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 October 1, 2005

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 if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.    Yes o   No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o   No x

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.  x

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

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

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: $564,933,286.

As of December 7, 2005, the registrant had outstanding 19,403,474 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 31, 2006 are incorporated by reference into Part III of this Form 10-K, to the extent described in such Part.

MTS Systems Corporation
Form 10-K

        Table of Contents

	PART I
Item 1.	Business	1
	Customers and Products by Business Segment	1
	Common Technologies	2
	Product Development Highlights for Fiscal Year 2005	2
	Characteristics of Sales	3
	Backlog	5
	Competition	5
	Manufacturing and Engineering	5
	Patents and Trademarks	5
	Research and Development	6
	Executive Officers	6
	Employees	7
	Sources and Availability of Raw Materials and Components	7
	Available Information	8
	Environmental Matters	8
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	9
Item 2.	Properties	9
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to Vote of Security Holders	10
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
Item 6.	Selected Financial Data	12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 8.	Financial Statements and Supplementary Data	28
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	28
Item 9A.	Controls and Procedures	28
Item 9B.	Other Information	29
	PART III
Item 10.	Directors and Executive Officers of Registrant	29
Item 11.	Executive Compensation	29
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	29
Item 13.	Certain Relationships and Related Transactions	29
Item 14.	Principal Accountant Fees and Services	29
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	30

PART I

Item 1.    Business

MTS Systems Corporation is a leading global supplier of test systems and high-performance industrial position sensors. The Company’s testing solutions help customers accelerate and improve their design, development, and manufacturing processes and are used for determining the mechanical behavior of materials, products, and structures. MTS high-performance position sensors provide controls for a variety of industrial and vehicular applications. 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.

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, multi-axial test systems, 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 markets:

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, durability, performance, and material characteristics. This represents the largest market segment within the Test segment.

Aerospace: This market consists of manufacturers of commercial, military, and private aviation aircraft and their suppliers, including engine manufacturers. 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.

Infrastructure: This market consists of construction and mineral/petroleum production companies and test laboratories owned and/or operated by industrial, academic, or governmental entities. Equipment, software, and consulting services are used to test effects of seismic activity, effects of forces on structures, characteristics of materials, and biomechanical properties. Customers also use the Company’s nanomechanical, biomechanical, and servo-hydraulic material testing products and systems in research and product development applications, where a high degree of precision and 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, prostheses, and other medical and dental devices and materials. Material producers include metal, ceramic, composite, paper, and plastic manufacturers.

Services offered to customers in the above markets include on-site installation, training of customer personnel, and after-market support and maintenance.

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

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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 manufacturers of mobile equipment, steel-making equipment, plastic molding machines, pulp and paper processing equipment, transfer lines and various types of semiconductor equipment, and surgical room equipment. 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. 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 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, developed an innovative, laser-directed metal deposition process for manufacturing parts from 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 amount of material required to produce complex parts used in the aircraft and aerospace industries. The Company exited this business as of October 1, 2005.

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

For additional information regarding the Company’s revenue from external customers and measures of profit and loss and total assets, see the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements appearing under Item 8 of this Form 10-K.

Common Technologies

MTS specializes in the control and measurement of forces and motion. 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 test results. In combination, these technologies and products 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.

Product Development Highlights for Fiscal Year 2005

MTS invests in product, system, and application development. A combination of internal and customer funding enables MTS to advance the application of its existing technologies and develop new capabilities. Selected highlights of product developments that were in progress or completed during fiscal year 2005 include the following:

• Uni-axial Seismic Tables
MTS® seismic simulators are used throughout the world to research and develop earthquake-resistant buildings and bridges. MTS has extended its line of seismic simulators with a new, more affordable option that will help bring seismic testing capability to developing nations. The new Uni-axial Seismic Simulators are complete-package systems that can be easily installed into existing civil structure laboratories.

• MTS Insight™ Electromechanical Material Test System
The new MTS Insight™ Electromechanical Load Frame family further enhances the Company’s line of material testing solutions. MTS Insight™ Electromechanical Load Frame features a new load frame, load cells, and Testworks®

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Software to provide an affordable, high-performance solution. The product family is designed to provide a wide range of force capacities and performance characteristics to meet individual customer requirements.

• SWIFT® 50 GLP
The new Spinning Wheel Integrated Force Transducer (SWIFT®) 50 Global Low Profile (GLP) was launched to meet and improve upon the demands of data acquisition and road simulation testing of heavy trucks. SWIFT® enhances the speed and accuracy of durability testing to ensure safe, long-term operation of vehicles.

• Ride and Comfort Roadway System
Built on industry-leading Flat-Trac® technology, MTS delivered its first Ride and Comfort Roadway system. The system provides automakers with a repeatable laboratory environment to research and improve the vibration and sound characteristics of a vehicle. The MTS solution permits vehicle manufacturers to produce better vehicles by simulating a wide variety of surface conditions that are too costly and time-consuming to conduct via road tests.

• Multi-Axial Simulation Table
MTS introduced a new high-frequency Multi-Axial Simulation Table (MAST) system. This model features a compact design, higher frequency of operation and advanced acoustical features to enhance squeak, rattle, noise, vibration, and harshness testing. MTS’ high-frequency MAST system accelerates vehicle development processes, expands testing options, and increases productivity in a laboratory testing environment.

• AeroPro™ 4.1
AeroPro™ Version 4.1 introduced new functionality called “Calculations in the Loop,” which allows experienced test engineers to modify a control loop to achieve unparalleled control of their tests.

• RPC® Pro 4.2
Release of RPC® Pro Version 4.2 addresses test lab productivity by incorporating new features that standardize the test reporting process and improve the software’s overall usability. Some of the key features of this release include easy-to-use, standardized test reporting, expanded durability testing functionality, and enhanced data management functionality.

• Temposonics® C-Series Sensors
The Temposonics® C-Series sensors were introduced as the smallest and lowest-cost sensors based on magnetostrictive technology. Their modular design and high electronic migration offer the maximum value for the light industrial market.

MTS, RPC, SWIFT, Flat-Trac, Testworks, and Temposonics are registered trademarks, and AeroPro and MTS Insight 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 research institutions. MTS is generally not dependent on any single customer for a significant portion of its business. Approximately 45% of the Company’s revenue is associated with the ground vehicles market, and approximately 70% 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 $5 million. The timing and volume of contracts valued at $5 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 test system ranges from one to twelve months,

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depending on the complexity of the system and the availability of components. The production cycle for larger, more complex test systems may be up to three years.

Industrial segment sensor products are sold in quantity at unit prices ranging from $100 to $2,000. Production cycles generally vary from several days to several months, depending on the degree of product customization and manufacturing capacity.

During fiscal year 2005, 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 rate fluctuations.

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. 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 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 Luedenscheid, Germany	Tokyo and Nagoya, Japan
Gloucester, United Kingdom	Turin, Italy
Gothenburg, Sweden

The Company also has independent 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 October 1, 2005 and in prior fiscal years, MTS made various export sales that required the Company to obtain 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

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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 license application be denied or 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 orders or shipments.

Backlog

The Company’s revenue backlog, defined as firm orders from customers that remain unfilled, totaled approximately $220 million, $186 million, and $141 million at October 1, 2005, October 2, 2004, and September 27, 2003, respectively. Based on anticipated production schedules and other factors, the Company estimates that approximately $179 million of the backlog at October 1, 2005 will be converted to revenue during fiscal year 2006. Delays may occur as a result of technical difficulties, export licensing, changes in scope, manufacturing capacity, supplier issues, or the availability of 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. Historically, the Company has not experienced a significant volume of 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, Illinois Tool Works Inc. (purchased Instron Corporation in 2005), Moog Inc. (purchased FCS Control Systems in 2005), Saginomiya Seisakusho Inc., and Horiba, Ltd. (purchased the Development Test Systems Group (DTS), including Schenck Pegasus, in 2005). Customers consider such factors 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 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 Novotechnik.

Manufacturing and Engineering

The Company conducts a significant portion of its manufacturing and engineering activities for the Test segment from its corporate headquarters in Minneapolis, Minnesota. The Test segment also has a manufacturing plant in 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 Raleigh, North Carolina; Luedenscheid, Germany; and Tokyo, Japan.

Patents and Trademarks

The Company relies on a combination of patents, trademarks, copyrights, trade secrets, and confidentiality agreements to establish and protect its proprietary technology. The Company has filed and obtained numerous patents in the United States and abroad and regularly files patent applications worldwide in its continuing effort to establish and protect its proprietary technology. In addition, the Company has entered into exclusive and non-exclusive licenses relating to certain third-party technologies. The Company has also obtained certain trademarks for its products, and the Company maintains certain details about its processes, products and strategies as trade secrets. The Company’s

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efforts to protect its intellectual property and avoid disputes over proprietary rights have included ongoing review of third-party patents and patent applications.

There can be no assurance that pending patent applications will result in issued patents, that patents or trademarks issued to the Company will not be challenged or circumvented by competitors, or that such patents or trademarks will be found to be valid or sufficiently broad to protect the Company’s proprietary technology or to provide it with a competitive advantage.

Research and Development

MTS generally does not perform basic research, but the Company does invest in significant product, system, and software application development. Costs associated with these development programs are expensed as incurred and aggregated $14.9 million, $12.7 million, and $13.8 million for the fiscal years ended October 1, 2005, October 2, 2004, and September 27, 2003, 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 were:

Name	Office	Officer Since	Age
Sidney W. Emery, Jr.	Chairman, President and Chief Executive Officer	1998		59
Laura B. Hamilton	Senior Vice President, Test	2000		44
Joachim Hellwig	Vice President, Sensors	2003		56
Susan E. Knight	Vice President and Chief Financial Officer	2001		51
Douglas E. Marinaro	Vice President, Software and Consulting	2002		44
Kathleen M. Staby	Vice President, Human Resources	2000		59

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 Inc. 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 Incorporated (a clinical laboratory) from 1997 to 1999. Executive Director Revenue Services, Quest Diagnostics, from 1995 to 1997.

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Officer	Business Experience
J. Hellwig	Vice President of the Company’s Sensors business since January 2003. Vice President from 1993 to January 2003 and General Manager from 1989 to January 2003 of MTS Sensor Technologie GmbH and Co. KG (formerly, Hellwig GmbH). Prior thereto, co-owner of Hellwig GmbH from 1980 to 1989 and Sales and Development Engineer at Hellwig GmbH from 1976 to 1980.
S. E. Knight	Vice President and Chief Financial Officer since October 2001. Prior thereto, various management and executive positions with Honeywell Inc. 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. (provider of Internet-based training services) from 2000 to 2002. Various management positions at MSC.Software Corp. 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).

Employees

MTS had 1,549 employees at October 1, 2005, including approximately 437 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 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 computer hardware, electronics, and software devices and raw materials. However, MTS has not experienced significant issues in procuring any essential materials, parts, or components needed in its engineering or production processes for any extended period of time.

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. The Company believes that such fluctuations in the cost of raw materials and components have not had a significant effect on reported operating results.

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Available Information

The MTS web site address is www.mts.com. MTS makes 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 Securities and Exchange Commission (the “SEC”). The MTS Code of Business Conduct, as well as any waivers from and amendments to the Code, are also posted on the Company’s web site.

Environmental Matters

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

Item 1A.    Risk Factors

The following important risk factors, among others, could affect the Company’s actual results in the future and could materially harm the Company’s business, financial condition, operating results, or cash provided by operations:

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.

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. The Company derives significant revenue from the global ground vehicles and aerospace industries, and therefore is subject to economic cycles affecting these customers.

Export controls based on U.S. initiatives and foreign policy, as well as import controls imposed by foreign governments, may cause delays in 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.

Delays in realization of orders in backlog 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.

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, and required level of technology.

The Company operates internationally and thus is subject to foreign currency exchange rate changes, which can affect its results from operations and financial condition.

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

The Company’s short-term investments and borrowings carry floating interest rate risk. 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 its debt.

The Company relies on various raw material, component, and sub-assembly suppliers in its production processes and as such, business interruptions affecting these suppliers may cause delays in the Company’s ability to convert its backlog of unfilled orders to revenue.

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Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Properties Located in the United States:

The Company owns its corporate headquarters and major Test segment manufacturing, assembly, and research facility, which occupies 420,000 square feet and is located on 56 acres of land in the City of Eden Prairie, 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, 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 Minneapolis, Minnesota facility, the Test segment has four 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 2009 and 2006, respectively. The Company also leases 15,400 square feet in two facilities located in Oak Ridge, Tennessee. The Company sold a 57,200-square foot facility in Ann Arbor, Michigan as part of the sale of its engine test business in the fourth quarter of fiscal year 2005.

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, Pennsylvania. This facility was used by the Company’s Automation division, which was sold in fiscal year 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 serves 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 countries to support its international operations:

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.

Luedenscheid, 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.

Tokyo, Japan – an 8,400-square foot leased Industrial segment facility used for light manufacturing and administrative functions. The lease expires in 2015.

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 Nagoya, Japan; and Beijing, Hong Kong, and Shanghai 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 year 2006.

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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 to a vote of stockholders during the fourth quarter of the fiscal year ended October 1, 2005.

PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 low, high, and closing share prices for the fiscal quarters indicated, as well as the volume of shares traded in the quarter. *

Quarter Ended	Low		High		Close		Volume
December 27, 2003	$	14.40	$	19.79	$	19.50		5,658,690
March 27, 2004	$	18.91	$	28.77	$	26.83		8,598,430
June 26, 2004	$	21.00	$	29.21	$	22.93		7,881,111
October 2, 2004	$	18.95	$	23.85	$	22.12		5,108,783
January 1, 2005	$	20.29	$	35.15	$	33.81		9,279,950
April 2, 2005	$	27.82	$	37.72	$	28.58		8,401,375
July 2, 2005	$	26.13	$	35.50	$	34.11		7,184,021
October 1, 2005	$	32.93	$	42.90	$	37.77		8,328,833
* Source: The Nasdaq Stock Market, Inc.

At December 7, 2005, there were 1,450 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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Purchases of Company Equity Securities:

Fiscal Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
First Quarter
October 3, 2004 -
January 1, 2005		183,600	$	29.39		183,600		1,078,473
Second Quarter
January 2, 2005 -
April 2, 2005		269,200	$	31.36		269,200		809,273
Third Quarter
April 3, 2005 -
July 2, 2005		292,000	$	30.52		292,000		517,273
Fourth Quarter
Fiscal Month
July 3, 2005 -
August 6, 2005		105,600	$	35.37		105,600		411,673
August 7, 2005 -
Sept. 3, 2005		88,000	$	40.71		88,000		3,323,673
Sept. 4, 2005 -
Oct. 1, 2005		83,600	$	40.00		83,600		3,240,073
Fourth Quarter		277,200	$	38.46		277,200		3,240,073
Fiscal Year 2005		1,022,000	$	32.69		1,022,000

The Company purchases Company common stock to offset share dilution from new shares created by employee equity compensation such as stock options, restricted stock awards, and the employee stock plan, and as a means of returning excess cash to shareholders.

During fiscal year 2005, Company share purchases were completed under a 2.5 million share purchase plan that the Company announced and its Board of Directors approved on January 27, 2004. On August 25, 2005, the Company announced its Board of Directors authorized an additional 3.0 million share purchase program. Authority over pricing and timing under the program has been delegated to management. The program has no expiration date.

The Company’s dividend policy is to maintain a long-term payout ratio of 25% of net earnings. In the fourth quarter of fiscal year 2005, the Company increased the quarterly dividend 25% to $0.10 per share.

The Company’s long-term debt agreements have requirements on the minimum level of net worth that restrict the Company’s ability to purchase stock or pay dividends. At October 1, 2005 and October 2, 2004, the Company was in compliance with all such requirements. In fiscal year 2005, the Company reached agreements with the holders of its debt, reducing the minimum net worth requirement in order to provide the Company additional capacity for dividends, share purchases, and other investments.

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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 fiscal years ended October 1, 2005, October 2, 2004, and September 27, 2003 and the balance sheet data at October 1, 2005 and October 2, 2004 are derived from the audited Consolidated Financial Statements included elsewhere in this report. The statement of income data for the fiscal years ended September 28, 2002 and September 30, 2001 and the balance sheet data at September 28, 2002 and September 30, 2001 are derived from financial statements of the Company that are not included in this report.

Five-Year Financial Summary
(October 1, 2005, October 2, 2004, September 27, 2003, September 28, 2002, and September 30, 2001)
(expressed in thousands, except per share data and numbers of shareholders and employees)

	2005			20041			2003			2002			2001
Operations
Revenue	$	374,377		$	338,204		$	316,213		$	307,919		$	330,327
Gross profit		163,582			138,361			117,350			118,978			119,959
Gross profit as a % of revenue		43.7	%		40.9	%		37.1	%		38.6	%		36.3	%
Research and development expense	$	14,936		$	12,663		$	13,827		$	14,009		$	14,862
Research and development as a % of revenue		4.0	%		3.7	%		4.4	%		4.5	%		4.5	%
Effective income tax rate		29.4	%		36.7	%		33.8	%		34.2	%		33.8	%
Income before discontinued operations and
cumulative effect of accounting changes	$	36,569		$	27,208		$	19,574		$	21,326		$	15,627
Net income		37,058			28,983			20,313			4,282			10,614
Net income as a % of revenue		9.9	%		8.6	%		6.4	%		1.4	%		3.2	%
Diluted earnings per share of common stock
before discontinued operations and cumulative
effect of accounting changes	$	1.79		$	1.27		$	0.92		$	1.00		$	0.74
Diluted earnings per share of common stock		1.81			1.35			0.95			0.20			0.50
Weighted average dilutive shares
outstanding during the year2		20,509			21,464			21,474			21,433			21,070
Net interest (income) expense	$	(220	)	$	983		$	1,453		$	2,896		$	4,594
Depreciation and amortization		8,638			8,371			8,432			8,622			10,540
Financial Position
Cash, cash equivalents and
short-term investments	$	159,793		$	129,303		$	132,743		$	97,550		$	17,336
Property and equipment, net		42,953			44,406			47,562			47,796			52,284
Total assets		353,485			341,635			330,378			326,948			337,565
Interest-bearing debt3		23,963			30,718			37,709			49,417			54,255
Total shareholders’ investment		188,432			171,796			176,106			162,265			160,738
Interest-bearing debt as a % of
shareholders’ investment		12.7	%		17.9	%		21.4	%		30.5	%		33.8	%
Return on equity4		21.6	%		16.5	%		12.5	%		2.7	%		6.9	%

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	2005		20041		2003		2002		2001
Other Statistics
Number of common shareholders of
record at year-end5		1,471		1,644		1,907		2,058		2,086
Number of employees at year-end		1,549		1,501		1,531		1,603		1,864
Orders	$	404,377	$	387,307	$	295,195	$	328,016	$	317,674
Backlog of orders at year-end		219,680		186,228		141,386		159,253		139,708
Cash dividends paid per share		0.34		0.26		0.24		0.24		0.24

¹ The fiscal year ended October 2, 2004 was a 53-week fiscal year, whereas all other fiscal years presented were 52-week periods.
² Assumes the conversion of potential common shares using the treasury stock method.
³ Consists of notes payable and the current and non-current portion of long-term debt.
⁴ Calculated by dividing Net Income by beginning Shareholders’ Investment.
⁵ Does not include shareholders whose stock is held in the name of broker dealers or other nominees.

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

MTS Systems Corporation is a leading global supplier of test systems and high-performance industrial position sensors. The Company’s testing solutions help customers accelerate and improve their design, development, and manufacturing processes and are used for determining the mechanical behavior of materials, products, and structures. MTS high-performance position sensors provide controls for a variety of industrial and vehicular applications. MTS had 1,549 employees and revenue of $374 million for the fiscal year ended October 1, 2005.

Fiscal Year
The Company’s fiscal year ends on the Saturday closest to September 30. The fiscal years ended October 1, 2005 and September 27, 2003 consisted of 52 weeks. The fiscal year ended October 2, 2004 consisted of 53 weeks.

Overall Results
Orders for fiscal year 2005 increased 4.4% to $404.4 million, compared to orders of $387.3 million for fiscal year 2004. In fiscal year 2003, orders totaled $295.2 million. The increase in orders in fiscal year 2005 from fiscal year 2004 is primarily due to increased volume in the Test segment in Europe and Asia, increased volume in the Industrial segment across all geographies, and an estimated $7.9 million of favorable currency translation. The increase in orders in fiscal year 2004 from fiscal year 2003 is primarily due to increased volume in both the Test and Industrial segments in Europe and Asia and an estimated $17.4 million of favorable currency translation.

Backlog of undelivered orders at October 1, 2005 increased 18.0% to $219.7 million, compared to backlog of $186.2 million at October 2, 2004. Backlog at the end of fiscal year 2003 totaled $141.4 million. The current year increase in backlog from fiscal year 2004 is primarily attributable to increased order volume in the Test segment.

Revenue of $374.4 million for fiscal year 2005 increased 10.7%, compared to revenue of $338.2 million for fiscal year 2004. Revenue for fiscal year 2003 totaled $316.2 million. The increase in revenue in fiscal year 2005 from fiscal year 2004 was primarily due to higher beginning backlog, increased project and short-cycle business in the Test segment, continued growth in the Sensors business, and an estimated $7.4 million favorable impact from currency translation. The increase in fiscal year 2004 revenue from fiscal year 2003 was primarily due to higher orders, an increase in aftermarket product volume in the Test segment, and an estimated $17.1 million favorable impact of currency translation, partially offset by lower beginning backlog.

Income before income taxes and discontinued operations for fiscal year 2005 increased 20.5% to $51.8 million, compared to income before income taxes and discontinued operations of $43.0 million for fiscal year 2004. Income before income taxes and discontinued operations for fiscal year 2003 totaled $29.6 million. The increase in fiscal year 2005 from fiscal year 2004 is primarily driven by increased volume in

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both segments, improved margins in the Test segment, and an estimated $0.6 million favorable impact of currency translation, partially offset by $4.5 million of costs associated with the exit of the Company’s noise and vibration software business, which were recorded in the fourth quarter of fiscal year 2005. These business exit charges, as well as the related operating results of the noise and vibration software business, are reported in continuing operations for fiscal year 2005, as the Company will continue to support customers of this business through fiscal year 2006. The increase in income before income taxes and discontinued operations for fiscal year 2004 from fiscal year 2003 was primarily due to increased volume, high-margin product mix, and an estimated $2.3 million favorable impact of currency translation.

Net income was $37.1 million, or $1.81 per diluted share, for fiscal year 2005, an increase of 27.9% compared to $29.0 million, or $1.35 per diluted share, for fiscal year 2004 and increased from $20.3 million, or $0.95 per diluted share, for fiscal year 2003. During fiscal year 2005, the Company sold its engine test business, which resulted in a gain of $3.8 million, net of tax. Also during fiscal year 2005, the Company closed its laser deposition technology business, previously conducted through its wholly owned subsidiary AeroMet Corporation, which resulted in a loss of $0.7 million, net of tax. Both of these business exits are reported as discontinued operations effective with fiscal year 2005. The increase in net income for fiscal year 2005 from fiscal year 2004 was due to increased income from operations, a $2.6 million reduction in tax expense resulting from resolution of previously reserved tax matters, a $3.1 million net gain on the disposal of discontinued businesses, net of tax, and an estimated $0.4 million favorable impact of currency translation. These effects were partially offset by a $2.6 million loss from discontinued operations, net of tax, in fiscal year 2005 and $1.8 million income from discontinued operations, net of tax, in fiscal year 2004. The increase in net income for fiscal year 2004 compared to fiscal year 2003 was primarily due to increased income from operations, a $1.2 million loss on sale of discontinued businesses, net of tax, in fiscal year 2003, and an estimated $1.4 million favorable impact of currency translation, partially offset by a higher effective income tax rate in fiscal year 2004.

Critical Accounting Policies
The Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, which require the Company to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company’s results of operations and financial position and may require the application of a higher level of judgment by the Company’s management, and as a result are subject to an inherent degree of uncertainty. Further information is provided in Note 1 to the Consolidated Financial Statements.

Revenue Recognition.   Due to the diversity of its products, the Company is required to comply with a variety of technical accounting requirements in order to achieve consistent and accurate revenue recognition. This requires a certain amount of judgment in the evaluation of completed contract versus percentage-of-completion accounting, the determination of estimated costs to complete contracts, and evaluation of customer acceptance terms.

Inventories.   The Company maintains a material amount of inventory to support its engineering and manufacturing operations, and a certain amount of judgment is required in determining the appropriate level of inventory valuation reserves. While the Company expects its sales to grow, a reduction in its sales could reduce the demand for the Company’s products, and additional inventory valuation adjustments may be required.

Warranty Obligations.   The Company is subject to warranty guarantees on sales of its products. A certain amount of judgment is required in determining appropriate reserve levels for anticipated warranty claims. While these reserve levels are based on historical warranty experience, they may not reflect the actual claims that will occur over the upcoming warranty period, and additional warranty reserves may be required.

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Orders and Backlog
	2005		2004		2003
	(expressed in thousands)
Orders	$	404,377	$	387,307	$	295,195
Backlog of
Undelivered Orders	$	219,680	$	186,228	$	141,386

Orders for fiscal year 2005 totaled $404.4 million, an increase of $17.1 million, or 4.4%, compared to orders of $387.3 million for fiscal year 2004. In fiscal year 2003, orders totaled $295.2 million. The increase in fiscal year 2005 orders from fiscal year 2004 is primarily due to increased volume in the Test segment in Europe and Asia, increased volume in the Industrial segment across all geographies, and an estimated $7.9 million favorable impact of currency translation. The increase in fiscal year 2004 orders from fiscal year 2003 was primarily the result of increased volume in both the Test and Industrial segments across all geographies and an estimated $17.4 million impact of favorable currency translation.

Orders for the Test segment totaled $342.9 million for fiscal year 2005, an increase of $9.5 million, or 2.8%, compared to orders of $333.4 million for fiscal year 2004. Test segment orders for fiscal year 2003 totaled $250.2 million. The Test segment booked 84.8% of total Company orders for fiscal year 2005, compared to 86.1% for fiscal year 2004 and 84.8% for fiscal year 2003. The increase in fiscal year 2005 orders from fiscal year 2004 is primarily due to increased volume in Europe and Asia and an estimated $6.4 million favorable impact of currency translation. The increase in fiscal year 2004 orders from fiscal year 2003 was primarily due to increased volume across all geographies and an estimated $14.1 million favorable impact of currency translation.

Orders for the Industrial segment totaled $61.5 million for fiscal year 2005, an increase of $7.6 million, or 14.1%, compared to orders of $53.9 million for fiscal year 2004. Orders for the Industrial segment in fiscal year 2003 totaled $45.0 million. The Industrial segment booked 15.2% of total Company orders for fiscal year 2005, compared to 13.9% for fiscal year 2004 and 15.2% for fiscal year 2003. The increase in fiscal year 2005 orders from fiscal year 2004 reflects increased Sensors business volume across all geographies and an estimated $1.5 million favorable impact of currency translation. The increase in fiscal year 2004 orders from fiscal year 2003 primarily resulted from volume increases in the Sensors business across all geographies and an estimated $3.3 million favorable impact of currency translation.

Orders from customers located in North America totaled $130.4 million during fiscal year 2005, virtually flat compared to orders of $130.1 million for fiscal year 2004. Orders received in North America during fiscal year 2003 totaled $120.6 million. International orders received during fiscal year 2005 of $274.0 million increased by $16.8 million, or 6.5%, compared to orders received during fiscal year 2004 of $257.2 million. International orders in fiscal year 2003 totaled $174.6 million.

Backlog of undelivered orders at October 1, 2005 totaled $219.7 million, an increase of approximately $33.5 million, or 18.0%, compared to backlog of $186.2 million at October 1, 2004. Backlog at the end of fiscal year 2003 totaled $141.4 million. The increase in fiscal year 2005 backlog from fiscal year 2004 is primarily attributable to increased order volume in the Test segment. The Company believes backlog is not an absolute indicator of its future revenue because a substantial portion of the orders constituting this backlog could be cancelled at the customer’s discretion. However, the Company seldom experiences cancellations of orders larger than $1.0 million. Based on anticipated production schedules and other factors, the Company believes that approximately $179 million of the backlog at October 1, 2005 will be converted to revenue during fiscal year 2006.

Revenue
	2005		2004		2003
	(expressed in thousands)
Revenue	$	374,377	$	338,204	$	316,213

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Revenue for fiscal year 2005 totaled $374.4 million, an increase of $36.2 million, or 10.7%, compared to revenue of $338.2 million for fiscal year 2004. Revenue for fiscal year 2003 totaled $316.2 million. The increase in fiscal year 2005 revenue from fiscal year 2004 was primarily due to higher beginning backlog, increased project and short-cycle business in the Test segment, continued growth in the Sensors business, and an estimated $7.4 million favorable impact of currency translation. The increase in fiscal year 2004 revenue from fiscal year 2003 was primarily due to higher orders, an increase in after-market product volume in the Test segment, and an estimated $17.1 million favorable impact of currency translation, partially offset by lower beginning backlog.

Revenue for the Test segment totaled $313.5 million for fiscal year 2005, compared to revenue of $285.9 million for fiscal year 2004 and revenue of $271.4 million for fiscal year 2003. The increase in revenue for fiscal year 2005 was primarily due to higher beginning backlog, increased project and short-cycle business, and an estimated $5.8 million favorable impact from currency translation. The increase in fiscal year 2004 revenue from fiscal year 2003 was primarily due to higher orders, increased after-market product volume, and an estimated $13.7 million favorable impact from currency translation, partially offset by lower beginning backlog.

Revenue for the Industrial segment totaled $60.9 million for fiscal year 2005, compared to $52.3 million for fiscal year 2004 and $44.8 million for fiscal year 2003. The increase in fiscal year 2005 revenue from fiscal year 2004 was primarily due to higher beginning backlog, increased order volume in the Sensors business across all geographies, and an estimated $1.6 million favorable impact of currency translation. The increase in fiscal year 2004 revenue from fiscal year 2003 was primarily driven by increased volume in the Sensors business across all geographies and an estimated $3.4 million favorable impact from currency translation.

Revenue of $119.8 million in North America for fiscal year 2005 decreased $9.0 million, or 7.0%, compared to revenue of $128.8 million in North America for fiscal year 2004. Revenue in North America for fiscal year 2003 totaled $136.6 million. Revenue in Europe of $134.2 million for fiscal year 2005 increased $23.4 million, or 21.1%, compared to $110.8 million for fiscal year 2004. Revenue in Europe for fiscal year 2003 totaled $116.8 million. Revenue of $119.9 million in Asia for fiscal year 2005 increased $24.6 million, or 25.8%, compared to $95.3 million for fiscal year 2004. Revenue in Asia for fiscal year 2003 totaled $59.9 million. Other international revenue totaled $0.5 million, $3.3 million, and $2.9 million, respectively, for fiscal years 2005, 2004, and 2003.

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

	2005		2004		2003
	(expressed in thousands)
Gross Profit	$163,582		$138,361		$117,350
% of Revenue	43.7	%	40.9	%	37.1	%

Gross profit as a percentage of revenue increased to 43.7% for fiscal year 2005 from 40.9% and 37.1% for fiscal years 2004 and 2003, respectively. The increase in gross profit rate for fiscal year 2005 was primarily driven by improved project execution, favorable product mix, and other productivity gains in the Test segment, partially offset by a 1.0 percentage point unfavorable impact of $3.6 million of costs associated with the exit of the Company’s noise and vibration software business, as well as an unfavorable impact of currency translation of an estimated 0.3 percentage points. The increase in gross profit as a percentage of revenue for fiscal year 2004 from fiscal year 2003 was primarily driven by favorable product mix in both the Test and Industrial segments, partially offset by an unfavorable impact of foreign currency translation of an estimated 0.5 percentage points.

Gross profit as a percentage of revenue for the Test segment was 42.8% for fiscal year 2005, an increase from 39.4% and 35.2% for fiscal years 2004 and 2003, respectively. The increase in gross profit rate in fiscal year 2005 was primarily due to improved project execution and other productivity gains, partially offset by a 1.1 percentage point unfavorable impact from the previously mentioned

16

business exit costs of $3.6 million, as well as an unfavorable impact of currency translation of an estimated 0.3 percentage points. The increase in gross profit rate for the Test segment in fiscal year 2004 from fiscal year 2003 was primarily due to product mix, partially offset by an unfavorable impact of currency translation of an estimated 0.6 percentage points.

Gross profit as a percentage of revenue for the Industrial segment was 48.5% for fiscal year 2005, a decrease from 49.4% and 49.0% for fiscal years 2004 and 2003, respectively. The gross profit rate decrease in fiscal year 2005 was primarily due to charges associated with excess and obsolete inventory in the Sensors business, resulting from product line changes made in fiscal year 2005. The increase in fiscal year 2004 gross profit rate from fiscal year 2003 was primarily due to favorable product mix. There was no significant impact on gross profit rate due to currency translation in fiscal years 2005 or 2004.

Selling, General, and Administrative Expense

	2005		2004		2003
	(expressed in thousands)
Selling	$  65,254		$  57,486		$  48,681
General & Administrative	30,417		26,149		24,638
Total	$  95,671		$  83,635		$  73,319
% of Revenue	25.6	%	24.7	%	23.2	%

Selling, general and administrative (“SG&A”) expense as a percentage of revenue increased 0.9 percentage points in fiscal year 2005 compared to fiscal year 2004. Selling expense increased during fiscal year 2005 primarily due to $5.0 million of increased sales incentives and commissions, $0.7 million in expense related to the previously mentioned costs associated with the exit of the Company’s noise and vibration software business, and an estimated $1.1 million unfavorable impact of currency translation. Selling expense increased in fiscal year 2004 compared to fiscal year 2003 primarily due to $5.0 million increased investment in marketing initiatives and an estimated $2.4 million unfavorable impact of currency translation.

General and administrative expense increased by $4.3 million during fiscal year 2005, primarily due to $2.2 million associated with increased legal fees and expenses associated with Sarbanes-Oxley compliance, $0.9 million increased contract labor, $0.7 million favorable bad debt and workers compensation reserve adjustments made in fiscal year 2004, and an estimated $0.4 million unfavorable impact of currency translation. General and administrative expense increased by $1.5 million in fiscal year 2004 compared to fiscal year 2003, primarily due to increased consulting, legal and other professional fees, as well as an estimated $0.4 million unfavorable impact of currency translation.

SG&A expense for the Test segment increased to $77.6 million in fiscal year 2005 from $67.5 million and $58.3 million in fiscal years 2004 and 2003, respectively. The increase in fiscal year 2005 was primarily due to increased sales incentives and commissions, $0.9 million of business exit costs, $0.5 million increased legal expenses, and $1.5 million of expenses associated with Sarbanes-Oxley compliance. In addition, fiscal year 2005 SG&A expense included an estimated $1.1 million unfavorable impact of currency translation. The SG&A expense increase in fiscal year 2004 compared to fiscal year 2003 was primarily due to increased investment in marketing initiatives, consulting expense, sales force expansion, and other professional fees, as well as an estimated $1.9 million unfavorable impact of currency translation.

SG&A expense in the Industrial segment in fiscal year 2005 increased to $18.1 million from $16.1 million for fiscal year 2004 and $15.0 million for fiscal year 2003. The increase in SG&A in fiscal year 2005 from fiscal year 2004 was primarily due to an increase in selling expense in the Sensors business, consistent with increased revenue, and an estimated $0.4 million unfavorable impact of currency translation. Fiscal year 2004 selling expense as a percentage of revenue was 19.3%, relatively flat compared to selling expense as a percentage of revenue of 19.1% for fiscal year 2003. Fiscal year 2003 SG&A expense included an estimated $0.9 million unfavorable impact of currency translation.

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Research and Development Expense

	2005		2004		2003
	(expressed in thousands)
Research & Development	$  14,936		$  12,663		$  13,827
% of Revenue	4.0	%	3.7	%	4.4	%

Research and development (“R&D”) expense includes expenses for both equipment and software development in the Test and Industrial segments. During fiscal year 2005, approximately 79.5% of R&D spending was in the Test Segment, compared to 76.5% and 77.5%, respectively, in fiscal years 2004 and 2003.

R&D expense as a percentage of revenue increased in fiscal year 2005, primarily due to planned investments in new product development. The decrease in R&D expense as a percentage of revenue in fiscal year 2004 from fiscal year 2003 was primarily due to efforts to prioritize investments and better focus R&D spending on developments with the greatest market potential and the highest return on investment.

Interest Income (Expense)

	2005		2004		2003
	(expressed in thousands)
Interest Expense	$   (2,128	)	$    (2,784	)	$    (3,613	)
Interest Income	$    2,348		$     1,801		$     2,160

Interest expense of $2.1 million for fiscal year 2005 decreased compared to interest expense of $2.8 million and $3.6 million for fiscal years 2004 and 2003, respectively, primarily due to a reduction in long-term debt obligations. Interest income of $2.3 million for fiscal year 2005 increased compared to interest income of $1.8 million and $2.2 million for fiscal years 2004 and 2003, respectively. The increase in fiscal year 2005 interest income reflects higher interest rates, partially offset by a lower average balance in cash, cash equivalents and short-term investments in fiscal year 2005 compared to fiscal year 2004. The decrease in fiscal year 2004 interest income from fiscal year 2003 reflects a shift to short-term, tax-exempt investments with lower interest rates, partially offset by a higher average balance in cash, cash equivalents and short-term investments in fiscal year 2004 compared to fiscal year 2003.

Other (Expense) Income, net
Other expense for fiscal year 2005 was $1.4 million, compared to other income of $1.9 million and $0.8 million for fiscal years 2004 and 2003, respectively. Other expense for fiscal year 2005 primarily consisted of losses on the settlement of foreign currency transactions. Other income for fiscal year 2004 primarily consisted of gains on the settlement of foreign currency transactions. Other income for fiscal year 2003 consisted of proceeds of $1.3 million from penalties associated with a canceled customer contract, partially offset by losses on foreign currency transactions.

Operating Results

		2005			2004			2003
	(expressed in thousands)
Income Before Income Taxes and
Discontinued Operations		$	51,814		$	42,993		$	29,561
% of Revenue			13.8	%		12.7	%		9.3	%
Effective Income Tax Rate			29.4	%		36.7	%		33.8	%
Income Before Discontinued Operations		$	36,569		$	27,208		$	19,574
Income Before Discontinued Operations per
Diluted Share		$	1.79		$	1.27		$	0.92

Income before income taxes and discontinued operations totaled $51.8 million for fiscal year 2005, compared to income before income taxes and discontinued operations of $43.0 million for fiscal year

18

2004. The fiscal year 2005 increase was primarily driven by increased volume in both segments, improved margins in the Test segment, and an estimated $0.6 million favorable impact of currency translation. These favorable impacts were partially offset by increased SG&A expense of $12.1 million and the previously mentioned business exit costs of $4.5 million. These business exit costs, as well as the related operating results of the noise and vibration software business, are reported in continuing operations for fiscal year 2005 because the Company will continue to support customers of this business through fiscal year 2006. Income before income taxes and discontinued operations for fiscal year 2004 increased to $43.0 million compared to $29.6 million for fiscal year 2003. This increase was primarily driven by increased volume, favorable product mix, and an estimated $2.3 million favorable impact of currency translation.

Income from operations for the Test segment was $44.6 million for fiscal year 2005, an increase of $9.2 million compared to $35.4 million and $26.3 million for fiscal years 2004 and 2003, respectively. The increase in income from operations for fiscal year 2005 compared to fiscal year 2004 was primarily due to increased volume and improved margins, partially offset by increased SG&A expense and the business exit costs of $4.5 million. The increase in income from operations for fiscal year 2004 compared to fiscal year 2003 was primarily due to stronger revenue and a high-margin product mix, partially offset by increased SG&A expense. Income from operations for the Industrial segment increased to $8.4 million for fiscal year 2005 compared to $6.7 million for fiscal year 2004, primarily due to increased volume, partially offset by increased SG&A expenses. Income from operations for the Industrial segment totaled $3.9 million for fiscal year 2003.

The effective tax rate for each of the years presented is impacted by the Company’s 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 expenses. During fiscal year 2005, the Company recognized a favorable tax benefit of $2.6 million from the release of contingencies associated with tax matters accrued for in prior years. This tax benefit reflects the Company’s foreign tax credit position, which allows the Company to credit taxes paid offshore against taxes assessed in the United States. This tax benefit lowered the effective tax rate compared to fiscal year 2004. During fiscal year 2004, a greater percentage of the Company’s income was earned in higher tax jurisdictions compared to fiscal years 2003, resulting in a higher effective tax rate in fiscal year 2004 compared to fiscal year 2003.

Fiscal year 2005 income before discontinued operations increased to $36.6 million, or $1.79 per diluted share, from $27.2 million, or $1.27 per diluted share, and $19.6 million, or $0.92 per diluted share, for fiscal years 2004 and 2003, respectively.

Discontinued Operations
On August 5, 2005, the Company sold substantially all of the net assets of its engine test business, which was based in Ann Arbor, Michigan and also maintained operations in Byfleet, United Kingdom, to A&D Co., Ltd., of Tokyo, Japan. This sale represented the Company’s exit from the engine test business. As a result of this sale, the Company recorded a gain of $3.8 million, net of tax of $1.1 million, in the fourth quarter of fiscal year 2005. The engine test business was historically included in the Company’s Test segment for financial reporting. The gain on the sale of the engine test business and its results of operations have been excluded from the results of operations of the Test segment and are reported as discontinued operations for fiscal year 2005 and prior fiscal years.

Effective October 1, 2005, the Company closed its AeroMet subsidiary, a laser deposition technology business located in Eden Prairie, Minnesota. As a result of this business closure, the Company recorded a loss of $0.7 million, net of tax of $0.4 million, in the fourth quarter of fiscal year 2005. The AeroMet subsidiary was historically included in the Company’s Industrial segment for financial reporting. The loss on disposition of the AeroMet business and its results of operations have been excluded from results of operations of the Industrial segment and are reported as discontinued operations for fiscal year 2005 and prior fiscal years.

During the second and third quarters of fiscal year 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

19

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 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 these sales, the Company recorded a loss of $1.2 million, net of tax of $0.8 million. The Automation division was historically included in the Company’s Industrial segment for financial reporting, and its results of operations are reported as discontinued operations.

The Company does not allocate interest income or interest expense to discontinued operations. Following are the operating results of the discontinued operations included in the Company’s results for the respective fiscal years:

	2005			2004		2003
	(expressed in thousands)
Revenue	$	15,982		$	28,856	$	39,630
(Loss) income on discontinued operations before
taxes and gain (loss) on sale		(3,918	)		2,828		3,089
(Benefit) provision for income taxes		(1,329	)		1,053		1,173
(Loss) income from discontinued operations, net of tax	$	(2,589	)	$	1,775	$	1,916

The assets and liabilities of discontinued operations at October 1, 2005 and October 2, 2004 were as follows:

	2005			2004
	(expressed in thousands)
Accounts receivable, net of allowances for doubtful accounts	$	12		$	4,805
Unbilled accounts receivable		258			1,399
Inventories		358			2,439
Prepaid expenses		—			176
Current deferred tax assets		465			302
Other current assets		548			19
Current assets of discontinued operations		1,641			9,140
Land		—			810
Buildings and improvements		—			5,931
Machinery and equipment		106			5,518
Accumulated depreciation		(37	)		(3,890	)
Long-term deferred tax assets		—			181
Long-lived assets of discontinued operations		69			8,550
Total assets of discontinued operations	$	1,710		$	17,690
Accounts payable	$	238		$	1,372
Accrued payroll-related costs		223			2,143
Advance payments from customers		—			1,050
Accrued warranty costs		—			336
Accrued income taxes		—			1,028
Other accrued liabilities		429			422
Total liabilities of discontinued operations	$	890		$	6,351

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Cash Flow
Total cash and cash equivalents increased $16.2 million during fiscal year 2005, primarily due to strong earnings, decreased working capital requirements, proceeds from the exercise of stock options, and proceeds from the sale of the discontinued engine test business, partially offset by net purchases of short-term investments, repayment of long-term debt, dividend payments, and purchases of the Company’s common stock. Total cash and cash equivalents increased $17.2 million during fiscal year 2004, primarily due to improved earnings, net proceeds from the conversion of short-term investments to cash and cash equivalents, a decrease in net deferred tax assets, and proceeds from the exercise of stock options, partially offset by net purchases of short-term investments, repayment of long-term debt, dividend payments, and purchases of the Company’s common stock. Total cash and cash equivalents increased $3.1 million during fiscal year 2003, primarily due to strong earnings, decreased working capital requirements, proceeds from the exercise of stock options, and proceeds from the sale of discontinued businesses, partially offset by net purchases of short-term investments, repayment of long-term debt, dividend payments, and purchases of the Company’s common stock.

Cash flow from operating activities provided cash of $58.8 million during fiscal year 2005, compared to cash provided of $43.7 million and $49.4 million in fiscal years 2004 and 2003, respectively. Operating cash flow in fiscal year 2005 primarily resulted from strong earnings during the year, a $6.0 million decrease in working capital requirements, and $6.2 million tax benefit from the exercise of stock options. Fiscal year 2004 cash flow from operating activities was primarily due to strong earnings and a net decrease in deferred tax assets of $5.1 million, partially offset by a $4.6 million increase in working capital requirements. Fiscal year 2003 cash flow from operating activities was primarily due to strong earnings, a $19.1 million decrease in working capital requirements, and a $3.3 million net decrease in deferred tax assets. The increase in cash provided by operating activities during fiscal year 2005 compared to fiscal year 2004 was primarily due to improved earnings of $8.1 million and decreased working capital requirements of $10.6 million. The decrease in cash provided by operating activities during fiscal year 2004 compared to fiscal year 2003 was primarily due to $42.4 million of improvements in accounts receivable and inventory in fiscal year 2003, which more than offset increased advance payments from customers of $12.0 million, accrued payments to vendors of $6.8 million and improved earnings of $8.7 million in fiscal year 2004.

Cash flow used in investing activities required a use of cash of $7.1 million during fiscal year 2005, compared to cash provided by investing activities of $17.3 million during fiscal year 2004 and cash used in investing activities of $25.5 million in fiscal year 2003. During fiscal year 2005, the Company invested $14.3 million in short-term investments and $7.1 million in property and equipment additions, partially offset by $14.2 million received from the sale of discontinued businesses. During fiscal year 2004, the Company received net proceeds of $20.6 million from the maturity of short-term investments and $2.0 million from the sale of property and equipment and invested $5.3 million in property and equipment additions. During fiscal year 2003, the Company invested $32.1 million in short-term investments and $6.0 million in property and equipment additions, partially offset by $12.6 million received from the sale of discontinued businesses.

Cash flow used in financing activities required a use of cash of $30.9 million during fiscal year 2005, compared to $47.7 million and $29.9 million used in fiscal years 2004 and 2003, respectively. The cash usage in fiscal year 2005 primarily resulted from purchases of the Company’s common stock of $33.7 million, net repayment of interest-bearing debt of $6.7 million, and payment of cash dividends of $4.8 million, partially offset by $14.4 million received from employees’ exercise of stock options and purchases under the Company’s employee stock purchase plan. During fiscal year 2004, the Company’s cash usage primarily resulted from purchases of the Company’s common stock of $44.3 million, net repayment of interest-bearing debt of $6.7 million, and payment of cash dividends of $6.6 million, partially offset by $9.9 million received from employees’ exercise of stock options and purchases under the Company’s employee stock purchase plan. During fiscal year 2003, the Company’s cash usage primarily resulted from purchases of the Company’s common stock of $16.5 million, net 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 from employees’ exercise of stock options and purchases under the Company’s employee stock purchase plan.

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During fiscal year 2005, the Company reclassified its investments in highly rated, liquid municipal securities and corporate preferred stock from cash equivalents to short-term investments. Prior period balances associated with these investments were reclassified for comparability. This reclassification was due to the securities having a final maturity date in excess of three months beyond the date of acquisition.

Liquidity and Capital Resources
At October 1, 2005, the Company’s capital structure was comprised of $1.6 million in short-term debt, $22.4 million in long-term debt, and $188.4 million in Shareholders’ Investment. Total interest-bearing debt was $24.0 million, down from $30.7 million at October 2, 2004 due to scheduled repayments. Shareholders’ Investment increased by $16.6 million during fiscal year 2005, primarily due to profitable operating results, $14.4 million of employee purchases of the Company’s stock under its employee stock purchase plans, a $6.2 million tax benefit from the exercise of employee stock options, and $1.4 million in unrealized gains on derivative instruments, partially offset by $33.7 million in purchases of the Company’s common stock, $6.8 million in dividend payments, $1.6 million of foreign currency translation losses, and a $0.9 million minimum pension liability adjustment.

The Company had cash, cash equivalents and short-term investments of $160 million at October 1, 2005. Of this amount, approximately $86 million was located in North America, $55 million in Europe, and $19 million in Asia. The North American balance was primarily invested in U.S. state and local municipal securities not subject to federal taxation, as well as in taxable and tax-free money market funds. In Europe, the balances were primarily invested in Euro-denominated money market funds and bank deposits. In Asia, the balances were primarily invested in bank deposits.

The Company believes its cash and cash equivalents and anticipated funds from operations are adequate to fund ongoing operations, capital expenditures, and Company share purchases, as well as to fund opportunities to grow its business organically and through business acquisitions.

At October 1, 2005, the Company’s contractual obligations were as follows:

			Payments Due by Period (expressed in thousands)
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Notes Payable	$	1,582	$	1,582	$	—	$	—	$	—
Long-Term Debt Obligations		22,381		6,708		13,366		2,307		—
Capital Lease Obligations		106		55		49		2		—
Operating Lease Obligations		13,360		3,587		5,786		1,188		2,799
Interest Payable		3,273		1,507		1,637		129		—
Pension and Other Long-Term
Obligations		11,414		202		398		398		10,416
Total	$	52,116	$	13,641	$	21,236	$	4,024	$	13,215

The Company did not renew its $25 million revolving bank credit facility in fiscal year 2005 given liquidity available from domestic cash equivalents and short-term investments held for sale. There were no amounts outstanding on the revolving credit facility during fiscal year 2005 or fiscal year 2004. The Company’s foreign subsidiaries have uncommitted bank facilities available on either a free-standing basis or supported by Company guarantees. Short-term debt outstanding at October 1, 2005 and October 2, 2004 consisted of borrowings by the Company’s Japanese subsidiaries. At October 1, 2005, the Company was in compliance with the financial terms and conditions of its long-term debt agreements.

At October 1, 2005, the Company had letters of credit and guarantees outstanding totaling $46.0 million and $8.6 million, respectively, primarily to bond advance payments and performance guarantees related to customer contracts in the Test segment. The Company’s operating leases are primarily for office space and vehicles related to sales and service offices.

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Changes in Foreign Currency Exchange Rates
The Company exports products outside the United States and often invoices customers in foreign currencies. The Company’s international subsidiaries have functional currencies other than the Company’s reporting currency and may also transact business in currencies other than their functional currencies. The operating results and financial position of the Company’s international subsidiaries are reported on a consolidated basis in U.S. dollars. Thus, the Company has expected cash flows, assets, and liabilities denominated in currencies other than the U.S. dollar or the functional currencies of its international subsidiaries. This exposes the Company to market risk related to the market value of foreign currencies versus the functional currencies of the subsidiaries. The Company has operational procedures to minimize these non-functional currency exposures. The Company also enters into forward contracts with banks to exchange currencies at set exchange rates on future dates to offset gains or losses on specifically identified exposures.

Historically, approximately 50-60% of the Company’s revenue derives from shipments to customers outside the U.S., and about 65% of this revenue (approximately 35% 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 a favorable effect on revenue and earnings.

Gains and losses on foreign currency transactions are included in Other (Expense) Income, net in the accompanying Consolidated Statements of Income. Mark-to-market gains and losses on derivatives designated as cash flow hedges in the Company’s currency hedging program, as well as on the translation of non-current assets and liabilities, are recorded within Accumulated Other Comprehensive Income in the Consolidated Balance Sheet. The Company recognizes gains and losses on fair value and cash flow hedges at the time a gain or loss is recognized on the hedged exposure in the Consolidated Statement of Income or at the time the cash flow hedge is determined to be ineffective. The gains and losses associated mark-to-market gains and losses are reclassified from Accumulated Other Comprehensive Income to Other (Expense) Income, net on the Consolidated Statement of Income.

Restructuring and Other Charges
In the fourth quarter of fiscal year 2005, the Company decided to exit its noise and vibration software business. The Company assessed the recoverability of the assets associated with this business using an undiscounted cash flow methodology. Based on this assessment, the Company reduced the assets to their fair market value and recorded costs of $0.3 million to write down property, plant and equipment and $0.2 million to write down inventory. In addition, the Company recorded $1.3 million for employee severance costs and $2.7 million related to software development expense that will not repeat in future years. Of the total business exits costs of $4.5 million recorded, $3.6 million, $0.7 million and $0.2 million are included in Cost of Sales, Selling Expense, and General and Administrative Expense, respectively, on the Consolidated Statement of Income for fiscal year 2005. These expenses are reported within the results of operations of the Company’s Test segment. Substantially all of the severance costs will be paid in fiscal year 2006.

In fiscal year 2004 the Company had no significant restructuring activities. In fiscal year 2003, the Company had no significant restructuring activities related to business consolidation other than the sale of its Automation division (see Note 2 to the Consolidated Financial Statements). For the fiscal years ending October 1, 2005, October 2, 2004, and September 27, 2003 the reserve for restructuring was as follows:

Year	Beginning Balance		Provision		Write-off			Ending Balance
	(expressed in thousands)
2003	$	21	$	—	$	(21	)	$	—
2004		—		—		—			—
2005		—		1,319		—			1,319

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Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4,” which clarifies the types of costs that should be expensed in Cost of Sales rather than capitalized in inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. No material impact on the Company’s financial statements is expected from the adoption of this standard.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is to be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of fiscal year 2006. While the Company cannot precisely determine the impact on net earnings as a result of the adoption of SFAS 123R, estimated compensation expense related to prior periods is included in Note 1 to these Consolidated Financial Statements. The ultimate amount of compensation expense recorded will be dependent on the number of option shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.

In December 2004, the FASB issued Staff Position (“FSP”) No. 109-1, “Application of FASB Statement No. 109 (“SFAS 109”), Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” FSP 109-1 clarifies that the manufacturer’s deduction provided for under the American Jobs Creation Act of 2004 (“AJCA”) should be accounted for as a special deduction in accordance with SFAS 109 and not as a tax rate reduction. The FASB also issued Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” The Company is currently evaluating the potential impact of the various provisions of the AJCA on the Company’s financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which supersedes APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 requires retrospective application of changes in accounting principles to prior period financial statements as of the earliest date practicable. This statement also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. The provisions of SFAS 154 are effective for fiscal years beginning after December 15, 2005.

Quarterly Financial Information
Revenue and operating results reported on a quarterly basis do not necessarily reflect trends in demand for the Company’s products or its operating efficiency. Revenue and operating results in any quarter may be significantly affected by customer shipments, installation timing, or the timing of the completion of one or more contracts 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, respectively.

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Selected quarterly financial information for the fiscal years ended October 1, 2005 and October 2, 2004 was as follows:

	First Quarter			Second Quarter			Third Quarter		Fourth Quarter			Total Year
	(expressed in thousands, except per share data)
2005
Revenue	$	93,082		$	96,114		$	94,697	$	90,484		$	374,377
Gross profit		39,737			42,346			42,272		39,227			163,582
Income before income taxes and
discontinued operations		13,882			14,830			14,667		8,435			51,814
Income before discontinued operations		8,731			9,680			9,698		8,460			36,569
Discontinued operations, net of tax		(539	)		(1,207	)		209		2,026			489
Net income	$	8,192		$	8,473		$	9,907	$	10,486		$	37,058
Earnings per share:
Basic
Income before discontinued operations	$	0.45		$	0.49		$	0.49	$	0.43		$	1.86
Discontinued operations, net of tax		(0.03	)		(0.06	)		0.01		0.10			0.02
Earnings per share	$	0.42		$	0.43		$	0.50	$	0.53		$	1.88
Diluted
Income before discontinued operations	$	0.43		$	0.47		$	0.48	$	0.41		$	1.79
Discontinued operations, net of tax		(0.03	)		(0.06	)		0.01		0.10			0.02
Earnings per share	$	0.40		$	0.41		$	0.49	$	0.51		$	1.81
2004
Revenue	$	78,030		$	80,006		$	84,146	$	96,022		$	338,204
Gross profit		31,904			30,589			33,710		42,158			138,361
Income before income taxes and
discontinued operations		10,428			8,142			9,584		14,839			42,993
Income before discontinued operations		6,889			5,599			5,989		8,731			27,208
Discontinued operations, net of tax		688			942			639		(494	)		1,775
Net income	$	7,577		$	6,541		$	6,628	$	8,237		$	28,983
Earnings per share:
Basic
Income before discontinued operations	$	0.34		$	0.26		$	0.29	$	0.43		$	1.32
Discontinued operations, net of tax		0.03			0.04			0.03		(0.02	)		0.08
Earnings per share	$	0.37		$	0.30		$	0.32	$	0.41		$	1.40
Diluted
Income before discontinued operations	$	0.32		$	0.25		$	0.28	$	0.42		$	1.27
Discontinued operations, net of tax		0.03			0.04			0.03		(0.02	)		0.08
Earnings per share	$	0.35		$	0.29		$	0.31	$	0.40		$	1.35

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 2005 Annual Report to Shareholders, in the proxy statement for the annual meeting to be held in January 2006, and in the Company’s press releases and oral statements made with the approval of an authorized executive officer, which are not historical or current facts are “forward-looking” statements, as

25

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) 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.

(ii) 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. The Company derives significant revenue from the global ground vehicles and aerospace industries, and therefore is subject to economic cycles affecting these customers.

(iii) Export controls based on U.S. initiatives and foreign policy, as well as import controls imposed by foreign governments, may cause delays in 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.

(iv) Delays in realization of orders in backlog 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.

(v) 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, and required level of technology.

(vi) The Company operates internationally and thus is subject to foreign currency exchange rate changes, which can affect its results from operations and financial condition.

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

(viii) The Company’s short-term investments and borrowings carry floating interest rate risk. 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 its debt.

(ix) The Company relies on various raw material, component, and sub-assembly suppliers in its production processes and as such, business interruptions affecting these suppliers may cause delays in the Company’s ability to convert its backlog of unfilled orders to revenue.

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

26

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risks from changes in foreign currency exchange rates 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 23 and in Note 1 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

Foreign Currency Exchange Risk
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 translation of foreign currency-denominated assets and liabilities into U.S. dollars. This is in addition to the indirect impact of changes in currency exchange rates on interest rates and overall business activity.

Gains and losses from the settlement of foreign currency-denominated transactions are recorded within Other (Expense) Income, net in the Consolidated Statements of Income included in Item 8 of this Form 10-K. Currency gains and losses on specifically identified currency hedge transactions, as well as changes in the translated values of long-term assets and liabilities denominated in foreign currency, are recorded within Accumulated Other Comprehensive Income on the Consolidated Balance Sheet. When a gain or loss is recognized on the hedged exposure or the hedge is determined to be ineffective, associated mark-to-market gains and losses are reclassified from Accumulated Other Comprehensive Income to Other (Expense) Income, net on the Consolidated Statement of Income.

The following table restates financial results utilizing currency exchange rates from the prior year to hypothetically estimate the impact of currency on the following financial items:

	2005			2004		2003
	(expressed in thousands)
Increase from currency translation on:
Orders	$	7,883		$	17,414	$	12,245
Revenue		7,392			17,078		17,563
Net Income		436			1,448		1,073
Transaction (loss) gain included in
"Other (expense) income, net"	$	(1,264	)	$	1,466	$	(646	)

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, a strengthening of the U.S. dollar decreases the value of foreign currency-denominated revenue and earnings. During fiscal year 2005, the U.S. dollar generally strengthened against other major currencies, increasing by approximately 3% against the Euro and by approximately 3% against the Japanese Yen. However, the net effect of currency translation on orders, revenue, and net income during the year was favorable due to the delayed effect of currency changes relative to the calculation of the weighted average income statement rates used to translate the Consolidated Statements of Income. Gains and losses attributed to translating the financial statements for all non-U.S. subsidiaries are included in the currency translation adjustments recorded within Accumulated Other Comprehensive Income on the Consolidated Balance Sheet.

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 year 2005 revenue and asset balances of approximately $16.4 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 in fiscal year 2005 revenue and asset balances of approximately $16.4 million.

The Company regularly assesses its exposure to changes in market currency rates and employs certain practices to mitigate possible adverse effects of this risk. The Company utilizes forward currency forward exchange contracts to hedge the functional currency value of foreign currency-denominated transactions,

27

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 also directly exposed to changes in market interest rates on cash equivalents, short-term investments, and debt. The Company is also indirectly exposed to the impact of market interest 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 interest 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 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 October 1, 2005, the Company had cash, cash equivalents and short-term investments of $160 million. Most of this amount was invested in interest-bearing accounts or investments. For virtually all of these investments, interest rates re-set every 1-49 days. A hypothetical increase or decrease of 1% in market interest rates could increase or decrease interest income by $1.6 million per annum. The Company had an insignificant amount of short-term debt outstanding at the end of fiscal year 2005 and therefore would not be materially impacted by the effect of increases or decreases in market interest rates on interest expense.

A discount rate of 4.3% and an expected rate of increase in future compensation levels of 3.2% were used in the calculation of the accrued pension liability related to one of the Company’s international subsidiary’s non-contributory, unfunded defined benefit pension plan.

Item 8.   Financial Statements and Supplementary Data

The Company’s audited financial statements and notes thereto described in Item 15(1) of this report on Form 10-K and appearing on pages F-1 through F-26 of this report are incorporated by reference herein. See also “Quarterly Financial Data” in Management’s Discussion and Analysis under Item 7 of this Form 10-K, which is incorporated herein by reference.

Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

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 October 1, 2005. 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 October 1, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance

28

regarding the reliability of financial reporting and the preparation of financial statements. Under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal controls over financial reporting as of October 1, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on management’s assessment using this framework, management concluded that the Company’s internal control over financial reporting is effective as of October 1, 2005.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of October 1, 2005, has been audited by KPMG LLP, an independent registered public accounting firm. Their report appears on page F-3.

Item 9B.   Other Information

None.

PART III

Item 10.   Directors and Executive Officers of Registrant

The required information with respect to the directors of the Registrant, information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, and the Registrant’s Code of Business Conduct are incorporated herein by reference to the information set forth under the headings “Election of Directors” and “General 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 31, 2006. Information regarding the Company’s executive officers is contained under Item 1 of this annual report.

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 31, 2006.

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 “Executive Equity Compensation Plan Information” in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on January 31, 2006.

Item 13.   Certain Relationships and Related Transactions

The information required by this Item is incorporated herein by reference to the information set forth under heading “Executive Compensation – Certain Transactions” in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on January 31, 2006.

Item 14.   Principal Accountant Fees and Services

The information required by this Item is incorporated by reference to the information set forth under the heading “Independent Registered Public Accountants” in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on January 31, 2006.

29

PART IV

Item 15.   Exhibits and Financial Statement Schedules

        The following documents are filed as part of this report:

(1) Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets – October 1, 2005 and October 2, 2004

Consolidated Statements of Income for the Years Ended
October 1, 2005, October 2, 2004, and September 27, 2003

Consolidated Statements of Shareholders’ Investment for
the Years Ended October 1, 2005, October 2, 2004,
and September 27, 2003

Consolidated Statements of Cash Flows for the Years
Ended October 1, 2005, October 2, 2004, and September 27, 2003

Notes to Consolidated Financial Statements

Financial Statement Schedule

(2) Financial Statement Schedules:

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

(3) Exhibits:

Exhibit Number	Description
3.a	Restated and Amended Articles of Incorporation, incorporated herein by reference from Exhibit 3.a of the Registrant’s Form 10-K for the fiscal year ended September 30, 1996.
3.b	Restated Bylaws, incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on December 2, 2005.
10.a	Executive Variable Compensation Plan, incorporated herein by reference to Exhibit 99.1 of the Registrant’s Form 8-K filed on November 30, 2004.
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, 1996 and 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, as amended (Filed herewith).
10.e	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.

30

Exhibit Number	Description
10.f	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.g	Form of Change in Control Agreement between the Registrant and Sidney W. Emery, Jr., Kathleen M. Staby, and Susan E. Knight (Filed herewith).
10.h	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.i	Description of the terms of employment of Sidney W. Emery, Jr., 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.j	Change in Control Agreement, dated January 28, 2003, between the Registrant and Douglas E. Marinaro, incorporated herein by reference to Exhibit 10.s of the Registrant’s Form 10-K filed for the fiscal year ended September 27, 2003.
10.k	Description of the terms of employment of Douglas E. Marinaro, pursuant to an offer letter dated November 6, 2002, incorporated herein by reference to Exhibit 10.t of the Registrant’s Form 10-K filed for the fiscal year ended September 27, 2003.
10.l	Letter dated February 6, 1987 from MTS Sensor Technologie GmbH and Co. KG (formerly, Hellwig GmbH) regarding its pension commitment to Joachim Hellwig, incorporated by reference to Exhibit 10.p of the Registrant’s Form 10-K filed for fiscal year ended October 2, 2004.
10.m	Employment Contract dated January 1, 1991 between MTS Sensor Technologie GmbH and Co. KG and Joachim Hellwig, incorporated by reference to Exhibit 10.q of the Registrant’s Form 10-K filed for fiscal year ended October 2, 2004.
10.n	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.
21.	Subsidiaries of the Registrant (Filed herewith).
23.	Consent of Independent Registered Public Accounting Firm (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).

31

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

Date:   December 14, 2005

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 and on the date indicated:

Signatures	Title	Date
/s/   Sidney W. Emery, Jr.	Chairman, Chief Executive	December 14, 2005
	Officer and President
Sidney W. Emery Jr.
/s/   Susan E. Knight	Chief Financial Officer	December 14, 2005
	and Vice President
Susan E. Knight
/s/   Dugald K. Campbell	Director	December 14, 2005
Dugald K. Campbell
/s/   Jean Lou Chameau	Director	December 14, 2005
Jean Lou Chameau
/s/   Merlin E. Dewing	Director	December 14, 2005
Merlin E. Dewing
/s/   Brendan C. Hegarty	Director	December 14, 2005
Brendan C. Hegarty
/s/   Barb J. Samardzich	Director	December 14, 2005
Barb J. Samardzich
/s/   Linda Hall Whitman	Director	December 14, 2005
Linda Hall Whitman

32

MTS Systems Corporation and Subsidiaries

Index to Financial Statements

	Page
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm	F-2
Report of Independent Registered Public Accounting Firm	F-3
Consolidated Balance Sheets – October 1, 2005
and October 2, 2004	F-4
Consolidated Statements of Income for the Years Ended
October 1, 2005, October 2, 2004, and
September 27, 2003	F-5
Consolidated Statements of Shareholders’ Investment and
Comprehensive Income (Loss) for the Years Ended October 1,
2005, October 2, 2004, and September 27, 2003	F-6
Consolidated Statements of Cash Flows for the
Years Ended October 1, 2005, October 2, 2004,
and September 27, 2003	F-7
Notes to Consolidated Financial Statements	F-8 through F-26
Financial Statement Schedule

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

F-1

Report of Independent Registered Public Accounting Firm

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 October 1, 2005 and October 2, 2004 and the related consolidated statements of income, shareholders’ investment and comprehensive income (loss), and cash flows for each of the fiscal years in the three-year period ended October 1, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated 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 October 1, 2005 and October 2, 2004 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended October 1, 2005, in conformity with U.S. generally accepted accounting principles. 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.

We also audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of October 1, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 14, 2005 expressed an unqualified opinion on management’s assessment of, and effective operations of, internal control over financial reporting.

/S/ KPMG LLP

Minneapolis, Minnesota
December 14, 2005

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
MTS Systems Corporation:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing on page 28 under Item 9A of this Form 10-K, that MTS Systems Corporation and subsidiaries (“the Company”) maintained effective internal control over financial reporting as of October 1, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of October 1, 2005 is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 1, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and subsidiaries as of October 1, 2005 and October 2, 2004, and the related consolidated statements of income, shareholders’ investment and comprehensive income (loss), and cash flows for each of the fiscal years in the three-year period ended October 1, 2005, and our report dated December 14, 2005 expressed an unqualified opinion on those consolidated financial statements.

/S/ KPMG LLP

Minneapolis, Minnesota
December 14, 2005

F-3

Consolidated Balance Sheets
(October 1 and October 2, respectively)

Assets	2005			2004
	(expressed in thousands)
Current Assets:
Cash and cash equivalents	$	83,143		$	66,948
Short-term investments		76,650			62,355
Accounts receivable, net of allowance for doubtful accounts of
$1,210 and $1,197, respectively		64,363			61,261
Unbilled accounts receivable		25,093			34,497
Inventories		38,029			35,297
Prepaid expenses		2,600			3,932
Current deferred tax assets		6,415			5,988
Other current assets		2,351			237
Assets of discontinued operations		1,710			17,690
Total current assets		300,354			288,205
Property and Equipment:
Land		1,668			1,668
Buildings and improvements		40,906			41,610
Machinery and equipment		72,837			81,747
Accumulated depreciation		(72,458	)		(80,619	)
Total property and equipment, net		42,953			44,406
Goodwill		4,423			4,447
Other assets		2,291			2,283
Non-current deferred tax assets		1,711			2,294
Total assets	$	351,732		$	341,635
Liabilities and Shareholders’ Investment
Current Liabilities:
Notes payable	$	1,582		$	1,501
Current maturities of long-term debt		6,708			6,841
Accounts payable		16,142			14,303
Accrued payroll-related costs		31,059			29,823
Advance payments from customers		49,901			48,868
Accrued warranty costs		5,333			5,811
Accrued income taxes		3,643			2,829
Current deferred income taxes		3,767			7,101
Other accrued liabilities		15,026			13,465
Liabilities of discontinued operations		890			6,351
Total current liabilities		134,051			136,893
Deferred income taxes		2,310			1,382
Long-term debt, less current maturities		15,673			22,376
Other long-term liabilities		11,266			9,188
Total liabilities		163,300			169,839
Shareholders’ Investment:
Common stock, 25¢ par value; 64,000 shares authorized:
19,664 and 19,652 shares issued and outstanding		4,916			4,913
Retained earnings		173,487			155,825
Accumulated other comprehensive income		10,029			11,058
Total shareholders’ investment		188,432			171,796
Total liabilities and shareholders’ investment	$	351,732		$	341,635
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-4

Consolidated Statements of Income
(For the Years Ended October 1, October 2, and September 27, respectively)

	2005			2004			2003
	(expressed in thousands, except per share data)
Revenue:
Product	$	328,514		$	299,263		$	284,406
Service		45,863			38,941			31,807
Total Revenue		374,377			338,204			316,213
Cost of Sales:
Product		187,261			177,976			179,746
Service		23,534			21,867			19,117
Total Cost of Sales		210,795			199,843			198,863
Gross Profit		163,582			138,361			117,350
Operating Expenses:
Selling		65,254			57,486			48,681
General and administrative		30,417			26,149			24,638
Research and development		14,936			12,663			13,827
Income From Operations		52,975			42,063			30,204
Interest expense		(2,128	)		(2,784	)		(3,613	)
Interest income		2,348			1,801			2,160
Other (expense) income, net		(1,381	)		1,913			810
Income Before Income Taxes and Discontinued Operations		51,814			42,993			29,561
Provision for Income Taxes		15,245			15,785			9,987
Income Before Discontinued Operations		36,569			27,208			19,574
Discontinued Operations:
(Loss) income from discontinued operations, net of tax		(2,589	)		1,775			1,916
Net gain (loss) on disposal of discontinued businesses, net of tax		3,078			—			(1,177	)
Income from Discontinued Operations, net of tax		489			1,775			739
Net Income	$	37,058		$	28,983		$	20,313
Earnings Per Share
Basic:
Income Before Discontinued Operations	$	1.86		$	1.32		$	0.93
Discontinued Operations:
(Loss) income from discontinued operations, net of tax		(0.13	)		0.08			0.09
Net gain (loss) on disposal of discontinued businesses, net of tax		0.15			—			(0.06	)
Income from Discontinued Operations, net of tax		0.02			0.08			0.03
Earnings Per Share	$	1.88		$	1.40		$	0.96
Diluted:
Income Before Discontinued Operations		1.79			1.27			0.92
Discontinued Operations:
(Loss) income from discontinued operations, net of tax		(0.13	)		0.08			0.09
Net gain (loss) on disposal of discontinued businesses, net of tax		0.15			—			(0.06	)
Income from Discontinued Operations, net of tax		0.02			0.08			0.03
Earnings Per Share	$	1.81		$	1.35		$	0.95
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-5

Consolidated Statements of Shareholders’ Investment and Comprehensive Income (Loss)
(For the Years Ended October 1, October 2, and September 27, respectively, expressed in thousands, except per share data)

	Common Stock						Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Investment
	Shares Issued			Amount
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			5,972			—			—			6,142
Restricted stock compensation		3			1			31			—			—			32
Tax benefit from equity compensation		—			—			1,127			—			—			1,127
Issuance for employee stock purchase plan		97			24			803			—			—			827
Common stock purchased and retired		(1,269	)		(317	)		(16,169	)		—			—			(16,486	)
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
Net income		—			—			—			28,983			—			28,983
Foreign currency translation		—			—			—			—			3,520			3,520
Derivative instruments		—			—			—			—			222			222
Total comprehensive income		—			—			—			28,983			3,742			32,725
Exercise of stock options		851			213			9,079			—			—			9,292
Restricted stock compensation		4			1			43			—			—			44
Tax benefit from equity compensation		—			—			2,594			—			—			2,594
Issuance for employee stock purchase plan		47			12			634			—			—			646
Common stock purchased and retired		(1,970	)		(493	)		(13,884	)		(29,917	)		—			(44,294	)
Dividends, $0.26 per share		—			—			—			(5,317	)		—			(5,317	)
Balance, October 2, 2004		19,652			4,913			—			155,825			11,058			171,796
Net income		—			—			—			37,058			—			37,058
Foreign currency translation		—			—			—			—			(1,610	)		(1,610	)
Minimum pension liability adjustment		—			—			—			—			(865	)		(865	)
Derivative instruments		—			—			—			—			1,446			1,446
Total comprehensive income		—			—			—			37,058			(1,029	)		36,029
Exercise of stock options		1,005			251			13,441			—			—			13,692
Restricted stock compensation		7			2			176			—			—			178
Tax benefit from equity compensation		—			—			6,153			—			—			6,153
Issuance for employee stock purchase plan		29			7			664			—			—			671
Common stock purchased and retired		(1,029	)		(257	)		(20,863	)		(12,616	)		—			(33,736	)
Stock option compensation		—			—			429			—			—			429
Dividends, $0.34 per share		—			—			—			(6,780	)		—			(6,780	)
Balance, October 1, 2005		19,664		$	4,916		$	—		$	173,487		$	10,029		$	188,432
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-6

Consolidated Statements of Cash Flows
(For the Years Ended October 1, October 2, and September 27, respectively)

	2005			2004			2003
	(expressed in thousands)
Cash Flows from Operating Activities:
Net income	$	37,058		$	28,983		$	20,313
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss (income) from discontinued operations		2,589			(1,775	)		(1,916	)
Net (gain) loss on disposal of discontinued businesses		(3,078	)		—			1,177
Gain on sale of property and equipment		—			(363	)		—
Depreciation and amortization		8,638			8,371			8,432
Deferred income taxes		(2,310	)		5,077			3,314
Bad debt provision (benefit)		201			(228	)		184
Equity compensation income tax benefits		6,153			2,594			1,127
Restricted stock compensation		178			44			32
Changes in operating assets and liabilities, net of effects of
businesses divested:
Accounts and unbilled contracts receivable		5,481			(17,616	)		15,551
Inventories		(3,260	)		(1,336	)		7,941
Prepaid expenses		1,837			44			1,367
Other assets		(2,446	)		1,232			(629	)
Accounts payable		1,933			4,606			(2,196	)
Accrued payroll-related costs		882			5,477			4,628
Advance payments from customers		1,823			9,751			(2,205	)
Accrued warranty costs		(424	)		1,094			208
Other current liabilities		3,589			(2,208	)		(7,961	)
Net Cash Provided by Operating Activities		58,844			43,747			49,367
Cash Flows from Investing Activities:
Additions to property and equipment		(7,094	)		(5,257	)		(6,002	)
Proceeds from sale of property and equipment		—			1,952			—
Proceeds from maturity of short-term investments		175,305			210,909			69,749
Purchases of short-term investments		(189,600	)		(190,308	)		(101,886	)
Net proceeds from sale of businesses		14,241			—			12,621
Net Cash (Used in) Provided by Investing Activities		(7,148	)		17,296			(25,518	)
Cash Flows from Financing Activities:
Net receipts (repayments) under short-term borrowings		141			(374	)		(264	)
Proceeds received under notes payable		1,525			4,574			—
Payments of notes payable		(1,541	)		(3,074	)		—
Repayments of long-term debt		(6,840	)		(7,866	)		(15,093	)
Cash dividends		(4,785	)		(6,612	)		(5,074	)
Proceeds from exercise of stock options and employee stock
purchase plan		14,363			9,938			6,969
Payments to purchase and retire common stock		(33,736	)		(44,294	)		(16,486	)
Net Cash Used in Financing Activities		(30,873	)		(47,708	)		(29,948	)
Net Cash (Used in) Provided by Discontinued Operations		(2,804	)		1,534			5,619
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(1,824	)		2,292			3,536
Cash and Cash Equivalents:
Increase during the year		16,195			17,161			3,056
Balance, beginning of year		66,948			49,787			46,731
Balance, end of year	$	83,143		$	66,948		$	49,787
Supplemental Disclosures of Cash Flows:
Cash paid during the year for:
Interest	$	2,074		$	2,662		$	3,252
Income taxes		12,303			11,561			12,305
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

F-7

Notes to Consolidated Financial Statements

1.   Summary of Significant Accounting Policies:

Fiscal Year
The Company’s fiscal year ends on the Saturday closest to September 30. The Company’s fiscal years ended October 1, 2005 and September 27, 2003 consisted of 52 weeks. The Company’s fiscal year ended October 2, 2004 consisted of 53 weeks.

Consolidation
The Consolidated Financial Statements include the accounts of MTS Systems Corporation and its wholly owned subsidiaries (the “Company”). Significant intercompany balances and transactions have been eliminated.

Revenue Recognition
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 for revenue recognition purposes. 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.

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. However, 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 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, in certain circumstances, 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 Accounts Receivable.

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

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

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 (losses)/gains on foreign currency translation in Comprehensive Income of ($1.6) million, $3.5 million and $7.3 million for fiscal years 2005, 2004 and 2003, respectively.

Cash Equivalents
Cash equivalents represent cash, demand deposits, and investments with original maturities of three months or less and are recorded at cost, which approximates fair value. Cash is invested in money

F-8

market funds and bank deposits. Cash equivalents outside the United States are invested in local currency money market funds and bank deposits.

Short-Term Investments
Short-term investments have original maturities beyond three months. All short-term investments are classified as available-for-sale as the Company intends to liquidate them to fund current operations, acquisitions, or the return of capital to shareholders. At October 1, 2005 and October 2, 2004, all available-for-sale investments consisted of highly rated auction rate municipal obligations and corporate preferred equity securities. All investments in available-for-sale securities are carried at fair value, and unrealized gains and losses are reported as a component of Accumulated Other Comprehensive Income. At October 1, 2005 and October 2, 2004, unrealized gains or losses from the investment in available-for-sale securities were immaterial.

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 customer acceptance. Unbilled amounts relating to these contracts are reflected as Unbilled Accounts Receivable in the accompanying Consolidated Balance Sheets. Amounts unbilled at October 1, 2005 are expected to be invoiced during fiscal year 2006.

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 October 1, 2005 and October 2, 2004 were as follows:

	2005		2004
	(expressed in thousands)
Customer projects in
various stages of
completion	$	13,845	$	13,133
Components,
assemblies and parts		24,184		22,164
Total	$	38,029	$	35,297

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 recorded 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 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 of the assets may not be recoverable. When this review indicates the carrying value of the asset or asset group 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 impairment charge against operations. The amount of the impairment loss recorded is the amount by which the carrying value of the impaired asset or asset group exceeds its fair value.

F-9

Goodwill
Goodwill represents the excess of acquisition costs over the fair value of the net assets of businesses acquired. Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and certain other intangible assets having indefinite lives not be amortized to income, but instead be periodically tested for impairment. The Company determined there was no impairment of its goodwill at October 1, 2005 or October 2, 2004. At both October 1, 2005 and October 2, 2004, $2.9 million and $1.5 million of goodwill was associated with the Test and Industrial segments, respectively. There was no change in these Goodwill balances over the three-year period ending October 1, 2005 other than changes associated with the effect of currency translation.

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 to be 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 periodically evaluates the estimated useful lives of all intangible assets and periodically revises such estimates based on current events.

Annual amortization of other intangible assets was $0.5 million, $0.5 million, and $0.7 million in fiscal years 2005, 2004, and 2003, respectively. The anticipated amortization expense related to other intangible assets for the next five fiscal years is as follows:

	Fiscal Year
	2006		2007		2008		2009		2010
	(expressed in thousands)
Amortization of intangible assets	$	308	$	22	$	13	$	13	$	13

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 October 1, 2005 and October 2, 2004 were as follows:

	2005			2004
	(expressed in thousands)
Beginning balance	$	5,811		$	4,615
Warranty provisions		6,971			8,295
Warranty claims		(7,286	)		(7,229	)
Translation adjustment		(163	)		130
Ending balance	$	5,333		$	5,811

F-10

Derivative Financial Instruments
The Company operates in several currencies and is exposed to changes in the reporting currency value of transactions, current assets, and current liabilities denominated in foreign currencies. Gains or losses related to these currency exposures are recognized in Other Expense (Income), net on the Consolidated Statement of Income.

The Company periodically enters into firm and optional contracts with banks to exchange currencies at a set future date and rate to maintain the expected reporting currency value of foreign currency exposures specifically identified by currency, amount, and timing. Because the market value of these contracts is derived from current market rates, they are classified as derivative financial instruments. The Company does not use foreign exchange contracts for speculative purposes.

Currency contracts used to maintain the reporting currency value of expected financial transactions are designated as cash flow hedges. Subsequent changes in the market value of the derivative contracts are recorded in Accumulated Other Comprehensive Income (Loss) within Shareholders’ Investment on the Consolidated Balance Sheet until they are recognized in earnings at the time income or loss is recognized on the underlying forecasted transaction. The Company periodically assesses whether the contracts are effective in offsetting the change in reporting currency value of the forecasted transaction. When a contract is no longer effective as a hedge, the Company discontinues cash flow hedge reporting prospectively, and reclassifies accumulated unrecognized earnings or loss from Accumulated Other Comprehensive Income (Loss) into Other Expense (Income), net on the Consolidated Statement of Income in the current period. Gains or losses on currency contracts used to maintain the reporting currency value of current assets and current liabilities denominated in foreign currencies are recognized as incurred in Other (Expense) Income, net on the Consolidated Statement of Income in the current period.

At October 1, 2005 and October 2, 2004, the Company had outstanding foreign currency forward exchange contracts with gross U.S. dollar notional equivalent amounts of $99.9 million and $39.1 million, respectively. At October 1, 2005 and October 2, 2004, the market value of the foreign currency contracts was $2.1 million and ($0.2) million, respectively. The mark-to-market adjustment on these contracts is recorded within Other Current Assets on the Consolidated Balance Sheet. The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was immaterial for the periods ended October 1, 2005 and October 2, 2004. At October 1, 2005 and October 2, 2004, the amount projected to be reclassified from Accumulated Other Comprehensive Income into earnings in the next 12 months was approximately $1.4 million and ($0.2) million, respectively. The maximum original maturity of any derivative was 2.0 years and 1.75 years at October 1, 2005 and October 2, 2004, respectively.

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.

Earnings Per Share
Basic net earnings per share is computed by dividing net income 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. The number of options that has been excluded from the diluted weighted average shares outstanding calculation was not material for the period ended October 1, 2005. Options to acquire 0.2 million and 1.4 million weighted common shares have been excluded from the diluted weighted average shares outstanding calculation for fiscal years 2004 and 2003, respectively, because the exercise price was more than the weighted average market value of these shares. The potentially 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:

F-11

	2005		2004		2003
	(expressed in thousands, except per share data)
Income before discontinued operations	$	36,569	$	27,208	$	19,574
Income from discontinued operations, net of tax		489		1,775		739
Net income	$	37,058	$	28,983	$	20,313
Weighted average common shares outstanding		19,714		20,666		21,119
Dilutive potential common shares		795		798		355
Total dilutive common shares		20,509		21,464		21,474
Earnings per share:
Basic:
Income before discontinued operations	$	1.86	$	1.32	$	0.93
Income from discontinued operations, net of tax		0.02		0.08		0.03
Earnings per share	$	1.88	$	1.40	$	0.96
Diluted:
Income before discontinued operations	$	1.79	$	1.27	$	0.92
Income from discontinued operations, net of tax		0.02		0.08		0.03
Earnings per share	$	1.81	$	1.35	$	0.95

Stock-Based Compensation
The Company grants stock options to officers and key employees at the market price of the Company’s stock on the date of the grant. The Company also maintains an employee stock purchase plan that allows employees to purchase shares of Company stock at a 15% discount to the lower of the beginning or ending market price of the shares over defined six month intervals of participation.

The Company elects to follow Accounting Principles Board (“APB”) Opinion No. 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 Accounting Standards No. 123, “Accounting for Stock Based Compensation,” the Company’s net income and earnings per share would have been reported as shown below:

	2005			2004			2003
Net Income	(expressed in thousands, except per share data)
As Reported	$	37,058		$	28,983		$	20,313
Deduct: fair value of employee stock-based
compensation expense, net of tax		(3,132	)		(3,497	)		(2,589	)
Pro Forma	$	33,926		$	25,486		$	17,724
Basic Earnings Per Share
As Reported	$	1.88		$	1.40		$	0.96
Pro Forma	$	1.72		$	1.23		$	0.84
Diluted Earnings Per Share
As Reported	$	1.81		$	1.35		$	0.95
Pro Forma	$	1.66		$	1.19		$	0.83

The estimated fair value of employee stock options granted at market price during fiscal years 2005, 2004, and 2003 averaged $9.55, $7.94, and $5.60, 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 application of the Black-Scholes model values each vesting period separately

F-12

and thus 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 summarized as follows:

	2005			2004			2003
Expected life (in years)		2.7			2.7			2.8
Risk-free interest rate		3.8	%		2.9	%		1.6	%
Expected volatility		39.3	%		57.0	%		65.5	%
Dividend yield		1.2	%		1.4	%		1.7	%

In the fourth quarter of fiscal year 2005, the Company changed its estimate of stock price volatility used in the Black-Scholes valuation model from a calculation using a historical daily observation to one using a historical weekly observation. The Company believes this calculation provides a more accurate estimate of long-term stock price volatility as the historical average market trading volume in the Company’s stock is low relative to the number of total shares outstanding, increasing the price impact of trades. This change resulted in a reduction in estimated stock-based compensation expense of $0.8 million, which will be realized over the next three years.

Related to the sale of the Company’s engine test business in the fourth quarter of fiscal year 2005, the Company elected to accelerate the vesting schedule of options held by employees of this business to the date of the divestiture. As these options were priced below the market value of the Company’s stock on the date of the accelerated vesting, the value of the options was re-measured to the difference between the market price and the option price of the stock on the date of re-measurement. Accordingly, related expense of $0.4 million, net of tax, was recorded in Income (Loss) from Discontinued Operations in the fourth quarter of fiscal year 2005.

Comprehensive Income (Loss)
Comprehensive Income (Loss), a component of Shareholders’ Investment, consists of net income, minimum pension liability adjustment, unrealized gains or losses on investments classified as available-for-sale, derivative instrument gains or losses, and foreign currency translation adjustments. There were no substantive unrealized gains or losses from available-for-sale securities at October 1, 2005, October 2, 2004, or September 27, 2003.

F-13

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

	Derivative Financial Instrument Unrealized Gain (Loss)			Minimum Pension Liability Adjustment			Foreign Currency Translation Adjustment			Total Accumulated Other Comprehensive Income (Loss)
	(expressed in thousands)
Balances at September 28, 2002	$	(60	)	$	—		$	396		$	336
Foreign exchange translation adjustments		—			—			7,284			7,284
Change in unrealized gain
(loss), net of tax of ($430)		(672	)		—			—			(672	)
Realized (gain) loss, net of tax of $236		368			—			—			368
Balances at September 27, 2003	$	(364	)	$	—		$	7,680		$	7,316
Foreign exchange translation adjustments		—			—			3,520			3,520
Change in unrealized gain
(loss), net of tax of ($279)		(436	)		—			—			(436	)
Realized (gain) loss, net of tax of $421		658			—			—			658
Balances at October 2, 2004	$	(142	)	$	—		$	11,200		$	11,058
Foreign exchange translation adjustments		—			—			(1,610	)		(1,610	)
Minimum pension liability adjustment,
net of tax of ($550)		—			(865	)		—			(865	)
Change in unrealized gain
(loss), net of tax of $623		1,034			—			—			1,034
Realized (gain) loss, net of tax of $248		412			—			—			412
Balances at October 1, 2005	$	1,304		$	(865	)	$	9,590		$	10,029

Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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 expense during the reporting period. Ultimate results could differ from those estimates. Additionally, 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 revenue and gross profit variation due to changes in the estimate of the ultimate costs of these contracts.

Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4,” which clarifies the types of costs that should be expensed in Cost of Sales rather than capitalized in inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. No material impact on the Company’s financial statements is expected from the adoption of this standard.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is to be recognized over the period during which an employee is required to provide services in

F-14

exchange for the award. SFAS 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of fiscal year 2006. While the Company cannot precisely determine the impact on net earnings as a result of the adoption of SFAS 123R, estimated compensation expense related to prior periods is included in Note 1 to these Consolidated Financial Statements. The ultimate amount of compensation expense recorded will be dependent on the number of option shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.

In December 2004, the FASB issued Staff Position (“FSP”) No. 109-1, “Application of FASB Statement No. 109 (“SFAS 109”), Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” FSP 109-1 clarifies that the manufacturer’s deduction provided for under the American Jobs Creation Act of 2004 (“AJCA”) should be accounted for as a special deduction in accordance with SFAS 109 and not as a tax rate reduction. The FASB also issued Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” The Company is currently evaluating the potential impact of the various provisions of the AJCA on the Company’s financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which supersedes APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 requires retrospective application of changes in accounting principles to prior period financial statements as of the earliest date practicable. This statement also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. The provisions of SFAS 154 are effective for fiscal years beginning after December 15, 2005.

Reclassifications
Certain amounts included in the prior year Consolidated Financial Statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported Shareholders’ Investment or Net Income. During fiscal year 2005, the Company reclassified its investments in highly liquid municipal securities and corporate preferred stock from Cash Equivalents to Short-Term Investments. Prior period balances were reclassified for comparability. This reclassification was based on the securities having a final maturity date in excess of three months from their date of acquisition.

2.   Discontinued Operations:

On August 5, 2005, the Company sold substantially all of the net assets of its engine test business, which was based in Ann Arbor, Michigan and also maintained operations in Byfleet, United Kingdom, to A&D Co., Ltd., of Tokyo, Japan. This sale represented the Company’s exit from the engine test business. As a result of this sale, the Company recorded a gain of $3.8 million, net of tax of $1.1 million, in the fourth quarter of fiscal year 2005. The engine test business was historically included in the Company’s Test segment for financial reporting. The gain on the sale of the engine test business and its results of operations have been excluded from the results of operations of the Test segment and are reported as discontinued operations for fiscal year 2005 and prior fiscal years.

Effective October 1, 2005, the Company closed its AeroMet subsidiary, a laser deposition technology business located in Eden Prairie, Minnesota. As a result of this business closure, the Company recorded a loss of $0.7 million, net of tax of $0.4 million, in the fourth quarter of fiscal year 2005. The AeroMet subsidiary was historically included in the Company’s Industrial segment for financial reporting. The loss on disposition of the AeroMet business and its results of operations have been excluded from results of operations of the Industrial segment and are reported as discontinued operations for fiscal year 2005 and prior fiscal years.

During the second and third quarters of fiscal year 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

F-15

gradient amplifier product line. On April 11, 2003, the Company sold 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 these sales, the Company recorded a loss of $1.2 million, net of tax of $0.8 million. The Automation division was historically included in the Company’s Industrial segment for financial reporting, and its results of operations are reported as discontinued operations.

The Company does not allocate interest income or interest expense to discontinued operations. Following are the operating results of the discontinued operations included in the Company’s results for the respective fiscal years:

	2005			2004		2003
	(expressed in thousands)
Revenue	$	15,982		$	28,856	$	39,630
(Loss) income on discontinued operations before
taxes and gain (loss) on sale		(3,918	)		2,828		3,089
(Benefit) provision for income taxes		(1,329	)		1,053		1,173
(Loss) income from discontinued operations, net of tax	$	(2,589	)	$	1,775	$	1,916

The assets and liabilities of the discontinued operations at October 1, 2005 and October 2, 2004 were as follows:

	2005			2004
	(expressed in thousands)
Accounts receivable, net of allowances for doubtful accounts	$	12		$	4,805
Unbilled accounts receivable		258			1,399
Inventories		358			2,439
Prepaid expenses		—			176
Current deferred tax assets		465			302
Other current assets		548			19
Current assets of discontinued operations		1,641			9,140
Land		—			810
Buildings and improvements		—			5,931
Machinery and equipment		106			5,518
Accumulated depreciation		(37	)		(3,890	)
Non-current deferred tax assets		—			181
Long-lived assets of discontinued operations		69			8,550
Total assets of discontinued operations	$	1,710		$	17,690
Accounts payable	$	238		$	1,372
Accrued payroll-related costs		223			2,143
Advance payments from customers		—			1,050
Accrued warranty costs		—			336
Accrued income taxes		—			1,028
Other accrued liabilities		429			422
Total liabilities of discontinued operations	$	890		$	6,351

F-16

3.   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 — Test and Industrial. The Test segment provides testing hardware and software solutions to the ground vehicles, aerospace, and infrastructure markets. The Industrial segment manufactures high-performance position sensors for a variety of industrial and vehicular applications.

In evaluating each segment’s performance, management focuses on income from operations. This financial measure 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 for the fiscal years ended October 1, 2005, October 2, 2004, and September 27, 2003, was as follows:

	2005		2004		2003
	(expressed in thousands)
Revenue
Test	$	313,498	$	285,892	$	271,439
Industrial		60,879		52,312		44,774
Total Revenue	$	374,377	$	338,204	$	316,213
Income from Operations
Test	$	44,596	$	35,361	$	26,326
Industrial		8,379		6,702		3,878
Total Income from Operations	$	52,975	$	42,063	$	30,204
Identifiable Assets
Test	$	276,849	$	257,236	$	252,901
Industrial		73,173		66,709		59,127
Discontinued Operations		1,710		17,690		18,350
Total Assets	$	351,732	$	341,635	$	330,378
Other Segment Data
Test:
Capital expenditures	$	5,696	$	4,010	$	4,375
Depreciation and amortization	$	6,804	$	6,849	$	7,158
Industrial:
Capital expenditures	$	1,398	$	1,247	$	1,627
Depreciation and amortization	$	1,834	$	1,522	$	1,274

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Geographic information was as follows:

	2005		2004		2003
	(expressed in thousands)
Revenue
United States	$	106,730	$	114,701	$	125,907
Europe		134,228		110,772		116,824
Japan		63,377		50,463		31,321
Asia, excluding Japan		56,528		44,843		28,569
Other		13,514		17,425		13,592
Total Revenue	$	374,377	$	338,204	$	316,213
Property and Equipment, Net
United States	$	31,648	$	32,335	$	35,513
Europe		10,478		11,476		11,436
Asia		827		595		614
Other		—		—		—
Total Property and Equipment, Net	$	42,953	$	44,406	$	47,563

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

4.   Financing:

Information on short-term borrowings for the years ended October 1, 2005 and October 2, 2004 was as follows:  

	2005			2004
	(expressed in thousands)
Balance outstanding at year-end	$	1,582		$	1,501
Interest rate at year-end		1.9	%		1.4	%
Weighted-average interest rate during the year		1.5	%		0.9	%

Short-term debt consists of borrowings by the Company’s Japanese subsidiaries.  

The Company did not renew its $25 million revolving bank credit facility in fiscal year 2005 given liquidity available from domestic cash equivalents and short-term investments. There were no amounts outstanding on the revolving credit facility during fiscal year 2005 or fiscal year 2004. The Company was in compliance with all terms and conditions of the revolving bank credit agreement during fiscal year 2005 and at October 2, 2004.

At October 1, 2005, the Company had letters of credit and guarantees outstanding totaling $54.6 million, primarily to bond advance payments and performance guarantees related to customer contracts in the Test segment.  

F-18

Long-term debt at October 1, 2005 and October 2, 2004 was as follows:

	2005			2004
	(expressed in thousands)
6.6% notes, unsecured, due in annual installments of $4,375 beginning in July 2001	$	13,125		$	17,500
7.5% note, unsecured, due in semi-annual installments of $1,153 beginning in July 2003		9,231			11,539
Other		25			178
Total Long-Term Debt	$	22,381		$	29,217
Less Current Maturities of Long-Term Debt		(6,708	)		(6,841	)
Total Long-Term Debt, Less Current Maturities	$	15,673		$	22,376

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

Year	Maturity
	(expressed in thousands)
2006	$	6,708
2007		6,683
2008		6,683
2009		2,307
2010		—
	$	22,381

The 6.6% and 7.5% notes contain pre-payment penalties that make early repayment economically disadvantageous to the Company based on current market interest rates. The Company estimates the fair market value of its long-term debt portfolio exceeds its carrying value by approximately $0.8 million at October 1, 2005, due to lower current market interest rates relative to interest rates at the time of issuance of the debt.

The Company is subject to financial covenants, among other restrictions, under the 6.6% and 7.5% notes. At October 1, 2005 and October 2, 2004, the Company was in compliance with these financial covenants. Under these covenants the Company is required, among other matters, to maintain certain financial ratios and to meet certain indebtedness and restricted payment tests. In the first quarter of fiscal year 2005, the Company reached agreements with the holders of the notes to reduce the minimum net worth covenant requirements in order to provide the Company with additional capacity for dividend payments, Company share purchases, or investments.

5.   Income Taxes:

The components of income before income taxes for the fiscal years ended October 1, 2005, October 2, 2004, and September 27, 2003 were as follows:

	2005		2004		2003
	(expressed in thousands)
Income before income taxes and discontinued operations:
Domestic	$	35,466	$	21,011	$	13,450
Foreign		16,348		21,982		16,111
Total	$	51,814	$	42,993	$	29,561

F-19

The provision for income taxes from continuing operations for the fiscal years ended October 1, 2005, October 2, 2004, and September 27, 2003 was as follows:

	2005			2004		2003
	(expressed in thousands)
Current provision (benefit):
Federal	$	5,661		$	2,871	$	4,226
State		1,175			740		472
Foreign		10,892			7,187		2,802
Deferred		(2,483	)		4,987		2,487
Total provision	$	15,245		$	15,785	$	9,987

A reconciliation from the federal statutory income tax rate to the Company’s effective income tax rate for continuing operations for the fiscal years ended October 1, 2005, October 2, 2004, and September 27, 2003, is as follows:

	2005			2004			2003
Statutory income tax rate		35	%		35	%		35	%
Tax benefit of export sales		(3	)		(3	)		(4	)
Foreign provision in excess of U.S. tax rate		2			3			4
State income taxes, net of federal benefit		2			1			1
Research and development tax credits		(1	)		(1	)		(3	)
Foreign tax credits		(5	)		—			—
Tax exempt income		(1	)		(1	)		—
Meals and entertainment and other permanent items		—			3			1
Effective income tax rate		29	%		37	%		34	%

A summary of the deferred tax assets and liabilities for the fiscal years ended October 1, 2005, October 2, 2004, and September 27, 2003, is as follows:

	2005			2004			2003
	(expressed in thousands)
Deferred Tax Asset:
Accrued compensation and benefits	$	4,441		$	3,315		$	3,236
Inventory reserves		2,330			2,977			3,497
Intangible assets		2,177			2,274			2,055
Allowance for doubtful accounts		124			145			246
Other assets		547			306			48
Net operating loss carryovers		1,626			980			1,343
Unrealized derivative instrument losses		—			91			233
Capital loss carryovers		—			588			608
Research and development and foreign tax credits		1,081			2,999			6,008
Less valuation allowance		(496	)		(588	)		(723	)
Total Deferred Tax Asset	$	11,830		$	13,087		$	16,551
Deferred Tax Liability:
Property and equipment	$	5,416		$	6,143		$	6,549
Unrealized derivation instrument gains		789			—			—
Foreign deferred revenue and other		3,576			7,145			4,708
Total Deferred Tax Liability	$	9,781		$	13,288		$	11,257
Net Deferred Tax Asset (Liability)	$	2,049		$	(201	)	$	5,294

F-20

At October 1, 2005 the Company had research and development credit carryovers for state purposes of approximately $0.4 million. These credits will expire between the years 2015 and 2018 if not utilized. The Company also had foreign tax credit carryovers of approximately $0.8 million that, if not used, will expire between the years 2010 and 2014. The Company’s French, Swedish and German subsidiaries have net operating loss carryovers of $3.0 million, $0.4 million and $1.2 million, respectively. These losses will not expire under local law.

At October 2, 2004 and September 27, 2003, research and development credit carryovers for federal and state purposes were $1.5 million and $4.8 million, and foreign tax credit carryovers were $1.5 million and $1.2 million, respectively.

As a result of current business operations, the Company determined during fiscal year 2005 that it would realize the full benefit of its foreign tax credits. Accordingly, the Company released tax contingencies of $2.9 million previously recorded. The decrease in the Company’s effective tax rate in fiscal year 2005 from fiscal year 2004 was primarily due to the release of these tax contingencies.

The Company has assessed its taxable earnings history and prospective future taxable income. Based on this assessment, the Company has determined it is more likely than not that its net deferred tax assets will be realized in future periods. The Company has determined it will utilize its $1.6 million U.S. capital loss carryover in fiscal year 2005. Accordingly, the Company reversed a $0.6 million valuation allowance related to the U.S. capital loss carryover in fiscal year 2005. Of this adjustment, $0.5 million is recorded within results of discontinued operations and $0.1 million is recorded within results of continuing operations.

The Company also determined it was more likely than not that it will be unable to realize the benefit of its German net operating loss carryovers of approximately $1.2 million. Accordingly, the Company has a full valuation allowance against the German net operating loss in the amount of $0.5 million, of which $0.1 million is a result of the fiscal year 2005 German net operating loss.

At September 27, 2003 the Company determined it was more likely than not that it would be unable to realize the benefit of its Italian net operating loss carryforward of approximately $0.4 million. Accordingly, the Company recorded a full valuation allowance against the net operating loss and did not recognize any benefit associated with that asset. During the year ended October 2, 2004, the Company determined the net operating loss will be fully utilized and therefore reversed the valuation allowance. The net change in the valuation allowance was $0.1 million.

According to APB 23, “Accounting for Income Taxes – Special Areas,” U.S. income taxes are not provided on undistributed earnings of international subsidiaries that are permanently reinvested. At October 1, 2005, undistributed earnings permanently reinvested in international subsidiaries were approximately $74 million. The Company has not provided for U.S. income taxes on these earnings. The Company is in the process of analyzing the tax impacts of the undistributed earnings of its foreign affiliates, including the potential impact of repatriating the undistributed earnings under the American Jobs Creation Act of 2004. A decision regarding the repatriation of undistributed earnings is expected to be made by the end of fiscal year 2006.

In the fiscal years ended October 1, 2005, October 2, 2004, and September 27, 2003, the Company recognized tax benefits of $6.2 million, $2.6 million, and $1.1 million, respectively, related to the Company’s equity compensation plans. These benefits were directly allocated to Equity within Shareholders’ Investment on the Consolidated Balance Sheet. Additionally, the deferred tax asset or liability related to the Company’s unrealized gain or loss associated with derivative instruments is directly allocated to Accumulated Other Comprehensive Income within Shareholders’ Investment. Under SFAS 87, “Pension Accounting,” the deferred tax asset associated with the Company’s German defined benefit pension plan is also directly allocated to Accumulated Other Comprehensive Income within Shareholders’ Investment.

F-21

6.   Stock Plans:

The Company compensates officers, directors, and key employees with stock-based compensation under two stock plans approved by the Company’s shareholders in 1994 and 1997 and administered under the supervision of the Company’s Board of Directors. During the fiscal year ended October 1, 2005, 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 the closing market price of the Company’s stock 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 plans is summarized below (in thousands, except per share amounts):

	2005					2004					2003
	Shares			WAEP*		Shares			WAEP*		Shares			WAEP*
Options outstanding at beginning of year		2,229		$	15.08		2,527		$	11.86		3,064		$	11.29
Granted		560		$	35.19		611		$	22.39		699		$	14.30
Exercised		(1,005	)	$	13.62		(851	)	$	10.92		(681	)	$	9.44
Forfeited or expired		(98	)	$	15.12		(58	)	$	13.31		(555	)	$	14.76
Options outstanding at end of year		1,686		$	22.63		2,229		$	15.07		2,527		$	11.86
Options subject to exercise at year-end		650		$	14.80		913		$	12.22		1,084		$	10.51
*Weighted Average Exercise Price

The following summarizes information concerning stock options outstanding at October 1, 2005 (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		Weighted Average Exercise Price
$6.37-$13.12		342		1.31	$	11.30		331	$	11.32
$13.12-$21.48		356		2.69	$	14.81		183	$	14.72
$21.48-$33.98		457		3.66	$	22.52		131	$	22.70
$33.98-$35.15		520		4.76	$	35.15		5	$	35.15
$35.15-$40.59		11		4.88	$	40.58		—	$	—
Total		1,686		3.33	$	22.63		650	$	14.80

At October 1, 2005, a total of 602,729 shares were available for future grant under the two stock plans.

U.S. employees are eligible to participate in the Company’s Employee Stock Purchase Plan (“ESPP”), which was approved by the Company’s shareholders in fiscal year 2002. Purchases are funded by payroll deductions over calendar six-month periods. The ultimate purchase price is 85% of the lower of the market price at either the beginning or end of the six-month period. The shares are required to be held by the employee for at least one year subsequent to the purchase. Two purchase periods closed in fiscal year 2005 with the combined issuance of 29,379 shares at an average price of $22.85. In fiscal years 2004 and 2003, purchases were 47,095 and 97,202 shares, respectively, with average share prices of $13.71 and $8.51, respectively. At October 1, 2005, 576,325 shares remained reserved for issuance under the ESPP plan.

In fiscal year 2005, the Company awarded non-employee members of its Board of Directors restricted stock grants totaling 15,000 shares, with an aggregate fair value of $0.4 million. In fiscal year 2003, the Company awarded two officers restricted stock grants totaling 12,000 shares, with an aggregate grant date fair value of $0.1 million. These grants vest over three years. No restricted stock grants were awarded in fiscal year 2004.

See Note 1 to the Consolidated Financial Statements for further information regarding stock-based compensation.

F-22

7.   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) component of the retirement plan allows eligible employees to contribute a portion of their pre-tax income to the plan each pay period. The Company matches 50% of employees’ pre-tax contributions (excluding “catch-up” contributions that employees age 50 or older may make to the plan), up to 6% of compensation, subject to limitations imposed by federal law. The Company’s matching contribution was $2.0 million, $1.9 million, and $1.8 million in fiscal years 2005, 2004, and 2003, respectively. Employees may also contribute a percentage of their salary to the plan on an after-tax basis.

The Company also provides an annual fiscal year contribution to the retirement plan for eligible 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 fiscal year contributions. The vested interest increases each subsequent year by one-third of the total balance, until total vesting is reached after five years of participation. The 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. The Company’s Board of Directors approves any changes to the contribution levels under the plan. The Company’s fiscal year contributions under the plan totaled $3.0 million, $2.8 million, and $2.7 million in fiscal years 2005, 2004, and 2003, respectively.

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 service and compensation during the years immediately preceding retirement, early retirement, termination, disability, or death, as defined in the plan. The Company uses a September 30 measurement date for this defined benefit retirement plan.

The cost for the plan included the following components:

	2005		2004		2003
	(expressed in thousands)
Service cost-benefit earned during the period	$	337	$	307	$	237
Interest cost on projected benefit obligation		471		425		361
Net amortization and deferral		13		20		17
Net Periodic Retirement Cost	$	821	$	752	$	615

F-23

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

	2005			2004
	(expressed in thousands)
Change in benefit obligation:
Projected benefit obligation, beginning of year	$	8,432		$	7,413
Service cost		337			307
Interest cost		471			425
Translation change		(379	)		601
Actuarial loss (gain)		2,147			(127	)
Benefits paid		(197	)		(187	)
Projected benefit obligation, end of year	$	10,811		$	8,432
Change in plan assets:
Fair value of plan assets, beginning of year	$	—		$	—
Actual return on plan assets		—			—
Employer contributions		197			187
Benefits paid		(197	)		(187	)
Fair value of plan assets, end of year	$	—		$	—

The funded status of the Company’s defined benefit retirement plan at October 2, 2004 and September 27, 2003 was as follows:

	2005			2004
	(expressed in thousands)
Funded status	$	(10,811	)	$	(8,432	)
Unrecognized net gain		2,679			664
Unrecognized net liability being amortized		51			66
Required adjustment to recognize minimum liability		(1,415	)		—
Accrued Pension Liability	$	(9,496	)	$	(7,702	)
Major assumptions used in the above calculation include:
Discount rate		4.3	%		5.5	%
Expected rate of increase in future compensation levels		3.2	%		3.1	%

Information regarding the Company’s defined benefit retirement plan at October 1, 2005 and October 2, 2004 was as follows:

	2005		2004
	(expressed in thousands)
Projected benefit obligation	$	10,811	$	8,432
Accumulated benefit obligation		9,496		7,522
Fair value of plan assets		—		—

Statement of Financial Accounting Standard No. 87, “Employer’s Accounting for Pensions,” requires recognition of an additional minimum pension liability if the fair value of pension plan assets is less than the accumulated benefit obligation at the end of the plan year. In fiscal year 2005, the Company recorded a non-cash adjustment to Accumulated Other Comprehensive Income of $0.9 million, or $1.4 million on a pre-tax basis.

F-24

The Company expects to contribute approximately $0.2 million to its defined benefit retirement plan in fiscal year 2006. The future pension benefit payments, which reflect expected future service, are as follows:

Year		Pension Benefits
		(expressed in thousands)
	2006	$	226
	2007		267
	2008		302
	2009		361
	2010		419
	2011 through 2015		2,778
		$	4,353

8.   Restructuring and Other Charges:

In the fourth quarter of fiscal year 2005, the Company decided to exit its noise and vibration software business. The Company assessed the recoverability of the assets associated with this business using an undiscounted cash flow methodology. Based on this assessment, the Company reduced the assets to their fair market value and recorded costs of $0.3 million to write down property, plant and equipment and $0.2 million to write down inventory. In addition, the Company recorded $1.3 million for employee severance costs and $2.7 million related to software development expense that will not repeat in future years. Of the total business exits costs of $4.5 million recorded, $3.6 million, $0.7 million and $0.2 million are included in Cost of Sales, Selling Expense, and General and Administrative Expense, respectively, on the Consolidated Statement of Income for fiscal year 2005. These expenses are reported within the results of operations of the Company’s Test segment. Substantially all of the severance costs will be paid in fiscal year 2006.

In fiscal year 2004 the Company had no significant restructuring activities. In fiscal year 2003, the Company had no significant restructuring activities related to business consolidation other than the sale of its Automation division (see Note 2 to the Consolidated Financial Statements). For the fiscal years ending October 1, 2005, October 2, 2004, and September 27, 2003 the reserve for restructuring was as follows:

Year	Beginning Balance		Provision		Write-off			Ending Balance
			(expressed in thousands)
2003	$	21	$	—	$	(21	)	$	—
2004		—		—		—			—
2005		—		1,319		—			1,319

9.   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.

F-25

Leases: Total lease expense associated with continuing operations was $4.7 million, $4.9 million, and $5.6 million for fiscal years 2005, 2004, and 2003, respectively. The Company has non-cancelable operating lease commitments for equipment, land, and facilities that expire on various dates through 2052. Minimum annual rental commitments for the next five fiscal years and thereafter are as follows:

Year		Payments
		(expressed in thousands)
2006	$	3,587
2007		3,547
2008		2,239
2009		810
2010		378
Thereafter		2,799
	$	13,360

F-26

MTS SYSTEMS CORPORATION AND SUBSIDIARIES

SCHEDULE II — SUMMARY OF CONSOLIDATED ALLOWANCES

FOR DOUBTFUL ACCOUNTS AND RESTRUCTURING RESERVES

FOR THE YEARS ENDED OCTOBER 1, 2005, OCTOBER 2, 2004,

AND SEPTEMBER 27, 2003

(expressed in thousands)

	Balance Beginning of Year		Provisions (Benefit)			Amounts Written-Off/ Payments			Balance End of Year
Allowance for Doubtful Accounts:
2005	$	1,197	$	201		$	(188	)	$	1,210
2004		1,603		(228	)		(178	)		1,197
2003		2,275		184			(856	)		1,603
Restructuring Reserves:
2005	$	—	$	1,319		$	—		$	1,319
2004		—		—			—			—
2003		21		—			(21	)		—

S-1

EX-10.D

Exhibit 10.d

MTS SYSTEMS CORPORATION
2002 EMPLOYEE STOCK PURCHASE PLAN

Effective January 1, 2002

and

As amended by the FIRST AMENDMENT
Approved by the Board November 29, 2005

MTS SYSTEMS CORPORATION
2002 EMPLOYEE STOCK PURCHASE PLAN

        WHEREAS, MTS Systems Corporation (hereinafter the “Company”) established, effective as of January 1, 1992, an employee stock purchase plan in accordance with Section 423 of the Internal Revenue Code and authorized 250,000 (500,000 after the stock split) shares of its Stock to be reserved for issuance under the plan; and

        WHEREAS, the plan will expire on April 25, 2002, and all of the shares of Stock authorized under said plan will have been issued; and

        WHEREAS, the Board of Directors, at a meeting held on November 20, 2001, and subject to the approval of its shareholders, authorized a new stock purchase plan to be established to provide employees the opportunity to continue to purchase shares under such a plan.

        THEREFORE, the Company hereby establishes this plan as set forth herein:

        1.   Establishment of Plan. The Company proposes to grant to certain employees of the Company the opportunity to purchase Stock of the Company. Such Stock shall be purchased pursuant to the plan herein set forth which shall be known as the “MTS Systems Corporation 2002 Employee Stock Purchase Plan” (hereinafter referred to as the “Plan”). The Company intends that the Plan shall qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and shall be construed in a manner consistent with the requirements of said Section 423 and the regulations thereunder.

        2.   Purpose. The Plan is intended to encourage Stock ownership by eligible Employees of the Company, and by eligible Employees of any Subsidiaries that adopt the Plan with the consent of the Company. The Plan is further intended to incent Employees to remain in employment, improve operations, increase profits, and contribute more significantly to the Company’s success, and to permit the Company to compete with other corporations offering similar plans in obtaining and retaining the services of competent employees.

        3.   Administration.

(a) The Plan shall be administered by a stock purchase committee (hereinafter referred to as the “Committee”), consisting of two or more directors or employees of the Company, as designated by the Board of Directors of the Company (hereinafter referred to as the “Board of Directors”). If the Board fails to appoint such Committee, the Human Resources Committee shall administer the Plan. The Board of Directors shall fill all vacancies in the Committee and may remove any member of the Committee at any time, with or without cause.

(b) Unless the Board of Directors limits the authority delegated to the Committee in its appointment, the Committee shall be vested with full authority to make, administer, and interpret such rules and regulations, as it deems necessary to administer the Plan. For all purposes of this Plan other than the Plan’s Section 3(b), references to the Committee shall also refer to the Board of Directors.

(c) The Committee shall select its own chairman and hold its meetings at such times and places as it may determine. All determinations of the Committee shall be made by a majority of its members. Any decision, which is made in writing and signed by a majority of the members of the Committee, shall be effective as fully as though made by a majority vote at a meeting duly called and held.

(d) The determinations of the Committee shall be made in accordance with its judgment as to the best interests of the Company, its employees and its shareholders and in accordance with the purposes of the Plan; provided, however, that the provisions of the Plan shall be construed in a manner consistent with the requirements of Section 423 of the Internal Revenue Code, as amended. Such determinations shall be binding upon the Company and the Participants in the Plan unless otherwise determined by the Board of Directors.

(e) No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. The Company shall indemnify each member of the Committee against any and all claims, loss, damages, expenses (including counsel fees approved by the Committee), and liability (including any amounts paid in settlement with the Committee’s approval) arising from any loss or damage or depreciation which may result in connection with the execution of the member’s duties or the exercise of the member’s discretion, or from any other action or failure to act hereunder, except when it is determined that the member’s actions were to be due to gross negligence or willful misconduct of such member.

(f) The Company shall pay all expenses of administering the Plan, other than costs associated with either any required tax withholding or the sale or other disposition of shares purchased under the Plan.

        4.   Duration and Phases of the Plan.

(a) The Plan will commence on January 1, 2002 and will terminate December 31, 2011, except that any Phase commenced prior to such termination shall, if necessary, be allowed to continue beyond such termination until completion. Notwithstanding the foregoing, this Plan shall be considered of no force or effect and any options granted shall be considered null and void unless the holders of a majority of all of the issued and outstanding shares of Stock approve the Plan within twelve (12) months after the date of its adoption by the Board of Directors. The Plan year shall be the same as the Company’s fiscal year, ending each September 30.

(b) The Plan shall be carried out in one or more offering periods (“Phases”) being for a period determined by the Committee prior to the commencement of a Phase, provided that no Phase, shall be for a period of less than three (other than the first Phase, which may be shorter) nor for a period of longer than twelve months. No Phase shall run concurrently with any other Phase but a Phase may commence immediately after the termination of the preceding Phase. The existence and date of commencement of a Phase (the “Commencement Date”) shall be determined by the Committee and shall terminate on a date (the “Termination Date”) determined by the Committee consistent with the limitations specified above, provided that the commencement of the first Phase shall be within twelve months before or after the date of approval of the Plan by the shareholders of the Company. In the event all of the Stock reserved for grant of options hereunder is issued pursuant to the terms hereof prior to the commencement of one or more Phases scheduled by the Committee or the number of shares remaining is so small, in the opinion of the Committee, as to render administration of any succeeding Phase impracticable, such Phase or Phases shall be canceled. Phases shall be numbered successively as Phase 1, Phase 2, Phase 3, etc.

2

(c) The Board of Directors may elect to accelerate the Termination Date of any Phase effective on the date specified by the Board of Directors in the event of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Stock would be converted into cash, securities or other property, other than a merger of the Company in which shareholders immediately prior to the merger have the same proportionate ownership of stock in the surviving corporation immediately after the merger; or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company. Subject to any required action by the shareholders, if the Company shall be involved in any merger or consolidation, in which it is not the surviving corporation, and if the Board of Directors does not accelerate the Termination Date of the Phase, each outstanding option shall pertain to and apply to the securities or other rights to which a holder of the number of shares subject to the option would have been entitled.

(d) A dissolution or liquidation of the Company shall cause each outstanding option to terminate, provided in such event that, immediately prior to such dissolution or liquidation, each Participant shall be repaid the payroll deductions credited to the Participant’s account with Interest.

        5.   Eligibility. All Employees who have completed twelve or more months of continuous employment service for the Company prior to the Commencement Date of a Phase, shall be eligible to participate in such Phase. Any Employee who is a member of the Board of Directors of the Company and who satisfies the above requirements shall be eligible to participate in the Plan.

        6.   Participation.

(a) Participation in the Plan is voluntary. An eligible Employee may elect to participate in the Plan, and thereby become a “Participant” in the Plan, by completing the enrollment form provided by the Company and delivering it to the Company or its designated representative at such time prior to the Commencement Date of that Phase as the Committee determines. The first Commencement Date shall be a date after January 1, 2002 as determined by the Committee. [Last Sentence Amended by Board Resolution January 2004] A Participant who ceases to be an eligible Employee, although still employed by the Company, shall continue to be treated as a Participant for the remainder of the current Phase.

(b) [First sentence amended by Board Resolution January 2004] Once enrolled in the Plan, a Participant will continue to participate in the Plan until he or she withdraws from the Plan pursuant to Section 9(a), or until contributions are discontinued under Section 8(a)(iv)(A) or Section 9(e). A Participant who withdraws from the Plan pursuant to Section 9(a) may again become a Participant, if the Participant is then an eligible Employee, by proceeding as provided in Section 6(a) above, which shall be effective as of the next Commencement Date. A Participant whose payroll deductions were discontinued because of Section 8(a)(iv)(A) will automatically resume participation at the Commencement Date of the next Phase of the Plan that ends in the next calendar year, if he or she is then an eligible Employee. A Participant whose payroll deductions were discontinued because of Section 9(e) will automatically resume participation at the Commencement Date of the next Phase after the Participant is again permitted to make deferrals under the MTS Systems Corporation Retirement Plan, if he or she is then an eligible Employee. [Last Sentence Amended by First Amendment] Notwithstanding the foregoing, automatic resumption for Phase 8 shall not occur at the end of Phase 7, and each Participant who wants to participate in the Plan for Phase 8 must make a new payroll deduction election to do so.

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        7.   Payroll Deductions.

(a) [(a) Amended by First Amendment] Upon enrollment, except as provided in the next sentence, a Participant shall elect to make contributions to the Plan by payroll deductions, in whole percentages of 1% to 10% of Pay or such lesser percentage as determined by the Committee, but not in excess of the limit specified in Section 8(a)(iv)(A) below for each Phase until the Employee ceases to be a Participant as described in Section 6(b) above. In the event the Company anticipates that the maximum contribution specified in Section 8(a)(iv)(A) for the Phase will apply to a Participant, the Participant may designate a dollar amount. Payroll deductions for a Participant shall commence on the first payday after the Commencement Date of the Phase and shall terminate on the last payday immediately prior to or coinciding with the Termination Date of that Phase unless sooner terminated by the Participant as provided in Section 7 and 9 hereof. Except for payroll deduction, a Participant may not make any separate cash payments into the Participant’s account under the Plan.

(b) In the event that the Participant’s Pay for any pay period is terminated or reduced from the compensation rate for such a period as of the Commencement Date of the Phase for any reason so that the amount actually withheld on behalf of the Participant as of the Termination Date of the Phase is less than the amount anticipated to be withheld over the Phase as determined on the Commencement Date of the Phase, then the extent to which the Participant may exercise the Participant’s option shall be based on the amount actually withheld on the Participant’s behalf. In the event of a change in the pay period of any Participant, such as from bi-weekly to monthly, an appropriate adjustment shall be made to the deduction in each new pay period so as to ensure the deduction of the proper amount authorized by the Participant.

(c) A Participant may withdraw from participation in the Phase and terminate the Participant’s payroll deduction authorized at such times as determined by the Committee and shall have the rights provided in Section 9. No Participant shall be entitled to increase or decrease the amount to be deducted during a Phase after the Commencement Date of that Phase.

(d) All payroll deductions made for Participants shall be credited to their respective accounts under the Plan.

        8.   Options.

(a) Grant of Option.

(i) A Participant who is employed by the Company as of the Commencement Date of a Phase shall be granted an option as of such date to purchase shares of Stock to be determined by dividing the total amount credited to that Participant’s account under Section 7 hereof by the applicable option price set forth in Section 8(a)(ii) hereof, subject to the limitations of Sections 8(a)(iv)(A), 8(a)(iv)(B) and 8(a)(iv)(C) and Section 10 hereof.

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(ii) The option price for such shares of Stock shall be the lower of:

A. Eighty-five percent (85%) of the Fair Market Value of such shares of Stock on the Commencement Date of the Phase; or

B. Eighty-five percent (85%) of the Fair Market Value of such shares of Stock on the Termination Date of the Phase.

(iii) Stock options granted pursuant to the Plan may be evidenced by agreements in such form as the Committee shall approve, provided that all Employees shall have the same rights and privileges and provided further that such options shall comply with and be subject to the terms and conditions set forth herein. The Committee may conclude that agreements are not necessary.

(iv) Anything herein to the contrary notwithstanding, no Participant shall be granted an option hereunder:

A. Which permits the Participant’s rights to purchase shares of Stock under all employee stock purchase plans of the Company, its Subsidiaries or its parent, if any, to accrue at a rate which exceeds $25,000 of the Fair Market Value of such Stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. In the case of shares purchased during a Phase that commenced in the current calendar year, the limit shall be equal to $25,000 minus the Fair Market Value of the shares that the Participant previously purchased in the current calendar year under the Plan and all other employee stock purchase plans of the Company. In the case of shares purchased during a Phase that commenced in the immediately preceding calendar year, the limit shall be equal to $50,000 minus the Fair Market Value of the shares that the Participant previously purchased under this Plan and all other employee stock purchase plans of the Company in the current calendar year and in the immediately preceding calendar year.

B. Which permits the Participant to purchase shares of Stock under all employee stock purchase plans of the Company, its Subsidiaries or its parent, if any, in excess of 10,000 shares per Phase under the Plan; or

C. If immediately after the grant such Participant would own and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company, its parent, if any, or of any Subsidiary of the Company. For purposes of determining stock ownership under this Section, the rules of Section 424(d) of the Internal Revenue Code, as amended, shall apply.

(v) The grant of an option pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets.

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(b) Exercise of Option.

(i) Unless a Participant gives written notice to the Company pursuant to Section 9 prior to the Termination Date of a Phase to withdraw, the Participant’s option for the purchase of shares will be exercised automatically for the Participant as of such Termination Date for the purchase of that number of full and fractional shares (rounded to the nearest 1/100^th of a share) of Stock that the accumulated payroll deductions in the Participant’s account at that time will purchase at the applicable option price set forth in Section 8(a)(ii), and subject to the limitations set forth in Sections 8(a)(iv)(A), 8(a)(iv)(B) and 8(a)(iv)(C), and Section 10 hereof.

(ii) The Company shall, in addition, return to the Participant a cash payment equal to the balance, if any, in the Participant’s account which was not used for the purchase of Stock, without Interest, as promptly as practicable after the Termination Date of any Phase, or at the election of the Committee, apply such amount to the purchase of shares in the next Phase, if the Employee is then eligible.

(iii) [(iii) Amended by First Amendment] The Committee may appoint a registered broker dealer to act as agent for the Company in holding and performing ministerial duties in connection with the Plan, including, but not limited to, maintaining records of Stock ownership by Participants and holding Stock in its own name for the benefit of the Participants. No trust or escrow arrangement shall be express or implied by the exercise of such duties by the agent. A Participant may, at any time, request of the agent that any shares allocated to the Participant be registered in the name of the Participant, in which event the agent shall issue a certificate for the whole number of shares in the name of the Participant and shall deliver to the Participant any cash for fractional shares, based on the then Fair Market Value of the shares on the date of issuance.

(iv) [(iv) Amended by First Amendment] The Participant may direct the Committee or its agent to register the Participant’s account in joint tenancy with the Participant, or to register any shares in the name of the Participant and a joint tenant, provided that the joint tenant must be a natural person. The designation of a joint tenant shall be applied to any shares in the account or registered under the Plan in the name of the Participant and any additional shares allocated to the account or registered in the name of the Participant until further changed by the Participant. The Participant may change from a designated joint tenant to the Participant only and may change the named joint tenant with respect to the account or any shares, provided that any such change in joint tenant shall apply to any shares only when the restrictions described in Section 8(d) lapse.

(c) Unless the Committee designates otherwise, a Participant may elect to have any dividends on a Participant’s shares automatically reinvested in additional shares of Stock in lieu of receiving dividends in the form of cash. Any shares purchased through the reinvestment of dividends will be purchased on the open market. Such purchases shall be governed by the requirements of the Company’s dividend reinvestment program.

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(d) [First sentence amended by First Amendment] For a period beginning on the date of exercise and ending on the later of: (i) 12 months from the date of exercise or (ii) 24 months from the date of grant of the option pursuant to this Plan, each share of Stock so acquired may not, without the consent of the Committee (which consent shall be provided in a uniform and nondiscriminatory manner for similarly situated Participants) be sold, transferred (including changing the joint tenant on the Participant’s account or registered shares, the payment of the price upon the subsequent exercise of any option, or the payment of income taxes on the exercise), pledged or encumbered. The Committee may waive such restrictions with respect to Stock acquired upon the exercise of options granted or to be granted during any Phase of the Plan, either prior to or at any time subsequent to the Commencement Date of the Phase and may establish uniform rules for the transfer of such Stock during such period. During the period such shares are subject to the restrictions of this subsection (d), such shares shall be held by the transfer agent or the Company, or an appropriate legend describing the restriction and referencing the Plan shall be placed on the certificate evidencing such Stock.

        9.   Withdrawal or Termination of Participation.

(a) A Participant may, at any time prior to the Termination Date of a Phase, withdraw all deductions from Pay then credited to the Participant’s account by giving written notice to the Company. Promptly upon receipt of such notice of withdrawal, all such deductions credited to the Participant’s account will be paid to the Participant with Interest accrued thereon and no further payroll deductions by the Participant to this Plan will be permitted during the Phase. In such event, the option granted the Participant under that Phase of the Plan will lapse immediately. Partial withdrawals of payroll deductions hereunder may not be made. A Participant who withdraws the Participant’s participation during a Phase shall not be permitted to recommence participation until the next Commencement Date. A Participant’s withdrawal will not have any effect upon the Participant’s eligibility to participate in any succeeding Phase of the Plan that commences after the next Commencement Date or in any similar plan that may hereafter be adopted by the Company.

(b) Notwithstanding the provisions of Section 9(a) above, if a Participant files reports pursuant to Section 16 of the Securities Exchange Act of 1934 (at the Commencement Date of a Phase or becomes obligated to file such reports during a Phase) then such a Participant shall not have the right to withdraw all or a portion of the accumulated deductions from Pay except in accordance with Sections 9(c) and (d) below.

(c) In the event of the death of a Participant, the person or persons specified in Section 14 may give notice to the Company within 60 days of the death of the Participant electing to purchase the number of full shares which the accumulated payroll deductions in the account of such deceased Participant will purchase at the option price specified in Section 8(a)(ii) and have the balance in the account distributed in cash with Interest accrued thereon to the person or persons specified in Section 14. If no such notice is received by the Company within said 60 days, the accumulated payroll deductions will be distributed in full in cash with Interest accrued thereon to the person or persons specified in Section 14.

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(d) Upon termination of Participant’s employment for any reason other than death of the Participant, the Company shall return to the Participant, with Interest, any payroll deductions credited to the Participant’s account during that Phase.

(e) In the event the Participant’s participation is suspended under the MTS Systems Corporation Retirement Plan as a result of receiving a hardship withdrawal, the Participant shall be immediately and automatically suspended from the Plan and all payroll deductions shall be discontinued. The Participant shall again participate in the Plan as provided in Section 6(b) above.

(f) The Committee shall be entitled to make such rules, regulations and determination as it deems appropriate under the Plan in respect of any leave of absence taken by or disability of any Participant. Without limiting the generality of the foregoing, the Committee shall be entitled to determine:

(i) Whether or not any such leave of absence shall constitute a termination of employment for purposes of the Plan; and

(ii) The impact, of any, of any such leave of absence on options under the Plan theretofore granted to any Participant who takes such leave of absence.

        10.   Stock Reserved for Options.

(a) The maximum number of shares of Stock to be issued upon the exercise of options to be granted under the Plan shall be 750,000. Such shares may, at the election of the Board of Directors, be either shares authorized but not issued or shares acquired in the open market by the Company. Shares subject to the unexercised portion of any lapsed or expired option may again be subject to option under the Plan.

(b) If the total number of shares of Stock for which options are to be granted for a given Phase as specified in Section 8 exceeds the number of shares then remaining available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding) and if the Committee does not elect to cancel such Phase pursuant to Section 4, the Committee shall make a pro rata allocation of the shares remaining available in as uniform and equitable a manner as it shall consider practicable. In such event, the options to be granted and the payroll deductions to be made pursuant to the Plan, which would otherwise be affected, may, in the discretion of the Committee, be reduced accordingly. The Committee shall give written notice of such reduction to each Participant affected.

(c) The Participant (or a joint tenant named pursuant to Section 10(d) hereof) shall have no rights as a shareholder with respect to any shares subject to the Participant’s option until the date of the issuance of a Stock certificate evidencing such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such Stock certificate is actually issued, except as otherwise provided in Section 12 hereof.

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(d) The shares of Stock to be delivered to a Participant pursuant to the exercise of an option under the Plan will be registered in the name of the Participant or, if the Participant so directs by written notice to the Committee prior to the Termination Date of that Phase of the Plan, in the names of the Participant and one other person the Participant may designate as the Participant’s joint tenant with rights of survivorship, to the extent permitted by law.

        11.   Accounting and Use of Funds. Payroll deductions for each Participant shall be credited to an account established for the Participant under the Plan. Such account shall be solely for bookkeeping purposes and no separate fund or trust shall be established hereunder and the Company shall not be obligated to segregate such funds. All funds from payroll deductions received or held by the Company under the Plan may be used, without limitation, for any corporate purpose by the Company.

        12.   Adjustment Provision.

(a) Subject to any required action by the shareholders of the Company, the number of shares covered by each outstanding option, and the price per share thereof in each such option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Stock resulting from a subdivision or consolidation of shares or the payment of a share dividend (but only on the shares) or any other increase or decrease in the number of such shares effected without receipt of consideration by the Company.

(b) In the event of a change in the shares of the Company as presently constituted, which is limited to a change of all its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the shares within the meaning of this Plan.

(c) To the extent that the foregoing adjustments relate to shares or securities of the Company, such adjustments shall be made by the Committee, and its determination in that respect shall be final, binding and conclusive, provided that each option granted pursuant to this Plan shall not be adjusted in a manner that causes the option to fail to continue to qualify as an option issued pursuant to an “employee stock purchase plan” within the meaning of Section 423 of the Code.

(d) Except as hereinbefore expressly provided in this Section 12, no Participant shall have any right by reason of any subdivision or consolidation of shares of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation, and any issue by the Company of shares of any class, or securities convertible into shares of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to the option.

        13.   Non-Transferability of Options.

(a) Options granted under any Phase of the Plan shall not be transferable except under the laws of descent and distribution and shall be exercisable only by the Participant during the Participant’s lifetime and after the Participant’s death only by the Participant’s beneficiary of the representative of the Participant’s estate as provided in Section 9(c) hereof.

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(b) Neither payroll deductions credited to a Participant’s account, nor any rights with regard to the exercise of an option or to receive shares of Stock under any Phase of the Plan may be assigned, transferred, pledged or otherwise disposed of in any way by the Participant. Any such attempted assignment, transfer, pledge or other disposition shall be null and void and without effect, except that the Company may, at its option, treat such act as an election to withdraw funds in accordance with Section 9.

        14.   Designation of Beneficiary.

(a) A Participant may file a written designation of a beneficiary who is to receive any cash credited to the Participant’s account under any Phase of the Plan in the event of such Participant’s death prior to exercise of the Participant’s option pursuant to Section 8 hereof, or to exercise the Participant’s option and become entitled to any Stock and/or cash upon such exercise in the event of the Participant’s death prior to exercise of the option pursuant to Section 8 hereof. The Participant may change the beneficiary designation at any time upon receipt of a written notice by the Company.

(b) Upon the death of a Participant and upon receipt by the Company of proof deemed adequate by it of the identity and existence at the Participant’s death of a beneficiary validly designated under the Plan, the Company shall in the event of the Participant’s death, allow such beneficiary to exercise the Participant’s option pursuant to Section 9(c) if such beneficiary is living on the Termination Date of the Phase and deliver to such beneficiary the appropriate shares of Stock and/or cash after exercise of the option. In the event there is not validly designated beneficiary under the Plan who is living at the time of the Participant’s death or in the event the option lapses, the Company shall deliver the cash credited to the account of the Participant with Interest to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed to the knowledge of the Company, it may, in its discretion, deliver such cash to the spouse (or, if no surviving spouse, to any one or more children of the Participant), or if no spouse or child is known to the Company, then to such relatives of the Participant known to the Company as would be entitled to such amounts, under the laws of intestacy in the deceased Participant’s domicile as though named as the designated beneficiary hereunder. The Company will not be responsible for or be required to give effect to the disposition of any cash or Stock or the exercise of any option in accordance with any will or other testamentary disposition made by such Participant or in accordance with the provision of any law concerning intestacy, or otherwise. No designated beneficiary shall, prior to the death of a Participant by whom the Participant has been designated, acquire any interest in any Stock or in any option or in the cash credited to the Participant’s account under any Phase of the Plan.

        15.   Amendment and Termination. The Plan may be terminated at any time by the Board of Directors provided that, except as permitted in Section 4(c) with respect to an acceleration of the Termination Date of any Phase, no such termination will take effect with respect to any options then outstanding. Also, the Board may, from time to time, amend the Plan as it may deem proper and in the best interests of the Company or as may be necessary to comply with Section 423 of the Internal Revenue Code of 1986, as amended, or other applicable laws or regulations; provided, however, that no such amendment shall, without prior approval of the shareholders of the Company (1) increase the total number of shares for which options may be granted under the Plan (except as provided in Section 12 herein), (2) permit aggregate payroll deductions in excess of ten percent (10%) of a Participant’s compensation as of the Commencement Date of a Phase, or (3) impair any outstanding option.

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        16.   Notices. All notices or other communications in connection with the Plan or any Phase thereof shall be in the form specified by the Committee and shall be deemed to have been duly given when received by the Participant or the Participant’s designated personal representative or beneficiary or by the Company or its designated representative, as the case may be.

        17.   Participation of Subsidiaries.

(a) The Employees of any Subsidiary of the Company that adopts this Plan by action of its Board of Directors with the consent of the Company, shall be entitled to participate in the Plan on the same basis as Employees of the Company, unless the Board of Directors of the Company determines otherwise. Effective as of the date of coverage of any Subsidiary, any references herein to the “Company” shall be interpreted as referring to such Subsidiary.

(b) In the event that any Subsidiary, which is covered under the Plan, ceases to be a Subsidiary of the Company, the employees of such Subsidiary shall be considered to have terminated their employment for purposes of Section 9 hereof as of the date such Subsidiary ceases to be such a Subsidiary.

        18.   Definitions.

(a) “Employee” means any common law employee, including an officer, of the Company or any Participating Subsidiary who as of the day immediately preceding the Commencement Date of a Phase is customarily employed by the Company for more than twenty (20) hours per week and more than five (5) months in a calendar year.

(b) “Fair Market Value” of a share of Stock shall be the closing price of the Stock on the applicable date or the nearest prior business day on which trading occurred on the exchange on which the Stock is traded or on the Nasdaq Stock Market. If the Stock is not traded on any exchange or listed on the Nasdaq Stock Market, the Committee shall determine the Fair Market Value of a share of Stock for each valuation date in a manner acceptable under Section 423 of the Internal Revenue Code of 1986, as amended.

(c) “Interest” means the interest rate on a six-month certificate of deposit as published in the Wall Street Journal on the business day coincident with or immediately prior to the Commencement Date, or such other similar rate as determined by the Committee before the Commencement Date, which rate shall remain in effect until changed by the Committee. Such interest rate shall be applied to ½ of the Participant’s account.

(d) “Pay” means (i) the total compensation paid in cash to a Participant by the Company and any Subsidiary, including salary, wages, bonuses, incentive compensation, commissions, overtime pay and shift premiums, plus (ii) any pre-tax contributions made by the Participant under Section 401(k) or 125 of the Code. “Pay” shall exclude all non-cash items, moving or relocation allowances, cost-of-living equalization payments, car allowances, tuition reimbursements, imputed income attributable to cars or life insurance, severance pay, fringe benefits, contributions or benefits received under employee benefit plans, income attributable to the exercise of options, and similar items. [Last Sentence Amended by First Amendment] Except to the extent required by applicable law or as otherwise determined by the Committee in a uniform and nondiscriminatory manner, the definition of Pay shall be interpreted and administered in a manner consistent with the definition of compensation as determined from time to time for purposes of elective deferrals under the qualified retirement plan of the Company.

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(e) “Stock” means the common stock of the Company, $.25 par value.

(f) “Subsidiary” means any domestic corporation defined as a subsidiary of the Company in Section 424(f) of the Internal Revenue Code of 1986, as amended.

        19.   Miscellaneous.

(a) The Plan shall not, directly or indirectly, create any right for the benefit of any Employee or class of Employees to purchase any shares of Stock under the Plan, or create in any Employee or class of Employees any right with respect to continuation of employment by the Company, and it shall not be deemed to interfere in any way with the Company’s right to terminate, or otherwise modify, an Employee’s employment at any time.

(b) The provisions of the Plan shall, in accordance with its terms, be binding upon, and inure to the benefit of, all successors of each Employee participating in the Plan, including, without limitation, such Employee’s estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy, or representative of creditors of such Employee.

(c) As a condition of the obligations of the Company under this Plan, each Participant must, no later than the date as of which any part of the value of an option under this Plan first becomes includable as compensation in the gross income of the Participant for federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Company regarding payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to such value. The Company or any Subsidiary, to the extent permitted by law, may deduct any such taxes from any payment of any kind otherwise due to the Participant. If the Committee permits, a Participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements under this Section by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the Participant, or (ii) delivering (including by attestation) to the Company from shares of Stock already owned by the Participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the Participant under the this Section, and in the event shares of Stock are withheld, the amount withheld will not exceed the minimum required federal, state and FICA withholding amount. Any such election will be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings.

(d) The law of the State of Minnesota will govern all matters relating to this Plan except to the extent it is superseded by the laws of the United States.

(e) The offering of the shares hereunder shall be subject to the effecting by the Company of any registration or qualification of the shares under any federal or state law or the obtaining of the consent or approval of any governmental regulatory body which the Company shall determine, in its sole discretion, is necessary or desirable as a condition to or in connection with, the offering or the issue or purchase of the shares covered thereby. The Company shall make every reasonable effort to effect such registration or qualification or to obtain such consent or approval.

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(f) The Plan is expressly made subject to (i) the approval by shareholders of the Company, and (ii) at the Company’s election, the receipt from the Internal Revenue Service of a determination letter or ruling, in scope and content satisfactory to Company legal counsel, respecting the qualification of the Plan within the meaning of Section 423 of the Code. If the Plan is not so approved by the shareholders and if, at the election of the Company, the aforesaid determination letter or ruling from the Internal Revenue Service is not received on or before one year after the Plan’s adoption by the Board of Directors, the Plan shall not come into effect. In such case, the accumulated payroll deductions credited to the account of each Participant shall forthwith be repaid to the Participant with Interest.

(g) [Amended by First Amendment] Notwithstanding any provision in this Plan to the contrary, payroll deduction elections and cancellations or amendments thereto, withdrawals decisions, beneficiary designations, and any other decision or election by a Participant under this Plan may be accomplished by electronic or telephonic means, which includes but is not limited to the Internet, and which are not otherwise prohibited by law and which are in accordance with procedures and/or systems approved or arranged by the Employer or its delegates.

Plan Approved by Board of Directors: November 20, 2001

Plan Approved by Stockholders: January 29, 2002

First Amendment Approved by Board of Directors: November 29, 2005

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EX-10.G

Exhibit 10.g

MTS Systems Corporation	CHANGE IN CONTROL AGREEMENT
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 ________________ (the “Executive”), residing at __________, and shall be effective as of this ____ day of _______________, _____.

        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:

Change in Control Agreement

        1.      Term of Agreement. This Agreement shall be effective from and after the date hereof and shall continue in effect through December 31, 2006, and shall automatically be extended for successive one-year periods thereafter unless the Board of Directors of the Company (the “Board”) shall have approved, and the Executive is notified in writing, prior to January 1, 2007 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

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Change in Control Agreement

        (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 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. Termination by the Company or the Executive of the Executive’s employment based on “Disability” may occur in the event the Executive has incurred or is afflicted with any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, and as a result, has become eligible for and begun receiving income replacement benefits under the terms of the Company’s long-term disability plan or policy as may be in effect from time to time.

        (b)       Retirement. 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).

        (c)       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 that 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.

        (d)       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 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);

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Change in Control Agreement

        (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 that is not made pursuant to a Notice of Termination satisfying the requirements of this Agreement; for purposes of this Agreement, no such purported termination shall be effective.

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Change in Control Agreement

        (e)       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 that 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.

        (f)       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) aboveor 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).

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

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Change in Control 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;

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Change in Control Agreement

        (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 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 that 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 that 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 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).

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Change in Control 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.

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Change in Control Agreement

        6.      Limits on Payments and Benefits. In the event that the vesting, acceleration and payment of any equity awards or other compensation or benefits, together with all other payments and the value of any benefit received or to be received by the Executive would result in all or a portion of such payment being subject to excise tax under Section 4999 of the Code, then the amounts due under Section 4 that the Company shall pay to the Executive shall be either (A) the full payment or (B) such lesser amount determined by the Company in accordance with this Section 6 that would result in no portion of the payment being subject to excise tax under Section 4999 of the Code (the “Excise Tax”), whichever of the foregoing amounts, taking into account the applicable Federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by the Executive, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of the payment may be taxable under Section 4999 of the Code. The Company shall determine the order and amounts by which the amounts due under Section 4 are reduced. All determinations required to be made under this Section 14 shall be made by a nationally recognized accounting firm that is the Company’s outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax (the “Accounting Firm”). The Company shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Company and Executive. Notice must be given to the Accounting Firm within fifteen (15) business days after an event entitling Executive to an amount due under this Agreement. All fees and expenses of the Accounting Firm shall be borne solely by the Company. The Accounting Firm’s determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). For the purposes of all calculations under Section 280G of the Code and the application of this Section 6, all determination as to present value shall use 120 percent of the applicable Federal rate (determined under Section 1274(d) of the Code) compounded based on the nature of the payment, as in effect on the date of this Agreement, but if not otherwise specified, the Company and Executive agree to compound such rate on a semiannual basis. The determination by the Accounting Firm shall be final and binding on the Company and the Executive.

        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 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.

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Change in Control Agreement

        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.      Compliance with Code 409A. If and to the extent that any provision of this Agreement is required to comply with Code Section 409A, the Company shall have the authority, without the consent of the Executive to interpret and/or amend such provision to maintain to maximum extent practicable the original intent of the applicable provision without violating the provisions of Code Section 409A.

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Change in Control Agreement

        11.      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 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.

        12.      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:


___________________________________________

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EX-21

Exhibit 21

Subsidiaries of the Registrant

North American Subsidiaries
MTS Testing Systems (Canada) Ltd.

International Subsidiaries
MTS Holdings France, SARL
MTS Sensor Technologie und Verwaltungs-GmbH
MTS Automotive Sensors GmbH
MTS Sensor Technologie GmbH and Co. KG
MTS Systems SAS
MTS Systems GmbH
MTS Systems Beteiligungs-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

Consent of Independent Registered Public Accounting Firm

The Board of Directors
MTS Systems Corporation:

We consent to the incorporation by reference in the registration statements on Form S–8 (Nos. 33-75880, 333-28661, 333-39388, and 333-82582) of MTS Systems Corporation of our reports dated December 14, 2005, with respect to the consolidated balance sheets of MTS Systems Corporation as of October 1, 2005 and October 2, 2004 and the related consolidated statements of income, shareholders’ investment and comprehensive income (loss) and cash flows, and the related consolidated financial statement schedule for each of the fiscal years in the three-year period ended October 1, 2005, and management’s assessment of the effectiveness of internal control over financial reporting as of October 1, 2005, and the effectiveness of internal control over financial reporting as of October 1, 2005, which reports appears in the annual report on Form 10-K of MTS Systems Corporation for the fiscal year ended October 1, 2005.

/S/   KPMG LLP

Minneapolis, Minnesota
December 14, 2005

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)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     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

d)     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 14, 2005

/s/   Sidney W. Emery, Jr.

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)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     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

d)     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 14, 2005

/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 October 1, 2005 (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 14, 2005

/s/   Sidney W. Emery, Jr.

Sidney W. Emery, Jr.
Chairman, President and 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 October 1, 2005 (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 14, 2005

/s/   Susan E. Knight

Susan E. Knight
Vice President and Chief Financial Officer