SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended October 2, 2004

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)

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

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

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

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

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $566,761,213.

As of December 6, 2004, the registrant had outstanding 19,861,180 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 25, 2005 are incorporated by reference into Part III of this Form 10-K, to the extent described in such Part.

PART I

Item 1.   Business

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

Customers and Products by Business Segment

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

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

Aerospace:   This market consists of manufacturers of commercial, military, and general 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 universities 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. These customers also use the Company’s nanomechanical, biomechanical, and servo-hydraulic material testing products and systems in research and product development where a high degree of precision quality control is required during research and production. The nanomechanical test products address the needs of the highly precise semiconductor industry. Biomechanical applications include implants, 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 injection molding manufacturers, mobile equipment producers, sawmill manufacturers, and semiconductor and medical equipment companies. Products in the Industrial segment include:

Displacement Position and Liquid Level Sensors based on Magnetostrictive Technology:   Displacement sensors accurately measure position and are often used where accurate positioning and continuous control are critical, such as in discrete (piece part) manufacturing machinery, mobile equipment, process control elements and continuous measurement devices. 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 types of products are marketed to the ultimate end users, such as chemical-producing companies, and to original equipment manufacturers that design level measurement or leak detection into their control systems or accessories for remote indication.

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

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

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 2004

MTS invests in product, system, and application development. A combination of internal and customer funding enables MTS to advance the application of its existing technology and develop new capabilities. Selected highlights of product developments that were in progress or completed during fiscal year 2004 include the following:

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MTS, RPC, SWIFT, and Temposonics are registered trademarks, and AccuPhase, AeroPro, I-Stir, Safedesign, Safepass, and Sound Camera are trademarks of MTS Systems Corporation. NASTRAN is a registered trademark of the National Aeronautics and Space Administration.

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. However, approximately 50% of the

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Company’s revenue is associated with the ground vehicles market, and approximately 60% of the Company’s revenue is from customers outside the United States.

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

Industrial segment products are sold in quantity at unit prices ranging from $100 to $10,000. Production cycles generally vary from several days to several months, depending on the degree of product customization and manufacturing capacity.

During fiscal year 2004, the Company’s products were shipped to North America, Europe, Asia, and Latin America. The Company’s foreign operations and revenue derived from customers located in foreign countries may be affected by local political conditions, export licensing issues and restrictions, and foreign currency exchange rates and volatility.

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

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

Domestic Sales Offices:

International Sales Offices:

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.

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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 2, 2004 and in prior 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 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 $199 million, $159 million, and $170 million at October 2, 2004, September 27, 2003, and September 28, 2002, respectively. Based on anticipated production schedules and other factors, the Company estimates that approximately $168 million of the backlog at October 2, 2004 will be converted to revenue during fiscal year 2005. Delays may occur as a result of technical difficulties, export licensing or other approvals, changes in scope, manufacturing capacity, or the availability of the customer installation sites. Such delays may affect the period in which the backlog is recognized as revenue. The Company’s backlog is subject to order cancellations.

Competition

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

Alternatively, in lieu of purchasing equipment, software, or services from MTS or its competitors, customers may elect to contract with testing laboratories, including those operated by certain universities 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 manufacturing plants in Ann Arbor, Michigan and Oak Ridge, Tennessee. In addition, engineering, project management, final systems assembly, and service may be performed in Berlin, Germany; Tokyo, Japan; Paris, France; Turin, Italy; Gloucester, United Kingdom; and Gothenberg, Sweden. Manufacturing and engineering in the Industrial Segment are located in Raleigh, North Carolina; Luedenscheid, Germany; Tokyo, Japan; and Minneapolis, Minnesota.

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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 U.S. 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 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 developments. Costs associated with these development programs are expensed as incurred and aggregated $13.2 million, $14.7 million, and $14.7 million for the fiscal years ended October 2, 2004, September 27, 2003, and September 28, 2002, 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:

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:

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Employees

MTS had 1,615 employees at October 2, 2004, including approximately 427 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 computing hardware 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.

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

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

Available Information

MTS’ web site address is www.mts.com. MTS 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 that the Company’s operations are in compliance with federal, state, and local provisions relating to the protection of the environment.

Item 2.   Properties

Properties Located in the United States:

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

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

In addition to the Minneapolis, Minnesota facility, the Test Segment has five other domestic locations. The Company leases 29,000 square feet in two facilities located in Madison Heights, Michigan and Milford, Ohio. The lease agreements for these facilities terminate in 2006. The Company owns a 57,200 square foot facility in Ann Arbor, Michigan and has an additional 13,000 square feet in Ann Arbor under lease through 2004. MTS sold a 27,000 square foot facility in Cary, North Carolina in April 2004 for $2.1 million. The Company also leases 15,400 square feet in two facilities located in Oak Ridge, Tennessee.

The Company also has a five-year lease agreement that terminates in 2006 for a 90,000 square foot office, light manufacturing, and warehousing facility in Montgomeryville, Pennsylvania, a suburb of Philadelphia. This facility was used by the Company’s Automation division, which was sold in fiscal 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 European countries to support its international operations:

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The Company considers its current facilities adequate to support its operations during fiscal 2005.

Item 3.   Legal Proceedings

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

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

No matters were submitted for a vote of stockholders during the fourth quarter of the fiscal year ended October 2, 2004.

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 high and low sale prices for the periods indicated:

At December 6, 2004, there were 1,613 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:

During fiscal year 2004, the Company completed repurchases under a 1.5 million share repurchase program authorized by its Board of Directors and publicly announced in May 2002. On January 27, 2004, the Company publicly announced the approval by the Board of Directors of an additional repurchase program for 2.5 million shares. Authority over pricing and timing under the program have been delegated to management. There is no expiration date for the program.

During fiscal year 2004, the Company repurchased 2.0 million shares of its common stock at an average cost of $22.53 per share. The Company repurchased 1.2 million shares of its common stock at an average cost of $13.21 per share in fiscal year 2003 and 0.1 million shares in fiscal year 2002 at an average cost of $10.23 per share.

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

The Company’s dividend policy is to maintain a payout ratio of 25% of net earnings over the long term. In fiscal years 2002 and 2003 and through the third quarter of fiscal year 2004, the Company paid quarterly cash dividends of $.06 per share to holders of its common stock. In the fourth quarter of fiscal year 2004, the Company increased the quarterly dividend by 33% to $.08 per share.

The Company’s committed bank credit facility and long-term note agreements have requirements on the minimum level of net worth (as defined therein) that restrict the Company’s ability to repurchase stock or pay dividends. At October 2, 2004, the Company was in compliance with all such requirements. Subsequent to the fourth quarter the Company reached an agreement with the holders of the notes, reducing the minimum net worth requirement to provide the Company additional capacity for dividends and share repurchases.

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 2, 2004, September 27, 2003, and September 28, 2002 and the balance sheet data at October 2, 2004 and September 27, 2003 are derived from the audited Consolidated Financial Statements included elsewhere in this report. The statement of income data for the fiscal years ended September 30, 2001 and 2000 and the balance sheet data at September 28, 2002 and September 30, 2001 and 2000 are derived from financial statements of the Company that are not included in this report.

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Five-Year Financial Summary
(October 2, 2004, September 27, 2003, September 28, 2002, and September 30, 2001 and 2000)
(expressed in thousands except per share data and numbers of shareholders and employees)

¹The fiscal year ended October 2, 2004 was a 53-week fiscal year, whereas all other fiscal years presented were 52-week periods.

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²Assumes the conversion of potential common shares using the treasury stock method.
³Consists of notes payable and the current and non-current portion of long-term debt.
⁴Calculated by dividing net income by beginning shareholders’ investment.
⁵The measure “Income before cumulative effect of accounting changes” is not a measure of performance presented in accordance with Generally Accepted Accounting Principles (GAAP). The measures “earnings before cumulative effect of accounting changes,” “income before cumulative effect of accounting changes as a percent of revenue,” and “return on equity before cumulative effect of accounting changes” are derived from the non-GAAP measure “income before cumulative effect of accounting changes” and thus are also non-GAAP financial measures. Fiscal year 2002 amounts for these measures exclude the negative impact, net of tax, of the cumulative effect of the adoption of Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets,” of $13,721 (of which $9,198 and $4,523 were associated with discontinued operations and continuing operations, respectively), or $0.64 per diluted share. The Company discontinued a portion of its operations in fiscal year 2003, requiring prior years’ financial information to be restated. Because a portion of the Company’s fiscal year 2002 goodwill write-off resulting from the adoption of SFAS 142 was within the discontinued business, the measure “income before cumulative effect of accounting changes” is no longer presented on the income statement, making it a non-GAAP financial measure. Income before cumulative effect of accounting changes is utilized by management to measure the results of the Company’s operations, including the contribution of the discontinued business, before the effect of the goodwill write-off. Management views this measure as a valuable performance indicator because management was responsible for the operating results of both the Company’s continuing and discontinued operations during fiscal year 2002, whereas management was not able to influence the financial impact of the accounting change. Management believes this measure is useful to an investor in evaluating the Company’s operating performance because it helps investors more meaningfully evaluate and compare the results of operations from period to period by removing the impact of the cumulative effect of the accounting change, which reflects a one-time non-recurring charge unrelated to the operation of the business. Management therefore uses this measure to compare the Company’s year-over-year operating performance on a consistent basis. This measure should not be construed as an alternative to net income or any other measure determined in accordance with GAAP. The following table provides a reconciliation of the non-GAAP financial measures to the nearest GAAP measures:

⁶Calculated by dividing income before cumulative effect of accounting changes by revenue.
⁷Calculated by dividing income before cumulative effect of accounting changes by beginning shareholders’ investment.
⁸Does not include shareholders whose stock is held in the name of broker dealers or other nominees.

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

MTS Systems Corporation is a global supplier of testing products that help customers accelerate and improve their design, development, and manufacturing processes. MTS products are used for determining the mechanical behavior of materials, products, and structures and include computer-based testing and simulation systems, modeling and testing software, and consulting services. The Company is also a leading manufacturer of industrial position sensors. MTS had 1,615 employees and revenue of $367 million for the fiscal year ended October 2, 2004.

Fiscal Year
The Company’s fiscal year ends on the Saturday closest to September 30. The fiscal year ended October 2, 2004 consisted of 53 weeks. The fiscal years ended September 27, 2003 and September 28, 2002 consisted of 52 weeks.

Overall Results
Orders during fiscal year 2004 increased 26.3% to $409.5 million, compared to $324.2 million in fiscal year 2003. In fiscal year 2002, orders totaled $351.6 million. The increase in orders from fiscal year 2003 is partially the result of two multi-year international contracts totaling in excess of $48 million, booked in the first quarter of fiscal year 2004. Excluding these two contracts, orders for fiscal year 2004 increased 11.5%, driven by increased volume in both the Test and Industrial segments across all geographies and an estimated $17.4 million of favorable currency translation. Excluding the impact of currency, fiscal year 2004 orders would have been an estimated $392.1 million. The decrease in fiscal year 2003 from fiscal year 2002 was primarily the result of economic weakness in the Test segment market in North America and Asia, partially offset by increased volume in Europe.

Backlog of undelivered orders at October 2, 2004 increased 24.7% to $198.6 million, compared to backlog of $159.3 million at September 27, 2003. Backlog at the end of fiscal year 2002 totaled $170.0 million. The current year increase in backlog from fiscal year 2003 is attributable to increased order volume, partially offset by the cancellation in January 2004 of a $10.4 million customer order that was included in backlog at September 27, 2003.

Revenue of $367.0 million for fiscal year 2004 increased 7.9%, compared to $340.1 million for fiscal year 2003. Revenue for fiscal year 2002 totaled $327.2 million. The increase in revenue in fiscal year 2004 was primarily due to higher orders, an increase in aftermarket product volume, and an estimated $17.1 million favorable impact from currency translation, partially offset by lower beginning backlog. The increase in fiscal year 2003 revenue from fiscal year 2002 was primarily driven by increased volume in the Industrial segment, higher beginning backlog in fiscal year 2003, and an estimated $17.6 million favorable impact of currency translation, partially offset by lower order volume in the Test segment and the timing of large custom projects.

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Income before income taxes, discontinued operations, and cumulative effect of accounting changes of $45.8 million for fiscal year 2004 increased 41.8%, compared with $32.3 million for fiscal year 2003, primarily driven by increased volume and high-margin product mix, partially offset by an estimated $2.3 million favorable impact of currency translation. Income before taxes, discontinued operations and cumulative effect of accounting changes for fiscal year 2003 was relatively flat compared to fiscal year 2002, as increased revenue and income from operations in fiscal year 2003 was offset by the impact of the one-time gain on sale of an investment recorded in fiscal year 2002.

Net income was $29.0 million, or $1.35 per diluted share, for fiscal year 2004, an increase of 42.9% compared to $20.3 million, or $0.95 per diluted share, for fiscal year 2003 and increased from $4.3 million, or $0.20 per diluted share, for fiscal year 2002. The increase in net income for fiscal year 2004 from fiscal year 2003 was primarily due to increased income from operations, an estimated $1.4 million favorable impact of currency translation, and a $1.0 million loss from discontinued operations in fiscal year 2003. These increases were partially offset by a higher effective income tax rate, primarily resulting from higher earnings and an unfavorable geographic mix of income in higher income tax jurisdictions for fiscal year 2004. The increase in net income for fiscal year 2003 compared to fiscal year 2002 was primarily the result of a $13.7 million cumulative effect of accounting changes, net of tax, and a $4.3 million loss from discontinued operations in fiscal year 2002.

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.

Orders and Backlog

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Orders during fiscal year 2004 totaled $409.5 million, an increase of $85.3 million, or 26.3%, compared to orders of $324.2 million for fiscal year 2003. In fiscal year 2002, orders totaled $351.6 million. The increase in orders from fiscal year 2003 is partially the result of two multi-year international contracts totaling in excess of $48 million, booked in the first quarter of fiscal year 2004. Excluding these two contracts, orders for fiscal year 2004 increased 11.5%, driven by increased volume in both the Test and Industrial segments across all geographies and an estimated $17.4 million of favorable currency translation. Excluding the impact of currency translation, fiscal year 2004 orders would have been an estimated $392.1 million. The decrease in fiscal year 2003 orders from fiscal year 2002 was primarily the result of Test segment market weakness in North America and Asia, partially offset by increased volume in Europe and an estimated $12.2 million impact of favorable currency translation. Excluding the impact of currency translation, fiscal year 2003 orders would have been an estimated $312.0 million.

Orders for the Test segment totaled $352.0 million for fiscal year 2004, an increase of $77.4 million, or 28.2%, compared to orders of $274.6 million for fiscal year 2003. Test segment orders for fiscal year 2002 totaled $308.2 million. The Test segment booked 86.0% of total Company orders for fiscal year 2004, compared to 84.7% for fiscal year 2003 and 87.7% for fiscal year 2002. The increase in fiscal year 2004 orders from fiscal year 2003 is principally due to the two large international orders totaling in excess of $48 million. Excluding these bookings, orders for fiscal year 2004 increased 10.7%, driven by increased volume across all geographies and an estimated $14.1 million impact of favorable currency translation. Excluding the impact of currency translation, fiscal year 2004 orders would have been an estimated $337.9 million. The decrease in fiscal year 2003 orders from fiscal year 2002 was primarily the result of reduced demand in the global aerospace and infrastructure markets due to customer restrictions on new capital spending, partially offset by an estimated $8.9 million impact of favorable currency translation. Excluding the impact of currency translation, fiscal year 2003 orders would have been an estimated $265.7 million.

Orders for the Industrial segment totaled $57.5 million for fiscal year 2004, an increase of $7.9 million, or 15.9%, compared to orders during fiscal year 2003 of $49.6 million. Orders for the Industrial segment in fiscal year 2002 totaled $43.4 million. The increase in fiscal year 2004 orders from fiscal year 2003 reflects increased Sensors business volume across all geographies and an estimated $3.3 million impact of favorable currency translation. Excluding the impact of currency translation, fiscal year 2004 orders would have been an estimated $54.2 million. The increase in fiscal year 2003 orders from fiscal year 2002 primarily resulted from volume increases in Europe and an estimated $3.3 million impact of favorable currency translation. Excluding the impact of currency translation, fiscal year 2003 orders would have been an estimated $46.3 million. This segment accounted for 14.0% of total Company orders during fiscal year 2004, compared to 15.3% and 12.3% in fiscal years 2003 and 2002, respectively.

Orders from customers located in North America totaled $150.2 million during fiscal year 2004, an increase of $3.5 million, or 2.4%, compared to orders of $146.7 million for fiscal year 2003. Orders received in North America during fiscal year 2002 totaled $175.2 million. International orders received during fiscal year 2004 of $259.3 million increased by $81.8 million, or 46.1%, compared to orders received during fiscal year 2003 of $177.5 million. International orders in fiscal year 2002 totaled $176.4 million.

Backlog of undelivered orders at October 2, 2004 totaled $198.6 million, an increase of approximately $39.3 million, or 24.7%, compared to backlog of $159.3 million at September 27, 2003. Backlog at the end of fiscal year 2002 totaled $170.0 million. The increase in backlog from fiscal year 2003 is attributable to increased order volume, partially offset by the cancellation in January 2004 of a $10.4 million order that was included in backlog at September 27, 2003. However, the Company believes backlog is not an absolute indicator of its future revenue because a substantial portion of the orders constituting this backlog could be cancelled at the customers’ discretion. 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 $168 million of the backlog at October 2, 2004 will be converted to revenue during fiscal year 2005.

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Revenue

Revenue of $367.0 million for fiscal year 2004 increased $26.9 million, or 7.9%, compared to $340.1 million for fiscal year 2003. Revenue for fiscal year 2002 totaled $327.2 million. The increase in revenue in fiscal year 2004 was primarily due to higher orders, an increase in aftermarket product volume, and an estimated $17.1 million favorable impact of currency translation, partially offset by lower beginning backlog. Excluding the impact of currency translation, revenue for fiscal year 2004 would have been an estimated $349.9 million. The increase in fiscal year 2003 revenue from fiscal year 2002 was primarily driven by increased volume in the Industrial segment, higher beginning backlog in fiscal year 2003, and an estimated $17.6 million favorable impact of currency translation, partially offset by lower order volume in the Test segment and the timing of large custom projects. Excluding the impact of currency translation, revenue for fiscal year 2003 would have been an estimated $322.5 million.

Revenue for the Test segment in fiscal year 2004 totaled $310.4 million, compared to revenue of $292.0 million and $287.0 million for fiscal years 2003 and 2002, respectively. The increase in revenue for fiscal year 2004 was principally due to higher orders, increased aftermarket product volume, and an estimated $13.7 million favorable impact from currency translation, partially offset by lower beginning backlog. Excluding the impact of currency translation, revenue for fiscal year 2004 would have been an estimated $296.7 million. The increase in revenue for fiscal year 2003 from fiscal year 2002 was principally driven by higher beginning backlog and an estimated $14.2 million favorable impact of currency translation, partially offset by timing of large custom projects and the decline in capital spending in worldwide industrial and ground vehicles markets. Excluding the impact of currency translation, revenue for fiscal year 2003 would have been an estimated $277.8 million.

Revenue in the Industrial segment totaled $56.6 million for fiscal year 2004, compared to $48.1 million for fiscal year 2003 and $40.2 million for fiscal year 2002. Revenue increased in fiscal year 2004 compared to fiscal year 2003, largely due to increased order volume in the Sensors business across all geographies as well as an estimated $3.4 million favorable impact of currency translation. Excluding the impact of currency translation, revenue for fiscal year 2004 would have been an estimated $53.2 million. The increase in fiscal year 2003 revenue from fiscal year 2002 was principally driven by sales into new markets, customer inventory replenishment in the European Sensors business, $1.9 million increased development revenue in the AeroMet business and an estimated $3.4 million favorable impact of currency translation. Excluding the impact of currency translation, revenue for fiscal year 2003 would have been an estimated $44.7 million.

Revenue of $155.1 million in North America for fiscal year 2004 was relatively flat compared with revenue of $157.3 million and $157.9 million for fiscal years 2003 and 2002, respectively. Revenue in Europe of $112.9 million for fiscal year 2004 decreased $6.5 million, or 5.4%, compared to $119.4 million for fiscal year 2003. Revenue in Europe for fiscal year 2002 totaled $92.3 million. Revenue of $95.6 million in Asia for fiscal year 2004 increased $35.1 million, or 58.0%, compared to $60.5 million for fiscal year 2003. Revenue in Asia for fiscal year 2002 totaled $76.6 million. Other international revenue totaled $3.4 million, $2.9 million, and $0.4 million, respectively, for fiscal years 2004, 2003, and 2002.

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

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Gross profit as a percentage of revenue increased to 40.4% for fiscal year 2004 from 37.2% and 38.2% for fiscal years 2003 and 2002, respectively. The increase in gross profit rate for fiscal year 2004 was primarily driven by favorable product mix in both the Test and Industrial segments, partially offset by an unfavorable impact of currency translation of an estimated 0.5 percentage points, or $5.1 million. Excluding the impact of currency translation, gross profit as a percentage of revenue for fiscal year 2004 would have been an estimated 40.9%. The decrease in gross profit as a percentage of revenue for fiscal year 2003 from fiscal year 2002 was primarily driven by unfavorable product mix in both the Test and Industrial segments and an unfavorable impact of foreign currency translation of an estimated 0.5 percentage points, or $4.8 million, partially offset by increased sales volume in the Industrial segment. Excluding the impact of currency translation, gross profit as a percentage of revenue for fiscal year 2003 would have been an estimated 37.7%.

Gross profit as a percentage of revenue for the Test segment was 38.8% for fiscal year 2004, an increase from 35.4% and 36.9% for fiscal years 2003 and 2002, respectively. The increase in gross profit rate in fiscal year 2004 was primarily due to product mix, partially offset by an unfavorable impact of currency translation of an estimated 0.6 percentage points. Excluding the impact of currency translation, gross profit as a percentage of revenue for fiscal year 2004 would have been an estimated 39.4%. The decrease in gross profit rate for the Test segment in fiscal year 2003 from fiscal year 2002 was primarily due to product mix and an unfavorable impact of currency translation of an estimated 0.5 percentage points. Excluding the impact of currency translation, gross profit as a percentage of revenue for the Test segment for fiscal year 2003 would have been an estimated 35.9%.

Gross profit as a percentage of revenue for the Industrial segment was 49.4% for fiscal year 2004, up from 48.0% and 47.7% for fiscal years 2003 and 2002, respectively. The gross profit rate increased in fiscal year 2004 primarily due to favorable product mix. The increase in fiscal year 2003 gross profit from fiscal year 2002 was primarily due to increased sales volume, partially offset by unfavorable product mix. There was no significant impact on gross profit from currency translation in fiscal years 2004 and 2003.

Selling, General, and Administrative Expense

Selling, general and administrative (“SG&A”) expense as a percentage of revenue increased 1.4 percentage points in fiscal year 2004 compared to fiscal year 2003, primarily due to increased investment in marketing initiatives and an estimated $2.4 million unfavorable impact of currency translation. Excluding the impact of currency translation, selling expense for fiscal year 2004 would have been an estimated $59.2 million. Selling expense increased in fiscal year 2003 compared to fiscal year 2002 primarily due to an estimated $2.3 million unfavorable impact of currency translation, partially offset by the benefit of headcount reductions made in late fiscal year 2002. Excluding the impact of currency translation, selling expense for fiscal year 2003 would have been an estimated $49.9 million.

General and administrative expense increased during fiscal year 2004 primarily due to $2.0 million of increased consulting, legal and other professional fees, as well as an estimated $0.4 million unfavorable impact of currency translation. Excluding the impact of currency translation, general and administrative expense for fiscal year 2004 would have been an estimated $28.0 million. General and administrative expense decreased in fiscal year 2003 compared to fiscal year 2002, primarily due to $0.8 million of non-recurring audit and related fees in fiscal 2002 associated with the Company’s fiscal year 2002 and prior year restatement activity and the recovery of $0.5 million in bad debt previously written off in fiscal year 2003, partially offset by an estimated $0.5 million unfavorable impact of currency translation. Excluding the impact of currency translation, general and administrative expense for fiscal year 2003 would have been an estimated $25.9 million.

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SG&A expense in the Test segment increased to $72.0 million in fiscal year 2004 from $62.7 million and $64.9 million in fiscal years 2003 and 2002, respectively. The increase in fiscal year 2004 was primarily due to increased investment in marketing initiatives, consulting expense, sales force expansion, and other professional fees. In addition, fiscal year 2004 SG&A expense included an estimated $1.9 million unfavorable impact of currency translation. Excluding the impact of currency translation, SG&A expense for fiscal year 2004 would have been an estimated $70.1 million. SG&A expense decreased in fiscal year 2003 compared to fiscal year 2002, primarily due to $0.8 million non-recurring audit and related fees in fiscal year 2002 and a bad debt recovery of $0.5 million in fiscal year 2003, partially offset by an estimated $1.9 million unfavorable impact of currency translation. Excluding the impact of currency translation, SG&A expense for fiscal year 2003 would have been an estimated $60.8 million.

SG&A expense in the Industrial segment in fiscal year 2004 increased to $18.0 million from $15.9 million for fiscal year 2003 and $14.1 million for fiscal year 2002. The increase in fiscal year 2004 from fiscal year 2003 was primarily due to an increase in selling expense, consistent with the increase in revenue in the Sensors business. Selling expense as a percentage of revenue was 18.1% for fiscal year 2004, relatively flat with 18.3% for fiscal year 2003. Fiscal year 2003 selling expense decreased from 19.7% in fiscal year 2002 due to the benefit of headcount reductions in fiscal year 2002. In addition, fiscal year 2004 SG&A expense included an estimated $0.9 million unfavorable impact of currency translation. Excluding the impact of currency translation, SG&A expense for fiscal year 2004 would have been an estimated $17.1 million.

Research and Development Expense

Research and development (“R&D”) expense includes expenses for both equipment and software development in the Test and Industrial segments. During fiscal year 2004, approximately 78.4% of R&D spending was in the Test Segment, compared to 78.8% and 80.8%, respectively, in fiscal years 2003 and 2002.

The decrease in R&D spending as a percentage of revenue in fiscal year 2004 is primarily due to management initiatives to focus spending on enhancements of the Company’s marketing capabilities as well as on R&D developments with the greatest market potential and the highest return opportunity. As a result of these initiatives, R&D spending as a percentage of revenue decreased to 3.6% in fiscal year 2004 compared to 4.3% and 4.5%, respectively, in fiscal years 2003 and 2002.

Interest Income (Expense)

Interest expense of $2.8 million for fiscal year 2004 decreased compared to interest expense of $3.6 million and $4.2 million for fiscal years 2003 and 2002, respectively, primarily due to reduced long-term debt obligations throughout the three-year period. Interest income of $1.9 million for fiscal year 2004 decreased compared to interest income of $2.2 million for fiscal year 2003 and increased compared to $1.2 million for fiscal year 2002. The decrease in fiscal year 2004 interest income from fiscal year 2003 reflects a shift to short-term, tax-exempt investments with lower tax-exempt interest rates, partially offset by a higher average balance in fiscal year 2004 compared to fiscal year 2003. The increase in fiscal year 2003 interest income from fiscal year 2002 resulted from an increase in the average balance of short-term investments in fiscal year 2003 compared to fiscal year 2002.

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

Other Income, net
Other income, net for fiscal years 2004, 2003, and 2002 was $1.6 million, $0.6 million, and $1.6 million, respectively. Other income for fiscal year 2004 primarily consisted of foreign currency exchange gains on the settlement of transactions. Other income for fiscal year 2003 was primarily derived from non-recurring proceeds of $1.3 million from penalties associated with a canceled customer contract, partially offset by the negative impact of foreign currency exchange losses on the settlement of transactions. Other income for fiscal year 2002 was primarily derived from the positive impact of foreign currency exchange gains on the settlement of transactions.

Operating Results

Income before income taxes, discontinued operations, and cumulative effect of accounting changes totaled $45.8 million for fiscal 2004, compared with $32.3 million for fiscal year 2003, primarily driven by increased volume and favorable product mix and an estimated $2.3 million favorable impact of currency translation. Excluding the impact of currency translation, income before income taxes, discontinued operations, and cumulative effect of accounting changes for fiscal year 2004 would have been an estimated $43.5 million. Income before income taxes, discontinued operations and cumulative effect of accounting changes for fiscal year 2003 of $32.3 million was relatively flat compared to $32.5 million for fiscal year 2002. The increase in revenue and income from operations in fiscal year 2003 was more than offset by the one-time gain of $2.6 million on sale of an investment recorded in fiscal year 2002.

Income from operations for the Test segment was $38.1 million for fiscal year 2004, an increase of $9.0 million compared to $29.1 million for fiscal year 2003, primarily due to stronger revenue and a higher margin rate, partially offset by increased SG&A expense in fiscal year 2004 of $9.3 million. Income from operations for fiscal year 2003 was flat compared to $29.0 million for fiscal year 2002, primarily due to lower gross margin rates in fiscal year 2003, offset by reduced general and administrative expense in fiscal year 2003 of $2.4 million. Income from operations for the Industrial segment increased to $7.1 million for fiscal year 2004 from $4.0 million for fiscal year 2003, primarily due to increased revenue and a higher margin rate. Income from operations for the Industrial segment totaled $2.2 million for fiscal year 2002.

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. A greater percentage of the Company’s income was earned in higher tax jurisdictions in fiscal year 2004 compared to fiscal years 2003 and 2002.

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Fiscal year 2004 income before discontinued operations and the cumulative effect of accounting changes, net of tax, increased to $29.0 million, or $1.35 per diluted share, from $21.3 million, or $1.00 per diluted share, and $22.3 million, or $1.04 per diluted share, for fiscal years 2003 and 2002, respectively.

Discontinued Operations
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 gradient amplifier product line. On April 11, 2003, the Company sold all the remaining net assets of the North American Automation division, based in New Ulm, Minnesota and on April 30, 2003 sold, to the same buyer, its stock in the Automation division’s German operations, which completed the sale of the Company’s entire Automation division and its exit from the motor and amplifier business. In March 2003 the Company discontinued the custom military business of its Automation division. As a result of these sales, the Company recorded a loss of $1.2 million, net of tax.

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

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

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

Cash Flow
The increase in total cash for fiscal year 2004 of $55.1 million compared to $11.7 million increase in fiscal year 2003 was primarily due to conversion of short-term investments to cash and cash equivalents, reduction in long-term debt payments, proceeds received from the exercise of stock options, and improved earnings, partially offset by the fiscal year 2004 increase in share repurchases and dividend payments and significant prior year decrease in accounts receivable and inventory as compared to fiscal year 2004. Fiscal year 2002 cash increased $45.1 million, primarily due to significant improvements in working capital, partially offset by purchases of short-term investments and long-term debt payments.

Cash flow from operating activities provided cash of $45.9 million during fiscal year 2004, compared to $55.3 million and $84.3 million generated in fiscal years 2003 and 2002, respectively. Operating cash flow in fiscal year 2004 primarily resulted from strong earnings during the year and improvements in working capital of $1.7 million. Fiscal year 2003 operating cash flow of $55.3 million was primarily due to strong earnings and significant improvements in working capital of $21.7 million. Fiscal year 2002 operating cash flow was principally derived from $57.6 million in working capital improvements. The decrease in cash provided by operating activities during fiscal year 2004 was primarily due to significant improvements in accounts receivable and inventory in fiscal year 2003, totaling $41.5 million, which more than offset increased advance payments from customers of $7.7 million, accrued payments to vendors of $7.6 million and improved earnings of $8.7 million in fiscal year 2004. The decrease in cash provided by operating activities during fiscal year 2003 compared to fiscal year 2002 was principally due to significant improvements in accounts receivable and inventory made during fiscal year 2002, totaling

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$25.7 million. During fiscal year 2002, the Company commenced a number of initiatives to reduce working capital. While these efforts continue, the rate of improvement in fiscal year 2004 has slowed relative to the significant improvements made in fiscal years 2003 and 2002.

Cash flow from investing activities provided cash of $54.6 million during fiscal year 2004, compared to cash usage of $17.4 million in fiscal year 2003 and $35.3 million in fiscal year 2002. During fiscal year 2004, the Company received net proceeds of $58.6 million and $2.0 million from the conversion of short-term investments to cash and cash equivalents and sale of property and equipment, respectively, and invested $5.9 million in property and equipment. During fiscal year 2003, the Company invested $23.5 million in short-term investments, net of sale proceeds, and $6.6 million in property and equipment, partially offset by $12.6 million received from the sale of discontinued businesses. During fiscal year 2002, the Company invested $35.1 million in short-term investments and $5.1 million in property and equipment and realized proceeds of $4.9 million from the sale of its investment in Mechanical Dynamics, Inc. stock.

Cash flow from financing activities represented a usage of cash of $47.7 million, primarily the result of repurchases 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 $10.0 million received from employees’ exercise of stock options and purchases under the Company’s employee stock purchase plan. During fiscal year 2003, the Company used $29.9 million of cash for financing activities, primarily for repurchases of the Company’s common stock of $16.5 million, repayment of interest-bearing debt of $15.4 million, and payment of cash dividends of $5.1 million, partially offset by $7.0 million received in connection with employees’ exercise of stock options and purchases under the Company’s employee stock purchase plan. During fiscal year 2002, the Company used $11.5 million of cash for financing activities, primarily for the net repayment of interest-bearing debt of $7.0 million, payment of cash dividends of $5.1 million, and repurchases of its common stock of $1.5 million, partially offset by funds received in connection with employees’ exercise of stock options and purchases under the Company’s stock purchase plan.

Liquidity and Capital Resources
At October 2, 2004, the Company’s capital structure was comprised of $1.5 million in short-term debt, $29.2 million in long-term debt and $171.8 million in shareholders’ investment. Total interest-bearing debt was $30.7 million, down from $37.7 million at September 27, 2003 due to scheduled amortization and early payment of long-term debt, partially offset by increased short-term debt offshore. Shareholders’ investment decreased by $4.3 million during fiscal year 2004, primarily the result of $44.3 million in repurchases of the Company’s common stock and $5.3 million in payment of cash dividends. This decrease was partially offset by profitable operating results, employee purchases of the Company’s stock under its stock purchase plans of $9.3 million, funds and related tax benefits received from the exercise of employee stock options of $11.9 million, and foreign currency translation gains of $3.5 million.

The Company had cash and cash equivalents of $129 million at October 2, 2004. Of this amount, approximately $69 million was located in North America, $43 million in Europe, and $17 million in Asia. The North American balance was primarily invested in U.S. state and local municipal securities with original maturities less than 90 days 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 balance was primarily invested in bank deposits.

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

At October 2, 2004, the Company’s contractual obligations were as follows:

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The Company had no amounts outstanding on its primary $25 million revolving bank credit facility during fiscal year 2004. The Company’s primary foreign subsidiaries also have committed and uncommitted bank facilities available on either a freestanding basis or with guarantees from the Company. At October 2, 2004, the Company was in compliance with the financial terms and conditions of each of its debt and credit facility agreements. The Company’s operating leases are primarily for office space related to sales and service offices.

Letters of credit and guarantees are primarily issued to secure advance payments received and performance on project contracts. At October 2, 2004, the Company had letters of credit outstanding totaling $46.1 million and guarantees totaling $9.1 million.

Changes in Foreign Currency Exchange Rates
The Company exports product outside the United States and often invoices customers in foreign currencies. The Company’s international subsidiaries 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. To mitigate this risk, the Company manages these non-functional currency exposures. The Company also enters into contracts with banks to exchange currencies at exchange rates set on future dates to offset gains or losses on specifically identified exposures.

Historically, approximately 50-60% of the Company’s revenue results 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.

The gains and losses on foreign currency transactions are included in Other Income, net in the accompanying Consolidated Statements of Income. Mark-to-market gains and losses on transactions designated as exposures 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 on the Consolidated Balance Sheet.

Restructuring and Other Charges
In fiscal year 2004 the Company had no significant restructuring activities related to business consolidation. In fiscal year 2003, the Company had no significant restructuring activities related to business consolidation other than the discontinuation of its Automation division operations (see Note 2 to the Consolidated Financial Statements).

During fiscal year 2002, the Company consolidated its Electromechanical Testing division into its Minneapolis, Minnesota operations from Raleigh, North Carolina. The physical move of the business and the facility closure were completed during fiscal year 2002. As a result of this consolidation, the

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Company recorded a $0.4 million charge for severance-related costs and a $0.6 million charge to write down inventory. Substantially all of the severance costs were paid during fiscal year 2002. For the fiscal years ended September 27, 2003 and September 28, 2002, the reserve for restructuring was as follows:

Recent Accounting Pronouncements
In December 2003 the FASB issued revisions to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” These revisions require changes to existing disclosures as well as new disclosures related to pension and other postretirement benefit plans. The annual disclosure requirements for the Company’s foreign retirement plans have been incorporated in Note 8 to the Consolidated Financial Statements.

Emerging Issues Task Force (“EITF”) Issue No. 03-01, “Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” provides detailed criteria to evaluate whether to record a loss and addresses both qualitative and quantitative disclosures required for marketable equity and debt securities accounted for under FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” This impairment accounting guidance is effective for reporting periods beginning after June 15, 2004; the disclosure requirements are effective for fiscal years ending after December 15, 2003. EITF Issue No. 03-01 did not have an impact on the Company’s disclosures.

Quarterly Financial Information
Revenue and operating results reported on a quarterly basis do not necessarily reflect changes in demand for the Company’s products or its operating efficiency. Revenue and operating results in any quarter may be significantly affected by customer shipments and/or 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.

Selected quarterly financial information for the fiscal years ended October 2, 2004 and September 27, 2003 is as follows:

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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 2004 Annual Report to Shareholders, in the proxy statement for the annual meeting to be held in January 2005, 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 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:

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

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risks from changes in foreign exchange and interest rates. Additional information relative to these risks is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 22 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 Income, net in the Consolidated Statements of Income included in Item 8 of this Form 10-K. Currency gains and losses on specifically identified and hedged transactions, as well as changes in the translated value of long-term assets and liabilities denominated in foreign currency, are recorded within Accumulated Other Comprehensive Income on the Consolidated Balance Sheet.

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:

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A weakening of the U.S. dollar relative to foreign currencies increases the value of foreign currency-denominated revenue and earnings translated into U.S. dollars. Conversely, strengthening of the U.S. dollar decreases the value of foreign currency-denominated revenue and earnings. During fiscal year 2004, the U.S. dollar was generally weaker against other major currencies, declining by approximately 15% against the Euro and 9% against the Japanese Yen. 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 2004 revenue and asset balances of approximately $14.4 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 2003 revenue and asset balances of approximately $14.4 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, 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 monetary assets and liabilities such as cash, short-term investments, and debt, as well as 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 2, 2004, the Company had cash equivalent financial investments of $129 million for which yield rates are reset every 1 to 49 days. A hypothetical increase or decrease of 100 basis points, or 1%, in market interest rates could increase or decrease interest income by $1.29 million per annum. The Company had an insignificant amount of short-term debt outstanding at the end of fiscal year 2004 and therefore would not be materially impacted by increases or decreases in market interest rates on interest expense.

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

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Item 8.   Financial Statements and Supplementary Data

The Company’s audited financial statements and notes thereto described in Item 15(a) of this report on Form 10-K and appearing on pages F-1 through F-22 of this report are incorporated by reference herein. See also “Quarterly Financial Data” appearing in Management’s Discussion and Analysis under Item 7 of this 10-K, which is incorporated herein by reference.

Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial 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 2, 2004. 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 2, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 Ethics is 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 25, 2005. 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 25, 2005.

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 25, 2005.

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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 25, 2005.

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 “Approval of Auditors” in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on January 25, 2005.

PART IV

Item 15.   Exhibits and Financial Statement Schedules

        The following documents are filed as part of this report:

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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.

Date: December 10, 2004

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:

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MTS Systems Corporation and Subsidiaries

Index to Financial Statements

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 2, 2004 and September 27, 2003 and the related consolidated statements of income, shareholders’ investment and cash flows for each of the fiscal years in the three-year period ended October 2, 2004. 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 2, 2004 and September 27, 2003 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended October 2, 2004, 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.

/S/   KPMG LLP

Minneapolis, Minnesota
November 17, 2004

F-2

Consolidated Balance Sheets
(October 2 and September 27, respectively)