	$	(5,128	)
Major assumptions used in the above calculation include:
Discount rate		5.5	%		6.0	%
Expected rate of increase in future compensation levels		3.1	%		3.1	%

9.    Restructuring and Other Charges:

During fiscal 2003, the Company had no significant restructuring activities related to business consolidation other than the discontinuation of its Automation division operations (See note 2 to the Consolidated Financial Statements).

During fiscal 2002, the Company consolidated its Electromechanical Testing Division into Eden Prairie, Minnesota from Raleigh, North Carolina. The physical move of the business and the facility closure were completed during fiscal 2002. As a result of the consolidation, the Company recorded a $0.4 million

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charge for severance-related costs and a $0.6 million charge to write down inventory. Substantially all of the severance costs were paid during fiscal 2002.

During fiscal 2001, the Company recorded a restructuring charge of $2.3 million as a result of the closure of its manufacturing operations in France and the transfer of this product line to its electromechanical division in North Carolina. Substantially all the necessary cash outlays were completed during fiscal 2001. These costs were financed primarily with funds from continuing operations and borrowings under the Company’s bank line of credit. In addition, during fiscal 2001 the Company recorded a restructuring charge of $1.9 million related to the discontinuation of a line of data acquisition products acquired as part of its 1999 acquisition of DSP Technology, Inc. (“DSP”) in 1999. This included a provision for severance costs of $0.8 million, the write-off of leasehold improvements and production and other equipment of $0.3 million, and other costs of $0.8 million associated with closure of the facility, the wind-down of the related product line, excess and obsolete inventory, uncollectible receivables and the write-off of fixed assets. Of the total $1.9 million, $1.3 million was charged to Cost of Sales and $0.6 million was charged to General and Administrative Expense. The activity related to the provision was materially complete at September 30, 2001, and no additional charges were incurred during fiscal 2002.

For the three years ended September 27, 2003, September 28, 2002, and September 30, 2001, the reserve for restructuring is as follows:

Year	Beginning Balance		Provision		Write-off			Ending Balance
	(expressed in thousands)
2001	$	–	$	4,193	$	(3,972	)	$	221
2002		221		1,019		(1,219	)		21
2003		21		–		(21	)		–

10.     Commitments and Contingencies:

Litigation: The Company is a party to various claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of management, final resolution of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

Leases: Total lease expense associated with continuing operations was $5.1 million in fiscal 2003, $5.2 million in fiscal 2002, and $4.8 million in fiscal 2001. The Company has non-cancelable operating lease commitments for equipment and facilities that expire on various dates through 2011. Minimum annual rental commitments for the next five fiscal years and thereafter are as follows:

Year	Amount
	(expressed in thousands)
2004	$	3,937
2005		3,882
2006		2,521
2007		1,450
2008		1,149
Thereafter		3,079
	$	16,018

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MTS SYSTEMS CORPORATION AND SUBSIDIARIES

SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES

FOR DOUBTFUL ACCOUNTS AND RESTRUCTURING RESERVES

FOR THE YEARS ENDED SEPTEMBER 27, 2003, SEPTEMBER 28, 2002
AND SEPTEMBER 30, 2001

(In Thousands)

	Balance Beginning of Year		Provisions		Amounts Written-Off/ Payments			Balance End of Year
Allowance for Doubtful Accounts:
2003	$	2,432	$	184	$	( 833	)	$	1,783
2002		2,525		712		(805	)		2,432
2001		1,919		673		(67	)		2,525
Restructuring Reserves:
2003	$	21	$	–	$	( 21	)	$	–
2002		221		1,019		(1,219	)		21
2001		–		4,193		(3,972	)		221

S-1

EXHIBIT INDEX TO FORM 10-K

3.b Restated Bylaws.

10.a Management Variable Compensation Plan, dated October 2003.

10.s Change in Control Agreement, dated January 28, 2003, between the Registrant and Douglas E. Marinaro.

10.t Description of terms of employment of Douglas E. Marinaro, pursuant to an offer letter dated November 6, 2002.

21. Subsidiaries of the Registrant.

23. Consent of Independent Public Accountants.

31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-3.B

Exhibit 3.b

BYLAWS
OF
MTS SYSTEMS CORPORATION

(Reflecting Amendments through November 26, 2002)

ARTICLE I

Shareholders

        Section 1. The annual meeting of the shareholders of this corporation may be held on such date and at such place as determined by the Board of Directors; provided, however, that if an annual meeting has not been held during the immediately preceding 15 months, a shareholder or shareholders holding three percent or more of the voting power of all shares entitled to vote may demand an annual meeting of shareholders by written demand given to the Chief Executive Officer or Chief Financial Officer of the corporation.”

        Section 2. At the annual meeting, the shareholders shall elect directors of the corporation and shall transact such other business as may properly come before them. To be properly brought before the meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, each such notice must be given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation, not less than 45 days nor more than 75 days prior to a meeting date corresponding to the previous year’s annual meeting. Each such notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address of record of the shareholder proposing such business, (c) the class or series (if any) and number of shares of the corporation which are owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this Article; provided, however, that nothing in this Article shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting, in accordance with these Bylaws.

        Section 3. A special meeting of the shareholders may be called at any time by the Chairman of the Board of Directors of the corporation and shall be called by the Secretary upon

the request in writing by two or more members of the Board of Directors, upon the vote of the Directors, or upon the request in writing of shareholders holding not less than one-tenth of the outstanding shares of voting stock. Such meeting shall be called by mailing a notice thereof as above provided. Such notice shall state the time, place, and object of the meeting.

        Section 4. At any shareholders’ meeting, each shareholder shall be entitled to one vote for each share of stock standing in his name on the books of the corporation as of the date of the meeting. Any shareholder may vote either in person or by proxy. The presence in person or by proxy of the holders of a majority of the shares of stock entitled to vote at any shareholders’ meeting shall constitute a quorum for the transaction of business. If no quorum be present at any meeting, the shareholders present in person or by proxy may adjourn the meeting to such future time as they shall agree upon without further notice other than by announcement at the meeting at which such adjournment is taken.

ARTICLE II

Directors

        Section 1. The Board of Directors shall have the general management and control of all business and affairs of the corporation and shall exercise all the powers that may be exercised or performed by the corporation under the statutes, its Articles of Incorporation, and its Bylaws.

        Section 2. The Board of Directors of this corporation shall consist of up to ten Directors, and majority of the Directors then holding office shall constitute a quorum.

        Section 3. Each director shall be elected for a term of one year, and shall hold office for that term and until his successor is elected and qualified. If a vacancy in the Board occurs by reason of death, resignation, or otherwise, the vacancy may be filled for the unexpired portion of the term in which it occurs by a majority vote of the remaining Directors.

        Section 4. The Board of Directors may meet regularly at such time and place as it shall fix by resolution, and no notice of regular meetings shall be required. Special meetings of the Board of Directors may be called by the President or any two Directors by giving at least three days’ notice to each of the other Directors by mail, telephone, telegraph, or in person, provided that such notice may be waived either before, at, or after a meeting by any Director by a signed waiver in writing.

        Section 5. Any action which might have been taken at a meeting of the Board of Directors may be taken without a meeting if done in writing, signed by all of the Directors, and any such action shall be as valid and effective in all respects as if taken by the Board at a regular meeting.

        Section 6. The Board of Directors shall fix and change as it may from time to time determine by a majority vote, the compensation to be paid the officers of the corporation, and, if deemed appropriate, the members of the Board of Directors.

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        Section 7. Subject to the provisions of applicable laws and its Articles of Incorporation, the Board of Directors shall have full power to determine whether any, and if any, what part of any, funds legally available for the payment of the dividends shall be declared in dividends and paid to the shareholders; the division of the whole or any part of such funds of this corporation shall rest wholly within the discretion of the Board of Directors, and it shall not be required at any time, against such discretion, to divide or pay any part of such funds among or to the stockholders as dividends or otherwise.

        Section 8. Except as otherwise provided in Article III of these Bylaws, the Board of Directors may, in its discretion, by the affirmative vote of a majority of the Directors, appoint committees which shall have and may exercise such powers as shall be conferred or authorized by the resolutions appointing them. A majority of any such committee, if the committee be composed of more than two members, may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to discharge any such committee.

ARTICLE III

Executive Committee

        The Board of Directors may by unanimous affirmative action of the entire Board designate two or more of their number to constitute an Executive Committee which, to the extent determined by unanimous affirmative action of the Board, shall have and exercise the authority of the Board in the management of the business of the corporation. Such Executive Committee shall act only in the interval between meetings of the Board and shall be subject at all times to the control and direction of the Board.

ARTICLE IV

Officers

        Section 1. The officers of this corporation shall be a Chairman of the Board of Directors, a President (one of which may be designated Chief Executive Officer in the discretion of the Directors), one or more Vice Presidents (any one of which may be designated as Executive Vice President in the discretion of the Directors), a Treasurer, a Secretary, and such other and further officers, including any number of Assistant Secretaries and Assistant Treasurers as may be deemed necessary from time to time by the Board of Directors, each of whom shall be elected by the Board of Directors except that the Board of Directors may delegate to the President or Chief Executive Officer authority to appoint certain Vice Presidents. One person may hold any two offices other than those of President and Vice President. No more than two offices shall be held by any one person. Each officer shall serve at the pleasure of the Board of Directors until the next annual meeting of Directors and until his successor is duly elected and qualifies. Notwithstanding the foregoing, the Board of Directors shall have the power and authority to

3

cause the corporation to enter into Employment Agreements or Contracts with any of the officers of the corporation for periods exceeding one year.

        Section 2. The Chairman of the Board of Directors shall preside at meetings of shareholders and Directors.

        Section 3. The Chief Executive Officer shall have general and active management of the business under the supervision and direction of the Board of Directors and he shall be responsible for carrying into effect all orders and resolutions of the Board of Directors. He shall also have such other powers and perform such other duties as the Board of Directors may from time to time prescribe. The position of Chief Executive Officer shall be filled, at the Board of Directors’ discretion, either by the Chairman or the President.

        Section 4. The Board of Directors may also appoint a Chief Operating Officer with duties to be determined by the Chief Executive Officer. Unless he is also serving as the Chief Executive Officer, the President would be appointed as Chief Operating Officer. If the President is also serving as Chief Executive Officer, the President shall nominate an Executive Vice President to be appointed by the Board as Chief Operating Officer.

        Section 5. The Vice Presidents of the corporation shall each have such powers and duties as generally pertain to their respective offices as well as such powers and duties as from time to time may be conferred by the Board of Directors.

        Section 6. The Secretary shall keep a record of the meetings and proceedings of the Directors and shareholders, have custody of the corporate seal and of other corporate records specifically entrusted to him by these Bylaws or by direction of the Board of Directors, and shall give notice of such meetings as are required by these Bylaws or by the Directors.

        Section 7. The Treasurer shall keep accounts of all monies and assets of the corporation received or disbursed, shall deposit all funds in the name of and to the credit of the corporation in such banks or depositories or with such custodians as may be authorized to receive the same by these Bylaws or the Board of Directors, and shall render such accounts thereof as may be required by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, or the shareholders.

ARTICLE V

Fiscal Year

        Each fiscal year of the corporation shall, commencing with fiscal year 2002, end on the Saturday closest to September 30 of such year and the succeeding fiscal year shall, commencing with fiscal year 2003, commence on the next day thereafter, and each fiscal quarter shall end on the Saturday closest to December 31, March 31 and June 30 of each year and the succeeding fiscal quarter shall commence on the respective next day thereafter.

4

ARTICLE VI

Office

        The principal office of this corporation shall be at such place as the Board of Directors shall fix from time to time. The corporation may also have an office or offices at such other places and in such other states or countries as the Board of Directors may from time to time authorize and establish.

ARTICLE VII

Seal

        The corporation shall have a corporate seal which shall bear the name of the corporation and the name of the state of incorporation and the words “corporate seal.” It shall be in such form and bear such other inscription as the Board of Directors may determine or approve.

ARTICLE VIII

General Provisions

        Section 1. Shares of stock in this corporation not exceeding the authorized number thereof as specified in the Articles of Incorporation may be issued, and certificates therefore shall be authenticated by the Chairman of the Board of Directors, or the President or any Vice President and the Secretary or Treasurer upon authorization by the Board of Directors and receipt by the corporation of such consideration for such shares as shall be specified by the Board of Directors. In the event that a bank, trust company of other similarly qualified corporation is designated and agrees to act as the registrar and/or transfer agent for the corporation, then the signatures of the officers specified above and the seal of the corporation may be imprinted upon the stock certificates by facsimile and said certificates may be authenticated by signature of an authorized agent of the said registrar and/or transfer agent. The officers of the corporation may delegate to such transfer agent and/or registrar such of the duties relating to the recording and maintenance of records relating to shares of stock and shareholders of the corporation as may be deemed expedient and convenient and as are assumed by said registrar and/or transfer agent

        Section 2. The Board of Directors may establish reasonable regulations for recording of transfers of shares of stock in this corporation, and may establish a date, not earlier than 60 days prior to any shareholders’ meeting, as of which the shareholders entitled to vote and participate in any shareholders’ meeting shall be determined.

        Section 3. From time to time as it may deem appropriate and advantageous to the best interests of this corporation, the Board of Directors may establish such bonus, pension, profit sharing, stock bonus, stock purchase, stock option, or other employee incentive plans, as and for the benefit of such of the corporation’s employees as it in its sole discretion shall determine.

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        Section 4. No certificate for shares of stock in the corporation, or any other security issued by this corporation, shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the corporation, if the Board of Directors shall so require, of a bond of indemnity in such amount (not exceeding twice the value of the shares represented by such certificate), upon such terms and secured by such surety as the Board of Directors may in its discretion require.

        Section 5. Any person who at any time shall serve or shall have served as a director, officer or employee of the corporation, or of any other enterprise at the request of the corporation, and the heirs, executors and administrators of such person, shall be indemnified by the corporation in accordance with, and to the fullest extent permitted by, the provisions of the Minnesota Business Corporation Act, as it may be amended from time to time.

ARTICLE IX

Adoption and Amendment

        Section 1. These Bylaws shall become and remain effective until amended or superseded as hereinafter provided when they shall have been adopted by the Board of Directors named in the Articles of Incorporation or in the absence of such adoption, by the shareholders.

        Section 2. The Board of Directors may alter or may amend these Bylaws and may make or adopt additional Bylaws, subject to the power of the shareholders to change or repeal the Bylaws; provided the Board of Directors shall not make or alter any Bylaw fixing their qualifications, classifications, term of office, or number, except the Board of Directors may make or alter any Bylaw to increase their number.

        Section 3. The shareholder may alter or amend these Bylaws and may make or adopt additional Bylaws by a majority vote at any annual meeting of the shareholders or at any special meeting called for that purpose.

6

EX-10.A

MTS Systems Corporation
Management Variable Compensation (MVC) Plan

(Revised October, 2003)

1

Table of Contents

Section		Page
1.	General Purpose of the Plan	3
2.	Definitions	3
3.	Eligibility and Participation	3
4.	Plan Goals	4
5.	Payout Opportunity	4
6.	Determining the Payout	4
7.	Relationship to Other Compensation Plans	5

2

Section 1.     General Purpose of the Plan

The name of this plan is the MTS Systems Management Variable Compensation Plan (the “Plan”). The purpose of the Plan is to focus efforts on achievement of near term financial objectives which are critical to the success of MTS Systems Corporation; to reward accomplishments when performance meets or exceeds established targets or business plan objectives; and to more closely tie total compensation (salary plus variable) to the financial results and performance of the company. No employment contract is implied by participation in the Plan.

Section 2.     Definitions

Definitions as used in the Plan are:

a. “CEO” means the Chief Executive Officer duly elected by the Board.

b. “Company” means MTS Systems Corporation, a corporation organized under the laws of the State of Minnesota (or any successor corporation).

c. “Employee” means an employee of the Company, whether or not an officer or member of the Board, but excluding any temporary employee and any person serving the Company only in the capacity of a member of the Board.

d. “Participant” means an Employee who is eligible to participate in the Plan.

e. “Plan” means the MTS Systems Corporation Management Variable Compensation Plan.

f. “Plan Year” means the applicable fiscal year of the Company.

Section 3.     Eligibility and Participation

Employees eligible to participate in the Plan will include:

• Executives

• Managers & technical supervisors

• Key marketing or technical employees who meet certain minimum responsibilities for profitability, financial/human resource acquisition and allocation, balance sheet control, and/or market/technical direction.

Employees eligible for other variable compensation (i.e. commissions) are not eligible to participate in the Plan.

Participants must also work at least 1,000 hours in the Plan Year and be employed at the end of the Plan Year to be eligible for a payout. Employees resigning or terminating before the end of the Plan Year, regardless of cause, are not eligible for a payout. Participants who work less than full time during the Plan Year (g., due to a personal leave, but not due to illness) would earn a proportionately reduced payout.

The CEO must approve any waivers to the eligibility and participation rules listed above.

3

Section 4.     Plan Goals

Achieving financial results is one of the main objectives of the Plan. For the Executive Management Team, all goals are financial. For all other participants, the goals are a combination of plan financial and operating goals. The financial goals for the Plan Year include:

• Earnings Per Share (EPS)
• Earnings Before Interest and Taxes (EBIT)
• Working Capital Rate to Revenue (WCRR)
• Revenue

The operating goals reflect group accountability and are related to the operating unit where the employee has a direct impact.

The goals are established based on the following list of approved business unit levels:

AeroMet
Corporate
Friction Stir Welding
Sensors Software & Consulting
Test

The goals for participants below the direct reports to the CEO require one- over-one approval to:

• Integrate goals into the Company operating plan
• Guard against conflicting goals
• Help to assure consistency in degree of difficulty

The CEO has the final approval for plan goals over all participants other than himself.

Section 5.     Payout Opportunity

The MVC target payment is expressed as a percentage of salary level midpoint and is assigned at the beginning of the Plan Year. Incentive payments vary above and below the target percent based on the financial results in comparison to the established goals.

The MVC target percentage is assigned based on salary level, scope of responsibility, and profit impact of the position. These target percentages are reviewed annually with market survey information and are competitive within similar companies and industries. The MVC target percentage range by type of position is listed below:

Type of Position	MVC Target % range
Executive	30% – 70%
Manager/Technical Supervisor/
Key Technical Employee	6% – 25%

Overranging is when the payout is greater than 100% because the actual results are above established goals. An overranging multiplier is assigned to each financial goal. For all positions, the MTS EPS goal must be met or exceeded before the overranging multiplier for each established goal is applied. There is no overranging potential for operating goals.

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Payout Opportunity – Executive
Weight	30%	50%	20%
Goal	Corp EPS	BU EBIT or	BU WCRR or
		BU Revenue	BU Revenue
Over Range Multiplier	2	3	2
Maximum Over-ranging	60%	150%	40%
Total	250% Maximum Over-ranging
BU: Business Unit

Payout Opportunity – Manager/Technical Supervisor/Key Technical Employee
Weight	20%	50%	20%	10%
Goal	Corp EPS	BU EBIT	BU WCRR or BU Revenue	Operating Objective
Over Range Multiplier	2	3	2	1
Maximum Over-ranging	40%	150%	40%	10%
Total	240% Maximum Over-ranging
BU: Business Unit

Section 6. Determining the Payout

Payouts are based on four factors: 1) the degree to which goals are met; 2) the MVC target percentage; 3) the midpoint of the salary range as assigned at the beginning of the Plan Year; and 4) the percentage of time worked during the Plan Year.

Each goal is assigned a payout range. The minimum level or hurdle represents that level of performance below, which no award is to be paid. The stretch target and maximum stretch target of a payout range represents performance above target and overranging may apply at these levels. The sum of the relative weightings of the objectives must equal 100%.

Payouts will be made within 90 days of the end of the Plan Year, expected to be on or before December 31.

Section 7.     Relationship to Other Compensation Plans

7.a     “Non-Management” Variable Compensation (VC)

Employees may be eligible for a variable compensation bonus at the end of the Plan Year if they are not eligible to participate in another variable compensation program (i.e. Management Variable Compensation, sales commissions); work at least a 1,000 hours during the Plan Year; and are employed by the Company at the end of the Plan Year.

The following is an outline summary to which these VC plans must adhere. They are included in the MVC Plan for reference only.

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• VC Competitive payout potential is 3% of the midpoint of the salary range in which the employee is placed at the beginning of the fiscal year.

• VC payout will normally be based on the combination of the results of a corporate goal and the employee’s vice president’s goals for the year.

• The entire 3% VC payout potential is eligible for overranging for participating employees.

• Eligibility and participation rules for VC will be the same as those for MVC, where appropriate.

Payout Opportunity – Non-Management
Weight	30%	60%	20%
Goal	Corp EPS	BU EBIT	BU WCRR or
			BU Revenue
Over Range Multiplier	2	3	3
Maximum Over-ranging	40%	180%	60%
Total	280% Maximum Over-ranging
BU: Business Unit

7.b     Retirement Plan

The calculations for the Management Variable Compensation Plan and Variable Compensation Plan are made after deductions for retirement plans.

Payout to a U.S. based participant in the Management Variable Compensation Plan and Variable Compensation Plan is included in the calculation of the Company’s contribution to that employee’s retirement plan.

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EX-10.S

Exhibit 10.s

CHANGE IN CONTROL AGREEMENT

MTS Systems Corporation
14000 Technology Drive
Eden Prairie, MN 55344-2290
Telephone 952-937-4000
Fax 952-937-4515

        THIS CHANGE IN CONTROL AGREEMENT is made and entered into by and between MTS Systems Corporation, a Minnesota corporation with its principal offices at 14000 Technology Drive, Eden Prairie, MN 55344 (the “Company”) and Douglas E. Marinaro (the”Executive”), residing at Eden Prairie, and shall be effective as of this 28^th day of January, 2003.

        WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders; and

        WHEREAS, the Executive has made and is expected to continue to make, due to the Executive’s intimate knowledge of the business and affairs of the Company, its policies, methods, personnel, and problems, a significant contribution to the profitability, growth, and financial strength of the Company; and

        WHEREAS, the Company, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist, and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the Executive in the performance of the Executive’s duties, to the detriment of the Company and its shareholders; and

        WHEREAS, it is in the best interests of the Company and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including the Executive, to their assigned duties without distraction and to ensure the continued availability to the Company of the Executive in the event of a Change in Control; and

        WHEREAS, the Company and the Executive previously signed a Change in Control Agreement and now desire to amend and restate that agreement in its entirety.

        THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows:

        1.    Term of Agreement. This Agreement shall be effective from and after the date hereof and shall continue in effect through December 31, 2003, and shall automatically be extended for successive one-year periods thereafter unless the Board of Directors of the Company (the “Board”)

Change in Control Agreement

shall have approved, and the Executive is notified in writing, prior to January 1, 2004 and each January 1 thereafter, that the term of this Agreement shall not be extended or further extended; provided, however, that if a Change in Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of 24 months from the date of the occurrence of a Change in Control or, if an event triggering the Company’s severance payment obligations to the Executive under Section 4(d) has occurred during such 24-month period, this Agreement shall continue in effect until the benefits payable to the Executive hereunder have been paid in full. In the event that more than one Change in Control shall occur during the original or any extended term of this Agreement, the 24-month period shall follow the last Change in Control. This Agreement shall neither impose nor confer any further rights or obligations on the Company or the Executive on the day after the end of the term of this Agreement. Expiration of the term of this Agreement of itself and without subsequent action by the Company or the Executive shall not end the employment relationship between the Company and the Executive.

        2.    Change in Control. No benefits shall be payable hereunder unless there shall have been a Change in Control. For purposes of this Agreement, a “Change in Control” of the Company shall mean a change in control which would be required to be reported in response to Item 6(e) on Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to such reporting requirement, including, without limitation, if:

        (a)    Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company’s then outstanding securities; or

        (b)    During any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), the Incumbent Directors cease for any reason to constitute at least a majority of the Board of Directors. The term “Incumbent Directors” shall mean those individuals who are members of the Board of Directors on the effective date of this Agreement and any individual who subsequently becomes a member of the Board of Directors (other than a director designated by a person who has entered into agreement with the Company to effect a transaction contemplated by Section 2(c)) whose election or nomination for election by the Company’s shareholders was approved by a vote of at least a majority of the then Incumbent Directors; or

        (c)    (i)  The Company consummates a merger, consolidation, share exchange, division or other reorganization of the Company with any corporation or entity, other than an

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Change in Control Agreement

entity owned at least 80% by the Company, unless immediately after such transaction, the shareholders of the Company immediately prior to such transaction beneficially own, directly or indirectly 51% or more of the combined voting power of resulting entity’s outstanding voting securities as well as 51% or more of the Total Market Value of the resulting entity, or in the case of a division, 51% or more of the combined voting power of the outstanding voting securities of each entity resulting from the division as well as 51% or more of the Total Market Value of each such entity, in each case in substantially the same proportion as such shareholders owned shares of the Company prior to such transaction; (ii) the shareholders of the Company approve an agreement for the sale or disposition (in one transaction or a series of transactions) of assets of the Company, the total consideration of which is greater than 51% of the Total Market Value of the Company, or (iii) the Company adopts a plan of complete liquidation or winding-up of the Company. Total Market Value”shall mean the aggregate market value of the Company’s or the resulting entity’s outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Company’s or the resulting entity’s other outstanding equity securities as measured by the exchange rate of the transaction or by such other method as the Board determines where there is not a readily ascertainable exchange rate.

        3.    Termination Following Change in Control. If a Change in Control shall have occurred during the term of this Agreement, the Executive shall be entitled to the benefits provided in subsection 4(d) unless such termination is (A) because of the Executive’s death or Retirement, (B) by the Company for Cause or Disability, or (C) by the Executive other than for Good Reason.

        (a)    Disability; Retirement. If, as a result of incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive’s duties with the Company for at least three (3) consecutive months, and within 30 days after written Notice of Termination is given the Executive shall not have returned to the full-time performance of the Executive’s duties, the Company may terminate the Executive’s employment for “Disability”. Any question as to the existence of the Executive’s Disability upon which the Executive and the Company cannot agree shall be determined by a qualified independent physician selected by the Executive (or, if the Executive is unable to make such selection, it shall be made by any adult member of the Executive’s immediate family), and approved by the Company. The determination of such physician made in writing to the Company and to the Executive shall be final and conclusive for all purposes of this Agreement. Termination by the Company or the Executive of the Executive’s employment based on “Retirement” shall mean termination on or after attaining age sixty-five (65).

        (b)    Cause. For purposes of this Agreement, “Cause shall mean:

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Change in Control Agreement

        (i)    the willful and continued failure by the Executive (other than any such failure resulting from (1) the Executive’s incapacity due to physical or mental illness, (2) any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason or (3) the Company’s active or passive obstruction of the performance of the Executive’s duties and responsibilities) to perform substantially the duties and responsibilities of the Executive’s position with the Company after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the duties or responsibilities;

        (ii)    the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct which, in the good faith opinion of the Company, would impair the Executive’s ability to perform his or her duties or impair the business reputation of the Company; or

        (iii)    the willful engaging by the Executive in fraud or dishonesty which is demonstrably and materially injurious to the Company, monetarily or otherwise.

No act, or failure to act, on the Executive’s part shall be deemed willful unless committed, or omitted by the Executive in bad faith and without reasonable belief that the Executive’s act or failure to act was in the best interest of the Company and the Executive shall have either failed to correct, or failed to take all reasonable steps to correct, such act or failure to act within sixty (60) days from the Executive’s receipt of written notice from the Company demanding that the Executive take such action. The Executive shall not be terminated for Cause unless and until the Company shall have delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive’s counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive’s conduct was Cause and specifying the particulars thereof in detail.

        (c)    Good Reason. The Executive shall be entitled to terminate his or her employment for Good Reason. For purposes of this Agreement, “Good Reason” shall mean, without the Executive’s express written consent, any of the following:

        (i)    The authority, powers, functions, responsibilities or duties assigned to the Executive, as compared to those in effect immediately prior to the Change in

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Change in Control Agreement

Control, are materially and adversely diminished without the Executive’s written consent (except for any diminution that occurs solely as a result of the fact that the Company ceases to be a public company);

        (ii)    A reduction by the Company in the Executive’s annual compensation including, but not limited to, base pay or short and/long term incentive pay in effect immediately prior to a Change in Control;

        (iii)    The Company requiring the Executive to relocate his or her office, or to be based in an office, more than 50 miles from his or her office immediately prior to the Change in Control (except for required travel on the Company’s business to an extent substantially consistent with the Executive’s business travel obligations immediately prior to the Change in Control);

        (iv)    The failure by the Company to continue to provide the Executive with benefits at least as favorable to those enjoyed by the Executive under any of the Company’s pension, life insurance, medical, health and accident, disability, deferred compensation, incentive awards, incentive stock options, or savings plans in which the Executive was participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed immediately prior to the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation or sick days to which Executive is entitled immediately prior to the Change in Control, provided, however, that the Company may amend any such plan or programs as long as such amendments do not reduce any benefits to which the Executive would be entitled upon termination;

        (v)    The failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 8;

        (vi)    any material violation of this Agreement by the Company;

        (vii)    the Company requests the Executive’s resignation from employment; or

        (viii)    any purported termination of the Executive’s employment which is not made pursuant to a Notice of Termination satisfying the requirements of this

5

Change in Control Agreement

Agreement; for purposes of this Agreement, no such purported termination shall be effective.

        (d)    Notice of Termination. Any purported termination of the Executive’s employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 9. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of the Executive’s employment.

        (e)    Date of Termination. For purposes of this Agreement, “Date of Termination” shall mean:

        (i)    If the Executive’s employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall have been absent from full-time performance of duties for at least three (3) months and shall not have returned to the full-time performance of the Executive’s duties during such 30 day period, in accordance with Section 3(a) hereof); and

        (ii)    If the Executive’s employment is terminated pursuant to subsections (b) or (c) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to subsection (b) above shall not be less than 10 days, and in the case of a termination pursuant to subsection (c) above shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given).

        (f)    Dispute of Termination. If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company shall continue to pay the Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection. Amounts paid under this subsection are in

6

Change in Control Agreement

addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement.

        4.    Compensation Upon Termination or During Disability. Following a Change in Control of the Company, as defined in subsection 2(a), upon termination of the Executive’s employment or during a period of Disability, the Executive shall be entitled to the following benefits:

        (a)    During any period that the Executive fails to perform full-time duties with the Company as a result of a Disability, the Company shall pay the Executive, the Executive’s base salary as in effect at the commencement of any such period and the amount of any other form or type of compensation otherwise payable for such period if the Executive were not so disabled, until such time as the Executive is determined to be eligible for long term disability benefits in accordance with the Company’s insurance programs then in effect or the Executive is terminated for Disability.

        (b)    If the Executive’s employment shall be terminated by the Company for Cause or by the Executive other than for Good Reason or Disability, the Company shall pay to the Executive his or her full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Company shall have no further obligation to the Executive under this Agreement, except with respect to any benefits to which the Executive is entitled under any Company pension or welfare benefit plan, insurance program or as otherwise required by law.

        (c)    If the Executive’s employment shall be terminated by the Company or by the Executive for Disability or Retirement, or by reason of death, the Company shall immediately commence payment to the Executive (or the Executive’s designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under the Company’s retirement and insurance programs then in effect.

        (d)    If the Executive’s employment shall be terminated (A) by the Company other than for Cause, Retirement, Disability or the Executive’s death or (B) by the Executive for Good Reason, then the Executive shall be entitled to the benefits provided below:

        (i)    The Company shall pay the Executive, through the Date of Termination, the Executive’s base salary as in effect at the time the Notice of Termination is given and any other form or type of compensation otherwise payable for such period;

        (ii)    In lieu of any further salary payments for periods subsequent to the Date of Termination, the Company shall pay a severance payment (the “Severance

7

Change in Control Agreement

Payment”) equal to two times the Executive’s Annual Compensation as defined below. For purposes of this Section 4, Annual Compensation shall mean the Executive’s annual salary (regardless of whether all or any portion of such salary has been contributed to a deferred compensation plan), the average annual Management Variable Compensation (“MVC”) earned by the Executive during the three (3) fiscal years immediately preceding the Date of Termination or, if less, the actual number of fiscal years the Executive has participated in the MVC plan, and any other type or form of compensation paid to the Executive by the Company (or any corporation (an Affiliate) affiliated with the Company within the meaning of Section 1504 of the Internal Revenue Code of 1986 as it may be amended from time to time (the Code)) and included in the Executive’s gross income for federal tax purposes during the 12-month period ending immediately prior to the Date of Termination, but excluding: a) any amount actually paid to the Executive as a cash payment of the target bonus (regardless of whether all or any portion of such Company bonus was contributed to a deferred compensation plan); b) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired; and c) any payments actually or constructively received from a plan or arrangement of deferred compensation between Company and the Executive. All of the items included in Annual Compensation shall be those in effect on the Date of Termination and shall be calculated without giving effect to any reduction in such compensation which would constitute a breach of this Agreement. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination;

        (iii)    For the 24-month period after the Date of Termination, the Company shall arrange to provide, at its sole expense, the Executive with life, disability, accident and health insurance benefits substantially similar to those which the Executive is receiving or entitled to receive immediately prior to the Notice of Termination. The Executive shall be responsible for the payment of his or her portion of the premiums for such benefits, (recognizing that the Executive shall remain responsible for payment of the same relative percentage of total premiums as the Executive paid prior to the Date of Termination). The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise receivable by the Executive pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by the Executive during such period, and any such benefits actually received by Executive shall be reported to the Company; and

        (iv)    The Company shall also pay to the Executive all legal fees and expenses incurred by the Executive as a result of such termination (including all such

8

Change in Control Agreement

fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement).

        (e)    The Executive shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 (except as expressly provided in Section 4(d)(iii)) be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise.

        (f)    The Executive shall be entitled to receive all benefits payable to the Executive under the Company pension and welfare benefit plans or any successor of such plan and any other plan or agreement relating to retirement benefits which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 4.

        (g)    The Executive shall be entitled to exercise all rights and to receive all benefits accruing to the Executive under any and all Company stock purchase and stock option plans or programs, or any successor to any such plans or programs, which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 4.

        (h)    The Company will indemnify the Executive (and the Executive’s legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of the Company as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Executive or the Executive’s legal representatives in connection with any action, suit or proceeding to which the Executive (or the Executive’s legal representative or other successors) may be made a party by reason of the Executive’s being or having been a director, officer or employee of the Company or any of its subsidiaries or his or her serving or having served any other enterprise as a director, officer or employee at the request of the Company, provided that the Company shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors’ and officers’ liability insurance of at least the same coverage as those maintained by the Company on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies.

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Change in Control Agreement

        Notwithstanding anything herein to the contrary, if the Executive’s employment is governed by a separate written employment agreement that provides benefits upon a termination of employment, the aggregate of any payments or benefits payable under such employment agreement shall offset and reduce the aggregate of payments and benefits under this Agreement.

5.    Non-Compete and Confidentiality.

        (a)    Noncompetition. Except as provided in subsection (c) below, the Executive agrees that, as a condition of receiving benefits under this Agreement, the Executive will not render services directly or indirectly to any competing organization, wherever located, for a period of one year following the Date of Termination, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any “Conflicting Product” which as used herein means any product, process, system or service of any person, firm, corporation, organization other than the Company, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by the Company. The Executive agrees that violation of this covenant not to compete with the Company shall result in immediate cessation of all benefits hereunder, other than insurance benefits, which the Executive may continue where permitted under federal and state law at his or her own expense.

        (b)    Confidentiality. The Executive further agrees and acknowledges the Executive’s existing obligation that at all times during and subsequent to his or her employment with MTS, the Executive will not divulge or appropriate to the Executive’s own use or the uses of others any secret or confidential information or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his or her employment by MTS or any of its subsidiaries.

        (c)    Waiver — Unfriendly Change in Control. Notwithstanding anything herein to the contrary: the restriction on competition under subsection (a) shall not apply if the Executive’s employment terminates following a Change in Control which has not been approved by a majority of the Incumbent Directors in office immediately prior to the Change in Control (an “Unfriendly Change in Control”). Furthermore, in such event, the Company waives any other restriction on the Executive’s employment and consents unconditionally to any employment the Executive may subsequently obtain.

6.     Potential Excise Tax.

        (a)    Gross-Up Payments. In the event it shall be determined that any payment, distribution or benefit made or provided by or on behalf of the Company to or for the benefit

10

Change in Control Agreement

of the Executive (pursuant to this Agreement or contemplated hereunder) (a “Payment”), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, being, collectively referred to as the “Excise Tax”), then the Company shall pay the Executive in cash an additional amount (the “Gross-Up Payment”) such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including but not limited to income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. Notwithstanding the foregoing, no amount shall be paid under this Section 6, and the amounts payable to the Executive under this Agreement shall be reduced to the amount at which no such Excise Tax is payable, if the result of such reduction is to place Executive in the same or a better after-tax position than would result from making the additional payments provided under this Section.

        (b)    Determination of Gross-Up Payment. Subject to sub-paragraph (c) below, all determinations required to be made under this Section 6, including whether a Gross-Up Payment is required and the amount of the Gross-Up Payment, shall be made by the firm of independent public accountants selected by the Company to audit its financial statements for the year immediately preceding the Change in Control (the “Accounting Firm”) which shall provide detailed supporting calculations to the Company and the Executive within 30 days after the date of the Executive’s termination of employment. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required under this Section 6 (which accounting firm shall then be referred to as the “Accounting Firm”). All fees and expenses of the Accounting Firm in connection with the work it performs pursuant to this Section 6 shall be promptly paid by the Company. Any Gross-Up Payment shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm’s determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive’s applicable federal income tax return would not result in the imposition of a penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”). In the event that the Company exhausts its remedies pursuant to sub-paragraph (c) below, and the Executive is thereafter required to make a payment of Excise Tax, the Accounting Firm shall promptly determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to the Executive within

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Change in Control Agreement

5 days after such determination.

        (c)   Contest. The Executive shall notify the Company in writing of any claim made by the Internal Revenue Service that if successful, would require the Company to pay a Gross-Up Payment. Such notification shall be given as soon as practicable but in no event later than ten (10) business days in the case of an assessment and twenty (20) business days in all other cases after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall:

(1) give the Company any information reasonably requested by the Company relating to such claim;

(2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, without limitation, accepting legal representation with respect to such claim by an attorney elected by the Company and reasonably acceptable to the Executive;

(3) cooperate with the Company in good faith in order to effectively contest such claim; and

(4) permit the Company to participate in any proceedings relating to such claim, provided that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest including, upon request, advancing Executives’ legal and administrative costs associated with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses.

Without limitation on the foregoing provisions of this subparagraph (c), the Company shall control all proceedings taken in connection with such contest. At its sole option, the Company may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. The Executive agrees to prosecute such contest to a determination before any

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Change in Control Agreement

administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. The Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. Furthermore, the Company agrees to hold in confidence and not to disclose, without the Executive’s prior written consent, any information with regard to Executive’s tax position which the Company obtains pursuant to this Section 6.

        (d)    Suit for Refund. If the Company directs the Executive to pay any claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis. If the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

        7.   Funding of Payments. In order to assure the performance of the Company or its successor of its obligations under this Agreement, the Company may deposit in a so-called “rabbi” trust an amount equal to the maximum payment that will be due the Executive under the terms hereof; provided, however, that the Company shall deposit in trust the amount equal to the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under such written trust instrument, the trustee shall be instructed to pay to the Executive (or the Executive’s legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to the Company. If the Company deposits funds in trust, payment shall be made no later than the occurrence of the Change in Control. The written instrument governing the trust shall be irrevocable from and after such Change in Control and shall contain such provisions protective of the Executive as are contained in similar trust agreements approved by the Internal Revenue Service in published private letter rulings (provided that the assets of the trust shall be reachable by creditors of the Company as required by such rulings). The trustee shall be a national bank selected by the Company with the consent of the Executive, with trust powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets of the trust in any readily marketable securities of U.S. corporations (other than the Company, its successor, or any affiliate of

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Change in Control Agreement

the Company or its successor). If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, the Company shall remain liable for any and all payments due to Executive.

        8.    Successors; Binding Agreement.

        (a)    The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to 51% or more of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to the compensation and benefits from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive terminated his or her employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.

        (b)    This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, successors, heirs, and designated beneficiaries. If the Executive should die while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s designated beneficiaries, or, if there is no such designated beneficiary, to the Executive’s estate.

        9.    Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of the Company, to its principal office to the attention of each of the then directors of the Company with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

        10.    Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other-party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not

14

Change in Control Agreement

expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota.

        11.    Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

        IN WITNESS WHEREOF, the undersigned officer, on behalf of MTS Systems Corporation, and the Executive have hereunto set their hands as of the date first above written.

MTS SYSTEMS CORPORATION

By     Its          Chairman and CEO

EXECUTIVE:

Douglas E. Marinaro

15

EX-10.T

Exhibit 10.t

The following is a written description of the terms of employment of Doug Marinaro, pursuant to Item 601(b)(10)(iii)(B) of Regulation S-K:

Title:	Vice President – Software & Consulting.
Base Salary:	$15,000.00 per month.
Annual Incentive Bonus:	Eligible for incentive bonus under the MTS Management Variable Compensation (“MVC”) Plan. Pro rated for fiscal year 2003 with pay-out to
	be not less than $50,000.
Stock Options:	Option to purchase 15,000 shares on start date. Thereafter, eligible for grants under the MTS Stock Option Plan, as approved by the Board.
Employee Benefits:	Eligible to participate in all employee benefits available to U.S. employees.
Annual vacation:	Three weeks.
Other:	Business allowance of $625 per month.
	Sign-on bonus of $20,000
	Relocation payment of $56,000
	If terminated, other than for resignation or for cause during first 24 months of employment, MTS will provide:
	»  3 months notification
	»  9 months severance pay

EX-21

Exhibit 21

Subsidiaries of the Registrant

North American Subsidiaries
AeroMet Corporation
MTS Testing Systems (Canada) Ltd.

International Subsidiaries
MTS Automotive Sensors GmbH
MTS Holdings France, SARL
MTS International Ltd.
MTS Powertrain Technology Ltd
MTS Sensor Technologie undVerwaltungs-GmbH
MTS Sensor Technologie GmbH and Co. KG
MTS Systems SA
MTS Systems GmbH
MTS Systems Ltd.
MTS Systems Norden AB
MTS Systems srl
MTS (Japan) Ltd.
MTS Korea, Inc.
MTS Sensors Technology K.K.
MTS Systems (China) Inc.
MTS Systems (Hong Kong) Inc.

EX-23

Exhibit 23

Independent Auditors’ Consent

The Board of Directors
MTS Systems Corporation:

We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 333-28661, 33-21699, 33-35288, 333-39388, 33-45386 and 333-82582) of MTS Systems Corporation of our report dated November 14, 2003, with respect to the consolidated balance sheets of MTS Systems Corporation as of September 27, 2003 and September 28, 2002 and the related consolidated statements of income, shareholders’ investment and cash flows, and the related consolidated financial statement schedule for each of the fiscal years in the three-year period ended September 27, 2003, which report appears in the annual report on Form 10-K of MTS Systems Corporation for the fiscal year ended September 27, 2003.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of revenue recognition in fiscal year 2001. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill in fiscal year 2002.

/S/   KPMG LLP

Minneapolis, Minnesota,
December 12, 2003

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Sidney W. Emery, Jr., certify that:

1.     I have reviewed this annual report on Form 10-K of MTS Systems Corporation;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)     designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)     all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 12, 2003

/s/   Sidney W. Emery

Sidney W. Emery, Jr.
Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Susan E. Knight, certify that:

1.     I have reviewed this annual report on Form 10-K of MTS Systems Corporation;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)     designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)     all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 12, 2003

/s/   Susan E. Knight

Susan E. Knight
Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

MTS SYSTEMS CORPORATION
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)

The undersigned, Sidney W. Emery Jr., the Chief Executive Officer of MTS Systems Corporation (the “Company”), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2003 (the “Report”).

The undersigned hereby certifies that:

1.     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

Date: December 12, 2003

/s/   Sidney W. Emery Jr.

Sidney W. Emery Jr.
Chief Executive Officer

EX-32.2

Exhibit 32.2

MTS SYSTEMS CORPORATION
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)

The undersigned, Susan E. Knight, the Chief Financial Officer of MTS Systems Corporation (the “Company”), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2003 (the “Report”).

The undersigned hereby certifies that:

1.     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

Date: December 12, 2003

/s/   Susan E. Knight

Susan E. Knight
Chief Financial Officer