Table of Contents





UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549



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FORM 10-K

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(Mark One)


| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| | x | ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
| |   |                                                                                           
| |   | For the fiscal year ended September 29, 2007                                              
| |   |                                                                                           
| |   | 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

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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)
937-4000Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.25 par value per shareSecurities registered pursuant to Section 12(g) of the Act:
None

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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. o

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer (see definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act) Check One:

|                          |                       |                          
|------------------------- | --------------------- | -------------------------
|Large accelerated filer x | Accelerated
  filer o | Non-accelerated
  filer 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:
$687,801,170.

As of  November 20, 2007, the
Registrant had outstanding 17,685,450 shares of Common Stock.

DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the Registrants
Annual Meeting of Shareowners to be held January 15, 2008 are incorporated by
reference into Part III of this Form 10-K, to the extent described in such
Part.





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MTS Systems Corporation
Annual Report on Form 10-K

Table of Contents

|         |  |                                                                                                                |   
|-------- |  | -------------------------------------------------------------------------------------------------------------- | --
|PART
  I
|         |  |                                                                                                                |   
|         |  | Forward Looking Statements                                                                                     | 1 
|Item 1.  |  | Business                                                                                                       | 2 
|         |  | Products and Markets by Business
Segment                                                                       | 2 
|         |  | Sales and Service                                                                                              | 3 
|         |  | Manufacturing and Engineering                                                                                  | 4 
|         |  | Sources and Availability of Raw Materials and
  Components                                                     | 4 
|         |  | Patents and Trademarks                                                                                         | 4 
|         |  | Seasonality                                                                                                    | 4 
|         |  | Working Capital                                                                                                | 4 
|         |  | Customers                                                                                                      | 5 
|         |  | Order Backlog                                                                                                  | 5 
|         |  | Government Contracts                                                                                           | 5 
|         |  | Competition                                                                                                    | 5 
|         |  | Research and Development                                                                                       | 5 
|         |  | Environmental Matters                                                                                          | 5 
|         |  | Executive Officers                                                                                             | 6 
|         |  | Employees                                                                                                      | 6 
|         |  | Available Information                                                                                          | 6 
|Item 1A. |  | Risk Factors                                                                                                   | 7 
|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                                                                                        | 13
|Item 7.  |  | Managements Discussion and Analysis of
Financial
  Condition and Results of Operations                        | 14
|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                                                                 | 30
|Item 14. |  | Principal Accountant Fees and
Services                                                                         | 30
|         |  |                                                                                                                |   
|PART IV 
|         |  |                                                                                                                |   
|Item 15. |  | Exhibits and Financial Statement
Schedules                                                                     | 30

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Table of Contents

DOCUMENTS INCORPORATE BY REFERENCE

Portions of the Registrants definitive Proxy
Statement dated December 7, 2007, for the Annual Meeting of Shareowners to be
held on January 15, 2008, are incorporated by reference into Part III of this
Annual Report on Form 10-K, to the extent described in such Part.

FORWARD
LOOKING STATEMENTS

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

Forward-looking statements involve risks and
uncertainties that may cause actual results to differ materially from those in
such statements. Factors that could cause actual results to differ from those
discussed in the forward-looking statements include, but are not limited to,
those described in Item 1A, Risk Factors, below. The performance of our
business and our securities may be adversely affected by these factors and by
other factors common to other businesses and investments, or to the general
economy. Forward-looking statements are qualified by some or all of these risk
factors. Therefore, you should consider these risk factors with caution and
form your own critical and independent conclusions about the likely effect of
these risk factors on our future performance. Such forward-looking statements
speak only as of the date on which statements are made, and we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made to reflect the
occurrence of unanticipated events or circumstances. Readers should carefully
review the disclosures and the risk factors described in this and other
documents we file from time to time with the SEC, including our reports on
Forms 10-Q and 8-K to be filed by the Company in fiscal 2008.

1

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Table of Contents

# PART I

|        |         
|------- | --------
|Item 1. | Business

MTS Systems
Corporation (the Company or MTS) is a leading global supplier of mechanical
testing systems and high-performance industrial position sensors. The Companys
operations are organized and managed in two business segments, the Test segment
and the Sensors segment, based upon global similarities in markets, products,
operations and distribution. The Test and Sensors segments represent
approximately 80% and 20% of Company revenue, respectively. The Company was
incorporated under Minnesota law in 1967.

Products and Markets by Business Segment

Test Segment: Test segment products are used
by customers in their development of new products and in certain quality
control applications to characterize the products mechanical properties. Our
products simulate forces and motions that these customers expect their products
to encounter in use. Mechanical testing in a laboratory setting is an accepted
method to accelerate product development compared to limited prototype release,
proving ground testing and virtual testing as it provides more controlled
simulation and accurate measurement. The desirability of mechanical simulation
increases in proportion to the cost of a product, the range and complexity of
the physical environment in which the product will be used, expected warranty
or recall risk and expense, governmental regulation and potential legal
liability. As a significant portion of all of the products in the Test segment are considered
to be capital expenditures by customers, the Company believes the timing of
purchases may occasionally be delayed due to cyclical customer capital spending
constraints or product development cycles.

A typical test
system includes a load frame to hold the prototype specimen, a hydraulic pump
or electromechanical power source, piston actuators to create the force or
motion, and a computer controller with specialized software to coordinate the
actuator movement and record and manipulate results. Lower force and less
dynamic testing can usually be accomplished with electro-mechanical power
sources, which are generally less expensive than hydraulic systems. Higher
force and more dynamic testing typically require hydraulically powered systems,
which are usually more expensive. In addition to these basic components, the
Test segment sells a variety of accessories and spare parts, as well as
services, including installation, calibration, maintenance, training and
consulting.

The Test
segment has a diverse set of customers by industry and global geography. North
America, Europe and Asia each accounted for approximately one-third of revenue,
as measured by customer location.

Products and customers are
generally grouped by the Company into the following three global markets:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ground Vehicles: This market consists of
 automobile, truck, motorcycle, construction equipment, agricultural
 equipment, and off-road vehicle manufacturers and their suppliers. Test
 segment system and service products are utilized in customer testing for
 product durability, performance and aerodynamics, as well as the interaction of the vehicle
 with electronic control systems and the operator. Example systems include
 road and track simulators, tire performance and transmission test systems. This
 is the largest Test segment market, representing approximately 50% of segment
 orders.                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Infrastructure: This market is the most
 diverse of the Test segment markets, with customer testing uses ranging from
 the physical characterization of basic materials, such as ceramics,
 composites and steel, to high-force and high frequency applications for
 seismic event or blast simulation and drill bit testing for the petroleum
 industry. The Companys nano-mechanical test products address the needs of highly
 precise applications within the semiconductor, thin films and coatings
 industries. Bio-mechanical applications include systems to test wear and
 performance of implants, prostheses, and other medical and dental materials
 and devices. This global market represents approximately 35% of Test segment
 orders.

2

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| |   |                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Aerospace: This market consists of
 manufacturers of commercial, military, and private aircraft and their
 suppliers. These customers use the Companys products, systems, and software
 for full-scale structural tests on aircraft and space vehicles as well as to
 test sub-systems, components and materials. This market represents
 approximately 15% of worldwide Test segment orders.

Sensors Segment: Sensors segment products are
used by machine manufacturers to automate the operation of their products for
improved end-user productivity and safety. Example customer industries include
manufacturers of plastic molding machines, wood product processing equipment,
mobile equipment, and steel mills. Sensors segment products are also used to
measure fluid displacement, such as liquid levels for customers in the process
industries.

The Sensors
segment manufactures products exclusively utilizing magnetostriction
technology. MTS has developed a unique implementation of the technology, known
as Temposonics ®. This technology offers high speed and precise non-contact
position sensing. It is ideal for use in harsh operating environments.

Sensors
segment customers are also diverse by industry and geography. Regionally, North
America, Europe and Asia represent approximately 30%, 50% and 20% of revenue,
respectively, based upon customer location.

Financial
information about our segments is included in Item 7 of this Annual Report on
Form 10-K and Note 4 of the Notes to Consolidated Financial Statements under
Item 8 of this Annual Report on Form 10-K.

Sales and Service

Test segment: Test segment products are sold
worldwide through a direct field sales and service force, an internal sales force, independent
representatives in less developed markets, and to a much lesser extent, the
internet and catalogs for standard products and accessories. Direct field sales
and service personnel are compensated through salary and order incentive
programs. Independent representatives are compensated through commissions based
upon orders.

In addition to
field sales and service personnel throughout the United States, the Test
segment has sales and service subsidiaries in Toronto, Canada; Berlin, Germany;
Paris, France; Gloucester, United Kingdom; Turin, Italy; Gothenburg, Sweden;
Tokyo and Nagoya, Japan; Seoul, Korea; Shanghai, Beijing and Hong Kong, China.

In fiscal
2007, product orders in the Test segment ranged in value from a few hundred
dollars to almost $15 million on an equivalent United States dollar basis. The
average order size was over $100,000. The Test segment also markets services to
customers on a per-call and contract basis, accounting for virtually all of the
Companys Service Revenue in the Consolidated Statements of Income. Service
orders in fiscal 2007 ranged from $100 to over $1 million on a United States
dollar-equivalent basis.

The timing and
volume of large orders valued at $5 million or greater on a United States
dollar-equivalent basis may produce volatility in orders, backlog, and quarterly
operating results. Most customer orders are based on fixed-price quotations and
typically have an average sales cycle of three to nine months due to the
technical nature of the test systems and customer capital expenditure
processes. The sales cycle for larger, more complex test systems may be up to
three years.

Sensors segment: Sensors segment products are
sold worldwide through a direct sales force as well as through independent
distributors. The direct sales force is compensated though salary and
commissions based upon revenue. The independent distributors pay the Company a
wholesale price and re-sell the product to their customers. Sensors segment
products are sold at unit prices between $25 and $3,500, with an average sales
price of over $400 on a United States dollar-equivalent basis. While the
average sales cycle for the Sensors segment is approximately 1-4 weeks for
existing customers purchasing standard products, the typical sales cycle for a
new account can range from three months to two years.

3

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Table of Contents

Manufacturing and Engineering

Test Segment: Test systems are largely built
to order and primarily engineered and assembled at the Companys headquarters
in Eden Prairie, Minnesota. Nano-mechanical test systems are assembled in Oak
Ridge, Tennessee. Some smaller system assembly is performed at Company
locations in Swartz Creek, Michigan; Seoul, South Korea; and Berlin, Germany.
Installation of systems, training, service and consulting services are
primarily delivered by the Test segment at the customer site. The production
cycle for a typical Test segment system ranges from 1 to 12 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.

Sensors Segment: Sensors are primarily built
to order and engineered and assembled regionally at facilities located in Cary,
North Carolina; Ludenscheid, Germany; and Tokyo, Japan. Production cycles
generally vary from several days to several months, depending on the degree of
product customization, the size of the order and manufacturing capacity.

Sources and Availability of Raw Materials and
Components

A significant
portion of test systems and sensors that are manufactured may consist of
materials and component parts purchased from independent vendors. The Company
is dependent, in certain situations, on a limited number of vendors to provide
raw material, mechanical and electronic components, and software. However, the
Company has not experienced significant issues in procuring any essential
materials, parts, or components needed in its engineering or production
processes for extended periods.

As the Test
segment generally sells test systems based on fixed-price contracts,
fluctuations in the cost of materials and components between the date of the
order and the delivery date may impact the expected profitability of any
project. The material and component cost variability is considered in the
estimation and customer negotiation process. The Company believes that
fluctuations in the cost of raw materials and components have not had a
significant impact on operating results.

Patents and Trademarks

MTS
specializes in the control and measurement of forces and motion. Technologies
include application software for test parameter control and results analysis,
precise hydraulic and electric actuation in the Test segment, and
magnetostriction technology in the Sensors segment.

The Company
relies on a combination of patents, copyrights, trademarks and proprietary trade
secrets to protect its proprietary technology, some of which are considered
material to the Test and Sensors segments. The Company has obtained numerous
patents and trademarks worldwide, and actively files and renews patents and
trademarks on a global basis to establish and protect its proprietary
technology. The Company has also entered into exclusive and non-exclusive
license and confidentiality agreements relating to its own and third-party
technologies. The Company aggressively protects its processes, products, and
strategies as proprietary trade secrets. The Companys efforts to protect
intellectual property and avoid disputes over proprietary rights include
ongoing review of third-party patents and patent applications.

Seasonality

There is no significant
seasonality to Test or Sensor segment revenue.

Working Capital

Neither the
Test nor the Sensors segment have significant finished product inventory, but
maintain inventories of materials and components to facilitate rapid product
delivery. The Test segment may have varying levels of work-in-process inventory
depending upon the production cycle timing of orders, project revenue recognition
and shipments to customers.

4

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Table of Contents

In the Test
segment, payments are often received from customers upon order or at milestones
during the fulfillment of the order, depending upon the size and customization
of the system. These are recorded as Advance Payments from Customers on the
Companys Consolidated Balance Sheets and reduced as revenue is recognized on
the system. Conversely, if revenue is recognized on a system prior to customer
billing, an Unbilled Accounts Receivable is recorded on the Companys
Consolidated Balance Sheets until the customer is billed. Upon billing, it is
recorded as Accounts Receivable. Changes in the average size, payment terms and
revenue recognition for orders in the Test segment may have a significant
impact on investment in the Billed and Unbilled Receivables, Advance Payments
from Customers and Inventory. It has not been the Companys practice to provide
extended payment terms or rights of return for its products.

CustomersThe Company
does not have a significant concentration of sales with any individual customer
and, therefore, the loss of any one customer would not have a material impact
on the Companys business. No single customer accounted for 10% or more of
revenue in the fiscal years ended September 29, 2007 and September 30, 2006,
respectively.

Order Backlog

Most of the
Companys products are built to order. The Companys backlog of orders, defined
as firm orders from customers that remain unfulfilled, totaled approximately
$206 million, $192 million, and $220 million at September 29, 2007, September
30, 2006 and October 1, 2005, respectively. The majority of this backlog is
related to the Test segment. Based on anticipated production schedules, the
Company estimates that approximately $192 million of the backlog at September
29, 2007 will be converted to revenue during fiscal 2008. Delays may occur in the conversion
of backlog into revenue as a result of export licensing compliance, technical
difficulties, specification changes, manufacturing capacity, supplier issues,
or access to the customer laboratory to install the system. While the backlog
is subject to order cancellations, the Company has not historically experienced
a significant number of order cancellations.

Government ContractsNo material
portion of the Companys business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of any government.

Competition

Test Segment: For relatively simple and
inexpensive mechanical testing applications, customers may internally satisfy their needs by building their own test systems or
use any of a large number of competitors who compete on price and service. For larger and more complex mechanical test systems,
the Test segment competes directly with several other companies throughout the world based upon application knowledge, engineering
capabilities, technical features, price, quality and service.

Sensors segment: The Sensors segment primarily
competes on a technology basis in new applications or in situations in which
other position sensing technologies have been used. Competitors of the Sensors
segment are typically larger than the Company, and carry multiple sensor
product lines.

Research and Development

The Company
invests in significant product, system, and software application development.
The Company also occasionally contracts with its customers to advance the state
of technology and increase product functionality. Costs associated with R&D
were expensed as incurred, totaling $19.9 million, $18.4 million and $14.9
million for the fiscal years ended September 29, 2007, September 30, 2006 and
October 1, 2005, respectively.

Environmental
Matters

The Company believes its
operations are in compliance with all applicable environmental regulations
within the jurisdictions in which it operates.

5

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Table of Contents

Executive
Officers

Executive Officers
serve at the discretion of and are elected by the Companys Board of Directors.
Business experience of the Executive Officers over the last five years is as
follows:

|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |     |  |                
|----------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --- |  | ---------------
|Officer                                                     |  | Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                           |  | Age |  | Officer
  Since
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |     |  |                
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |     |  |                
|Sidney
  W. Emery, Jr.Chairman and ChiefExecutive Officer   |  | Chairman of the Board of Directors since January
  1999. Chief Executive Officer since March 1998. Prior experience in executive
  positions with Honeywell Inc. from 1985 to 1997.                                                                                                                                                                                                                                                           |  | 61  |  | 1998           
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |     |  |                
|Laura
  B. Hamilton,President and ChiefOperating Officer    |  | President and Chief Operating Officer since June
2007. Senior Vice President of Test from May 2003 to June 2007. 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
Reengineering from 1999 to 2000. Prior experience in executive and management positions with Quest Diagnostics Inc. from 1995 to
1999. |  | 46  |  | 2000           
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |     |  |                
|Joachim
  Hellwig,Vice President                            |  | Vice President of the Companys Sensors business
  since January 2003. Vice President from 1993 to January 2003.                                                                                                                                                                                                                                                                                                                              |  | 58  |  | 2003           
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |     |  |                
|Susan
  E. Knight,Vice President, Chief Financial
  Officer |  | Vice President and Chief Financial Officer since
  October 2001. Prior experience in executive and management positions with
  Honeywell Inc. from 1977 to 2001.                                                                                                                                                                                                                                                                              |  | 53  |  | 2001           
|                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |     |  |                
|K. M.
  Staby,Vice President                                |  | Vice President of Human Resources and Strategy since
  January 2006. Vice President of Human Resources from 2000 to 2006. Prior
  experience in management positions at Medtronic, Inc. from 1974 to 1999.                                                                                                                                                                                                                                    |  | 61  |  | 2000           

Employees

The Company had
1,618 employees as of September 29, 2007, including approximately 499 employees
located outside the United States.

Available
Information

The Company makes available on the Investor Relations pages of its
website, www.mts.com, copies of Securities and Exchange Commission (SEC)
filings including annual reports on SEC Form 10-K, quarterly reports on SEC
Form 10-Q, shareowner proxy reports on SEC Form DEF 14A, current reports on SEC
Form 8-K, and reports on insider stock transactions and ownership on SEC Form
3, 4, or 5 as soon as reasonably practical after they are filed with the SEC.
These web pages also include copies of the MTS Systems Corporation Code of
Business Conduct, any waivers from and amendments to the Code, and the
Companys Corporate Governance Guidelines, Articles of Incorporation and
Bylaws, as well as the Charters for the Audit, Human Resources, and Governance
and Nominating committees of our Board of Directors. The Companys SEC filings
are also available at the SEC online EDGAR database at www.sec.gov.

6

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Table of Contents

|         |               
|-------- | --------------
|Item 1A. | Risk
  Factors

The following summarizes,
in no particular order, certain risks which could harm the Companys business,
financial condition and operating results. No such list can be comprehensive or
predict in detail exactly which of the challenges listed below could occur. All
statements other than statements of historic fact in each of the Companys
public announcements and filings with the SEC are forward-looking statements
within the meaning of the U.S. securities laws and should be read in the light
of these risk factors.

The Company may experience
difficulty obtaining materials or components for its products. The Company purchases significant
components of its products from third party suppliers. Some of these suppliers
compete with the Company on some level. Other materials and components may be
provided by a limited number of suppliers or by sole sources and could only be
replaced with difficulty or significant added cost.

The Company may experience difficulties
obtaining the services of skilled employees. The Company relies on knowledgeable,
experienced and skilled technical personnel, particularly engineers, account executives, and service
personnel, to design, assemble and sell its products. The sales process is
iterative and consultative in key product lines of the Companys business. The
Company also requires capable senior executives to lead the business and may be
unable to attract, retain and motivate sufficient numbers of such people.

The Company may not achieve its growth plans for the expansion of the business. The Companys
long-term success depends on its ability to expand the business through (a) new product development, (b) mergers and acquisitions
or (c) geographic expansion.

New product development requires that the Company maintain its
ability to enhance and improve existing products, to continue to bring
innovative products to market in a timely fashion and to adapt products to the
needs and standards of current and potential customers. The Companys products
and services may become less competitive or eclipsed by technologies to which
the Company does not have access or which render its solutions obsolete.

Mergers and acquisitions will be accompanied by risks which may
include:

| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | difficulties identifying
  suitable acquisition candidates at acceptable costs;                 
| |   |                                                                                                 
| |  | unavailability of capital
  to conduct acquisitions;                                            
| |   |                                                                                                 
| |  | failure to achieve the
  financial and strategic goals for the acquired and combined businesses;
| |   |                                                                                                 
| |  | difficulty assimilating
  the operations and personnel of the acquired businesses;              
| |   |                                                                                                 
| |  | disruption of ongoing
  business and distraction of management from the ongoing business;       
| |   |                                                                                                 
| |  | dilution of existing stockholders
  and earnings per share;                                     
| |   |                                                                                                 
| |  | unanticipated,
  undisclosed or inaccurately assessed liabilities, legal risks and costs; and   
| |   |                                                                                                 
| |  | difficulties retaining
  key vendors, customers or employees of the acquired business.          

Acquisitions of businesses
having a significant presence outside the U.S. will increase the Companys
exposure to the risks of international operations discussed herein.

Geographic expansion will be primarily outside of the United
States, and hence will be disproportionately subject to the risks of
international operations discussed herein.

The Companys is significantly
international in scope, which poses multiple unique risks. Sales outside of the United States,
including export sales from U.S. businesses, accounted for approximately
two-thirds of the net sales in fiscal 2007. Accordingly, the Companys business
is subject to the political, economic and other risks that are inherent in
operating in many countries. These risks include:

| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | exposure to the risk of
  currency value fluctuations, where payment for products is denominated in a
  currency other than U.S. dollars;

7

---

Table of Contents

| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | variability in the U.S.
  dollar value of foreign currency-denominated assets, earnings and cash flows;                                     
| |   |                                                                                                                                             
| |  | difficulty of enforcing
  agreements and collecting receivables through foreign legal systems;                                              
| |   |                                                                                                                                             
| |  | trade protection measures
  and import or export licensing requirements;                                                                    
| |   |                                                                                                                                             
| |  | tax rates in certain
  foreign countries that exceed those in the U.S. and the imposition of
  withholding requirements on foreign earnings;
| |   |                                                                                                                                             
| |  | higher danger of
  terrorist activity, war or civil unrest, relative to domestic operations;                                                
| |   |                                                                                                                                             
| |  | imposition of tariffs,
  exchange controls or other restrictions;                                                                           
| |   |                                                                                                                                             
| |  | difficulty in staffing
  and managing global operations;                                                                                    
| |   |                                                                                                                                             
| |  | protection of
  intellectual property in foreign countries may be more difficult;                                                           
| |   |                                                                                                                                             
| |  | required compliance with
  a variety of foreign laws and regulations; and                                                                   
| |   |                                                                                                                                             
| |  | changes in general
  economic and political conditions in countries where the Company operates,
  particularly in emerging markets.         

The business could be adversely
affected by product liability and commercial litigation. The Companys products may be asserted to
cause or contribute to personal injury or property damage to its customers or
their employees. Additionally, the Company is, from time to time, involved in
various kinds of commercial disputes with customers, vendors and others. The
ensuing claims may arise singularly, in groups of related claims, or in class
actions involving multiple claimants. Such claims and litigation are frequently
expensive and time-consuming to resolve, may result in substantial liability to
the Company, and may be in excess of available sources of insurance or other
forms of reimbursement.

Government regulation could impose
significant costs and other constraints.The Companys manufacturing operations and
past and present ownership and operations of real property are subject to
extensive and changing federal, state, local and foreign environmental, health
and safety laws and regulations, including laws pertaining to the handling or
discharge of hazardous materials into the environment. The Company expects to
continue to incur costs to comply with these laws, and may incur penalties for
any failure to do so. The Company may also be identified as a responsible party
and be subject to liability relating to any investigation and clean-up of
properties used for industrial purposes or the generation or disposal of
hazardous substances. Some of the Companys export sales require approval from
the U.S. government. Changes in political relations between the U.S. and
foreign countries and/or specific potential customers for which export licenses
may be required, may cause a license application to be delayed or denied, or a
previously issued license withdrawn, rendering the Company unable to complete a
sale, or vulnerable to competitors who do not operate under such restrictions.

The Company may fail to protect
its intellectual property effectively, or may infringe upon the intellectual
property of others.
The Company relies on trade secret, copyright, trademark and patent laws and
contractual protections to protect its proprietary technology and other
proprietary rights. The Companys competitors may attempt to copy its products
or gain access to its trade secrets. Notwithstanding the precautions taken by
the Company to protect its intellectual property rights, it is possible that
third parties may illegally copy or otherwise obtain and use its proprietary
technology without the Companys consent. Any litigation concerning
infringement could result in substantial cost and diversions of the Companys
resources, either of which could adversely affect the business. In some cases,
there may be no effective legal recourse against duplication of products or
services by competitors. Intellectual property rights in foreign jurisdictions
may be limited or unavailable. Patents of third parties also have an important
bearing on the Companys ability to offer some of its products and services.
The Companys competitors may obtain patents related to the types of products
and services the Company currently offers or plans to offer. Any infringement
by the Company on intellectual property rights of others could result in
litigation and adversely affect its ability to continue to provide, or could
increase the cost of providing, products and services.

The sales, delivery and acceptance
cycle for many of the Companys products is irregular and may not develop as
anticipated. Many of
the Companys products have a long sales, delivery and acceptance cycle. Events
may cause recognition of orders, backlog and results of operations to be
aberrant over shorter periods of time. These factors include the timing of individual large fixed price orders, delays in product
readiness, damage or delays in
transit, problems in achieving promised results, and various customer-initiated
delays. Any such delay may cause fluctuation in the Companys reported periodic
financial results.

8

---

Table of Contents

The Companys customers are in cyclical
industries. The Companys orders are subject to
customers procurement cycles and ability to invest capital, especially in the
cyclical automotive, aircraft and machine tool industries. Any event which
adversely impacts those customers new product development activities may reduce
their demand for the Companys products.

The Companys business is subject to intense
competition.The Companys products are sold in
competitive markets throughout the world. Competition is based on application
knowledge, product features and design, brand recognition, reliability,
technology, breadth of product offerings, price, customer relationships, and
after-sale service. If the Company is not perceived as competitive in overall
value measured by these criteria, its customers may choose solutions offered by
its competitors or developed internally.

Interest rate fluctuations could adversely
affect results.Significant changes in interest rates
may affect the Companys business in several contradictory ways, depending on
the Companys financial position.The
Company may, in the future, use debt to finance the growth of the business
through acquisitions or to finance working capital needs. Fluctuations in
interest rates can increase borrowing costs. Increases in short-term interest
rates will directly impact the amount of interest the Companys is required to
pay and reduce earnings accordingly. Conversely, lower interest rates will
adversely impact the interest the Company earns on cash and short term
investments.

|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments

None.

|        |           
|------- | ----------
|Item 2. | Properties

The Companys
primary owned and leased facilities at September 29, 2007 were as follows:

Owned Property:

|                             |  |                                                                                              |  |                
|---------------------------- |  | -------------------------------------------------------------------------------------------- |  | ---------------
|Location                     |  | Use of Facility                                                                              |  | Square
 Footage
|                             |  |                                                                                              |  |                
|                            
|Eden
 Prairie, Minnesota USA |  | Corporate headquarters and primary Test
 segment manufacturing and research                  |  | 420,000        
|                             |  |                                                                                              |  |                
|                             |  |                                                                                              |  |                
|Cary, North
 Carolina USA    |  | Sensors segment manufacturing, research and
 North American sales and service administration |  | 65,000         
|                            
|Berlin,
 Germany             |  | Test segment manufacturing, research, and European
 sales and service administration         |  | 80,000         
|                             |  |                                                                                              |  |                
|Leased
 Property:            |  |                                                                                              |  |                

|                          |  |                                                                                                      |  |                 |  |              
|------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --------------- |  | -------------
|Location                  |  | Use of Facility                                                                                      |  | Square
 Footage |  | Lease
 Expiry
|                          |  |                                                                                                      |  |                 |  |              
|                         
|Chanhassen,
 MN USA       |  | Test segment manufacturing                                                                           |  | 97,000          |  | 2013         
|                         
|Oak Ridge,
 Tennessee USA |  | Test segment manufacturing                                                                           |  | 20,476          |  | 2011         
|                         
|Ludenscheid,
 Germany     |  | Sensors segment headquarters,
 manufacturing, research and European sales and service administration |  | 55,000          |  | 2012         
|                         
|Tokyo, Japan              |  | Test segment sales and service
 administration                                                       |  | 13,875          |  | 2009         
|                         
|                          |  | Sensors segment manufacturing and Asia
 sales and service administration                             |  | 8,400           |  | 2015         
|                         
|Seoul, South
 Korea       |  | Test segment sales and assembly                                                                      |  | 7,784           |  | 2009         
|                         
|Shanghai,
 China          |  | Test segment sales and assembly                                                                      |  | 13,257          |  | 2010         
|                         
|Berlin,
 Germany          |  | Land under Berlin facility                                                                           |  | 29,520          |  | 2052         

9

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Table of Contents

The Company
also leases space in the United States, Europe and Asia for sales and service
functions for the Test segment, including locations in Madison Heights,
Michigan; Paris, France; Gloucester, United Kingdom; Gothenburg, Sweden; Turin,
Italy; Seoul, South Korea; Nagoya, Japan; Bejing and Hong Kong, China, and in
various other cities in the United States. Neither the amount of leased space
nor the rental obligations are significant individually or in the aggregate.
Additional information relative to lease obligations is included in
Managements Discussion and Analysis of Financial Condition and Results of
Operations, appearing under Item 7 of this Annual Report on Form 10-K.

The Company
considers its current facilities adequate to support its operations during
fiscal year 2008.

|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The Company
has been subject to investigations conducted by the U.S. Department of Commerce
and the U.S. Attorney for the District of Minnesota since 2000 concerning the
Companys compliance with U.S. export control regulations. In fiscal year 2006,
the Company entered into a civil settlement with the U.S. Department of
Commerce, pursuant to which the Company paid a civil fine of less than $0.1
million, while denying any violation of law. The separate criminal inquiry by
the U.S. Attorneys office has been ongoing and, during fiscal year 2007, the
Company and the U.S. Attorneys office began discussing terms to terminate the
criminal inquiry. No formal litigation has been commenced against the Company.

The Company
and its Audit Committee have independently investigated the matter and believe no willful or material violation of applicable law
has been committed. The Company believes that its maximum exposure to any fine related to these matters is an additional $1.0
million, plus the cost of its defense. The Company does not believe the final outcome of these proceedings will have a material
adverse effect on its consolidated financial position or results of operations.

|        |                                                    
|------- | ---------------------------------------------------
|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 September 29, 2007.

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 Global Select MarketSM
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. *

10

---

Table of Contents

|                                              |  |     |       |      |   |       |  |        |       |  |  |           | 
|--------------------------------------------- |  | --- | ----- | ---- | - | ----- |  | ------ | ----- |  |  | --------- | 
|Quarter
 Ended                                |  | Low |       | High |   | Close |  | Volume |      
|                                              |  |     |       |      |   |       |  |        |      
|                                             
|December 31,
 2005                            |  | $   | 29.82 |      | $ | 40.80 |  | $      | 34.58 |  |  | 8,656,400 | 
|                                             
|April 1,
 2006                                |  | $   | 34.02 |      | $ | 42.05 |  | $      | 41.83 |  |  | 4,935,700 | 
|                                             
|July 1, 2006                                  |  | $   | 34.98 |      | $ | 48.38 |  | $      | 39.51 |  |  | 6,505,864 | 
|                                             
|September
 30, 2006                           |  | $   | 30.86 |      | $ | 39.81 |  | $      | 32.34 |  |  | 6,700,527 | 
|                                             
|December 30,
 2006                            |  | $   | 31.10 |      | $ | 39.87 |  | $      | 38.62 |  |  | 6,181,757 | 
|                                             
|March 31,
 2007                               |  | $   | 35.64 |      | $ | 42.98 |  | $      | 38.84 |  |  | 8,851,364 | 
|                                             
|June 30,
 2007                                |  | $   | 37.23 |      | $ | 45.12 |  | $      | 44.67 |  |  | 6,501,027 | 
|                                             
|September 29,
 2007                           |  | $   | 38.42 |      | $ | 47.45 |  | $      | 41.60 |  |  | 7,685,326 | 
|                                              |  |     |       |      |   |       |  |        |       |  |  |           | 
|* Source:
 NASDAQ OnlineSM at www.nasdaq.net. |  |     |       |      |   |       |  |       

At November
20, 2007, there were 1,088 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.

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 1, 2006 - December 30, 2006          |  | 54,000                             |  | $                               | 38.36 |                                                                                         | 54,000  |                                                                                       | 1,434,238 | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 
|Second Quarter
 December 31, 2006 - March 31, 2007          |  | 621,206                            |  | $                               | 38.09 |                                                                                         | 621,206 |                                                                                       | 813,032   | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 
|Third Quarter
 April 1, 2007 - June 30, 2007                |  | 108,000                            |  | $                               | 41.70 |                                                                                         | 108,000 |                                                                                       | 705,032   | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 
|Fourth Quarter
 Fiscal Month
 July 1, 2007 - August 4, 2007 |  | 88,600                             |  | $                               | 42.81 |                                                                                         | 88,600  |                                                                                       | 616,432   | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 
|August 5, 2007 - September
 1, 2007                         |  | 59,400                             |  | $                               | 40.44 |                                                                                         | 59,400  |                                                                                       | 3,557,032 | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 
|September 2, 2007
 - September 29, 2007                     |  | 36,000                             |  | $                               | 42.37 |                                                                                         | 36,000  |                                                                                       | 3,521,032 | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 
|Fourth Quarter                                              |  | 184,000                            |  | $                               | 41.96 |                                                                                         | 184,000 |                                                                                       | 3,521,032 | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 
|Fiscal Year 2007                                            |  | 967,206                            |  | $                               | 39.24 |                                                                                         | 967,206 |                                                                                       |           | 
|                                                            |  |                                    |  |                                 |       |                                                                                         |         |                                                                                       |           | 

The Company
purchases its common stock to mitigate dilution related to new shares created
by employee equity compensation such as stock option, restricted stock, and
employee stock purchase plan awards, as well as to return excess capital to
shareholders.

11

---

Table of Contents

During fiscal
year 2007, Company share purchases were executed under a 3.0 million share
purchase authorization approved by the Companys Board of Directors and
announced on August 25, 2005. The Companys Board of Directors also approved,
and on August 20, 2007 announced, a new 3.0 million share purchase
authorization. Authority over pricing and timing under both authorizations have
been delegated to management. The share purchase authorizations have 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 2007, the Company increased the quarterly
dividend 36% to $0.15 per share.

The Companys
long term debt agreements include minimum net worth and book leverage covenants
that restrict its ability to purchase common equity and pay dividends. At
September 29, 2007 and September 30, 2006, the Company was in compliance with
these agreements. Information on the Companys debt agreements is included in
Item 7 of this Annual Report on Form 10-K.

Information
regarding the Companys equity compensation plans is included in Item 12 of
this Annual Report on Form 10-K.

Shareowner Return Performance:

The graph and
table below set forth a comparison of the cumulative total return of the
Companys Common Stock over the last five fiscal years. Assuming a $100
investment on September 28, 2002 and reinvestment of dividends, the total
return over the same periods is compared to the Russell 2000 Index and a peer
group of companies in the Laboratory Apparatus and Analytical, Optical,
Measuring, and Controlling Instruments Standard Industrial Code (SIC Code 3820)
who are traded on the NASDAQ, AMEX and NYSE exchanges. The table and graph are
not necessarily indicative of future investment performance.



12

---

Table of Contents

|                                                                              |  |                    |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 
|----------------------------------------------------------------------------- |  | ------------------ | ------ | ------- | - | ------- |  | ------- | ------ | ------- | - | ------- |  | - | ------ |  | - | ------ | 
|                                                                              |  | FISCAL
 YEAR ENDED |       
|                                                                              |  |                   
|                                                                              |  | 9/28/02            |        | 9/27/03 |   | 10/2/04 |  | 10/1/05 |        | 9/30/06 |   | 9/29/07 | 
|                                                                              |  |                    |        |         |   |         |  |         |        |         |   |         | 
|MTS
 Systems Corporation                                                      |  | $                  | 100.00 |         | $ | 152.93  |  | $       | 236.13 |         | $ | 407.24  |  | $ | 352.75 |  | $ | 459.25 | 
|                                                                              |  |                    |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 
|Russell
 2000 Index                                                           |  |                    | 100.00 |         |   | 136.01  |  |         | 162.35 |         |   | 191.49  |  |   | 210.50 |  |   | 236.47 | 
|                                                                              |  |                    |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 
|*SIC Code
 3820 Peer Group (Modified to remove non-exchange traded companies) |  |                    | 100.00 |         |   | 142.33  |  |         | 171.14 |         |   | 194.86  |  |   | 219.29 |  |   | 279.66 | 
|                                                                              |  |                    |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 

|        |                        
|------- | -----------------------
|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 Annual Report on From 10-K. The statement of income data for
each of the three fiscal years ended September 29, 2007, September 30, 2006, and
October 1, 2005 and the balance sheet data at September 29, 2007 and September
30, 2006 are derived from the audited Consolidated Financial Statements
included elsewhere in this report. The statement of income data for the fiscal
years ended October 2, 2004 and September 27, 2003 and the balance sheet data
at October 1, 2005, October 2, 2004 and September 27, 2003 are derived from
financial statements of the Company that are not included in this Annual Report
on Form 10-K.

Five-Year Financial Summary(September 29, 2007;
September 30, 2006; October 1, 2005; October 2, 2004; and September 27, 2003)(expressed in thousands,
except per share data and numbers of shareholders and employees)

|                                                                           |  |      |         |      |   |         |   |       |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | ----- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                           |  | 2007 |         | 2006 |   | 2005    |   | 20041 |         | 2003 |  
|                                                                           |  |      |         |      |   |         |   |       |         |      |  
|Operations                                                                 |  |      |         |      |   |         |   |       |         |      |   |         |   |   |         |  
|Revenue                                                                    |  | $    | 420,504 |      | $ | 396,785 |   | $     | 374,377 |      | $ | 338,204 |   | $ | 316,213 |  
|Gross profit                                                               |  |      | 178,216 |      |   | 172,665 |   |       | 163,582 |      |   | 138,361 |   |   | 117,350 |  
|Gross profit as a % of revenue                                             |  |      | 42.4    | %    |   | 43.5    | % |       | 43.7    | %    |   | 40.9    | % |   | 37.1    | %
|Research and development expense                                           |  | $    | 19,874  |      | $ | 18,413  |   | $     | 14,936  |      | $ | 12,663  |   | $ | 13,827  |  
|Research and development as a % of revenue                                 |  |      | 4.7     | %    |   | 4.6     | % |       | 4.0     | %    |   | 3.7     | % |   | 4.4     | %
|Effective income tax rate                                                  |  |      | 27.8    | %    |   | 33.9    | % |       | 29.4    | %    |   | 36.7    | % |   | 33.8    | %
|Income before discontinued operations                                      |  | $    | 41,996  |      | $ | 38,862  |   | $     | 36,569  |      | $ | 27,208  |   | $ | 19,574  |  
|Net income                                                                 |  |      | 41,996  |      |   | 39,323  |   |       | 37,058  |      |   | 28,983  |   |   | 20,313  |  
|Net income as a % of revenue                                               |  |      | 10.0    | %    |   | 9.9     | % |       | 9.9     | %    |   | 8.6     | % |   | 6.4     | %
|Diluted earnings per share of common stock before discontinued
 operations |  | $    | 2.29    |      | $ | 2.02    |   | $     | 1.79    |      | $ | 1.27    |   | $ | 0.92    |  
|Diluted earnings per share of common stock                                 |  |      | 2.29    |      |   | 2.04    |   |       | 1.81    |      |   | 1.35    |   |   | 0.95    |  
|Weighted average dilutive shares outstanding during the
year2              |  |      | 18,330  |      |   | 19,229  |   |       | 20,509  |      |   | 21,464  |   |   | 21,474  |  
|Net interest (income) expense                                              |  | $    | (2,590  | )    | $ | (1,879  | ) | $     | (220    | )    | $ | 983     |   | $ | 1,453   |  
|Depreciation and amortization                                              |  |      | 8,149   |      |   | 7,863   |   |       | 8,638   |      |   | 8,371   |   |   | 8,432   |  
|                                                                           |  |      |         |      |   |         |   |       |         |      |   |         |   |   |         |  
|Financial Position                                                         |  |      |         |      |   |         |   |       |         |      |   |         |   |   |         |  
|                                                                           |  |      |         |      |   |         |   |       |         |      |   |         |   |   |         |  
|Cash, cash equivalents and short-term investments                          |  | $    | 121,395 |      | $ | 121,537 |   | $     | 159,793 |      | $ | 129,303 |   | $ | 132,743 |  
|Property and equipment, net                                                |  |      | 50,900  |      |   | 43,614  |   |       | 42,953  |      |   | 44,406  |   |   | 47,562  |  
|Total assets                                                               |  |      | 352,981 |      |   | 324,123 |   |       | 351,732 |      |   | 341,635 |   |   | 330,378 |  
|Interest-bearing debt3                                                     |  |      | 8,991   |      |   | 15,673  |   |       | 23,963  |      |   | 30,718  |   |   | 37,709  |  
|Total shareholders investment                                             |  |      | 189,701 |      |   | 169,321 |   |       | 188,432 |      |   | 171,796 |   |   | 176,106 |  
|Interest-bearing debt as a % of shareholders
investment                   |  |      | 4.7     | %    |   | 9.3     | % |       | 12.7    | %    |   | 17.9    | % |   | 21.4    | %
|Return on equity4                                                          |  |      | 24.8    | %    |   | 20.9    | % |       | 21.6    | %    |   | 16.5    | % |   | 12.5    | %
|                                                                           |  |      |         |      |   |         |   |       |         |      |   |         |   |   |         |  
|Other Statistics                                                           |  |      |         |      |   |         |   |       |         |      |   |         |   |   |         |  
|                                                                           |  |      |         |      |   |         |   |       |         |      |   |         |   |   |         |  
|Number of common shareholders of record at
year-end5                       |  |      | 1,092   |      |   | 1,201   |   |       | 1,471   |      |   | 1,644   |   |   | 1,907   |  
|Number of employees at year-end                                            |  |      | 1,618   |      |   | 1,510   |   |       | 1,549   |      |   | 1,501   |   |   | 1,531   |  
|Orders                                                                     |  | $    | 430,105 |      | $ | 376,895 |   | $     | 404,377 |      | $ | 387,307 |   | $ | 295,195 |  
|Backlog of orders at year-end                                              |  |      | 206,110 |      |   | 191,819 |   |       | 219,680 |      |   | 186,228 |   |   | 141,386 |  
|Cash dividends paid per share                                              |  |      | 0.48    |      |   | 0.41    |   |       | 0.34    |      |   | 0.26    |   |   | 0.24    |  

1The fiscal year ended October 2, 2004 was
a 53-week fiscal year, whereas all other fiscal years presented were 52-week
periods.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.5Does not include shareholders whose stock
is held in the name of broker dealers or other nominees.

13

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial Condition and
 Results of Operations

MTS is a
leading global supplier of mechanical test systems and high-performance
industrial position sensors. The Companys testing solutions help customers
accelerate and improve their design, 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 1,618 employees and
revenue of $421 million for the fiscal year ended September 29, 2007.

Fiscal YearThe Companys fiscal year ends on the Saturday closest
to September 30. The fiscal years ended September 29, 2007; September 30, 2006
and October 1, 2005 consisted of 52 weeks.

Summary of ResultsOrders for fiscal year 2007 increased 14.1%, to $430.1
million, compared to orders of $376.9 million for fiscal year 2006. In fiscal
year 2005, orders totaled $404.4 million. The increase in orders in fiscal year
2007 from fiscal year 2006 is primarily driven by Test segment orders in Asia
and worldwide growth in the Sensors segment, as well as an estimated $9.1 million
favorable impact of currency translation. The decrease in orders in fiscal year
2006 from fiscal year 2005 is primarily due to a decrease in large custom
orders in the Test segment in Europe and Asia, an $8.4 million reduction in
volume associated with the noise and vibration business that the Company exited
at the end of fiscal year 2005, and an estimated $6.9 million unfavorable
impact from currency translation, partially offset by increased volume in the
Test segment in North America and continued growth in the Sensors segment.

Backlog of undelivered orders
at September 29, 2007 increased 7.5%, to $206.1 million, compared to backlog of
$191.8 million at September 30, 2006. Backlog at the end of fiscal year 2005
totaled $219.7 million. The current year increase in backlog from fiscal year
2006 is primarily attributable to increased order volume.

Revenue of $420.5 million for
fiscal year 2007 increased 6.0%, compared to revenue of $396.8 million for
fiscal year 2006. Revenue for fiscal year 2005 totaled $374.4 million. The
increase in revenue in fiscal year 2007 from fiscal year 2006 was primarily due
to higher standard product and service business in the Test segment, continued
worldwide growth in the Sensors business, and an estimated $11.6 million
favorable impact of currency translation, partially offset by a decrease in
custom business in the Test segment. The increase in revenue in fiscal year
2006 from fiscal year 2005 was primarily due to higher beginning backlog,
increased standard product and service business in the Test segment, and
continued growth in the Sensors business, partially offset by a $7.7 million
reduction in revenue associated with the Companys exit of the noise and
vibration software business and an estimated $9.6 million unfavorable impact of
currency translation.

14

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Table of Contents

Gross profit
for fiscal year 2007 increased 3.2%, to $178.2 million, compared to gross
profit of $172.7 million for fiscal year 2006. Gross profit for fiscal year
2005 totaled $163.6 million. The increase in gross profit in fiscal 2007 from
fiscal year 2006 was primarily due to higher volume in both segments, increased
operating efficiency in the Sensors segment and an estimated $3.4 million
favorable impact of currency translation, partially offset by unplanned custom
project costs and unfavorable product mix in the Test segment. The increase in
gross profit in fiscal year 2006 from fiscal year 2005 was primarily driven by
higher volume in both segments and $3.6 million in fiscal year 2005 exit costs
associated with the noise and vibration business, partially offset by $1.1
million of stock compensation expense and an estimated $2.3 million unfavorable
impact of currency translation.

Income before
income taxes and discontinued operations for fiscal year 2007 decreased 1.0%,
to $58.2 million, compared to $58.8 million for fiscal year 2006. Income before
income taxes and discontinued operations for fiscal year 2005 totaled $51.8
million. The decrease in fiscal year 2007 from fiscal year 2006 was primarily
due to planned increases in sales, marketing, and R&D spending to support
strategic initiatives, as well as $1.3 million unfavorable impact of foreign
currency transaction losses. These factors were partially offset by higher
gross profit, $0.7 million favorable net interest, and an estimated $1.2
million favorable impact of currency translation. The increase in fiscal year
2006 from fiscal year 2005 was primarily driven by higher gross profit in both
segments, a $0.9 million gain on sale of assets of the noise and vibration
business, and $0.9 million of fiscal 2005 costs associated with the exit of the
noise and vibration business, partially offset by planned increases in
operating expenses, $4.2 million of stock compensation expense, and an
estimated $0.9 million unfavorable impact of currency translation.

Net income was
$42.0 million, or $2.29 per diluted share, for fiscal year 2007, an increase of
6.9% compared to $39.3 million, or $2.04 per diluted share, for fiscal year
2006 and increased from $37.1 million, or $1.81 per diluted share, for fiscal
year 2005. The increase in net income in fiscal year 2007 from fiscal year 2006
was primarily the result of decreased income tax expense of $3.7 million,
resulting from the enactment of favorable tax legislation and research and
development credits, and an estimated $0.9 million favorable impact of currency
translation. The increase in net income in fiscal year 2006 from fiscal year
2005 was primarily driven by higher income before income taxes and discontinued
operations, a $2.1 million favorable net impact of foreign currency transaction
gains, and $1.7 million favorable net interest, partially offset by increased
income tax expense and an estimated $0.9 million unfavorable impact of currency
translation.

During fiscal
year 2007, the Company purchased approximately 1.0 million shares of its common
stock. The reduction in shares outstanding positively impacted the Companys
earnings per share by $0.11 for fiscal year 2007.

Detailed
Financial Results

Orders and
Backlog

|                               |  |                          |         |      |   |         |  |   |         | 
|------------------------------ |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|                               |  | 2007                     |         | 2006 |   | 2005    | 
|                               | 
|                               |  | (expressed in thousands) |        
|Orders                         |  | $                        | 430,105 |      | $ | 376,895 |  | $ | 404,377 | 
|                               | 
|Backlog of Undelivered
 Orders |  | $                        | 206,110 |      | $ | 191,819 |  | $ | 219,680 | 
|                               | 

Orders for
fiscal year 2007 totaled $430.1 million, an increase of $53.2 million, or
14.1%, compared to orders of $376.9 million for fiscal year 2006. In fiscal
year 2005, orders totaled $404.4 million. The increase in orders in fiscal year
2007 from fiscal year 2006 was primarily due to Test segment orders in Asia,
continued worldwide growth in the Sensors segment, and an estimated $9.1
million favorable impact of currency translation. The decrease in orders in
fiscal year 2006 from fiscal year 2005 was primarily due to a decrease in large
custom orders in the Test segment in Europe and Asia, a $8.4 million reduction
in volume associated with the noise and vibration business that the Company
exited at the end of fiscal year 2005, and an estimated $6.9 million
unfavorable impact from currency translation, partially offset by increased
volume in the Test segment in North America and continued growth in the Sensors
segment, particularly in Europe and Asia.

15

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Table of Contents

Orders for the
Test segment totaled $349.3 million for fiscal year 2007, an increase of $38.6
million, or 12.4%, compared to orders of $310.7 million for fiscal year 2006.
Test segment orders for fiscal year 2005 totaled $342.9 million. The increase
in orders in fiscal 2007 from fiscal 2006 was primarily due to increased volume
in Asia and an estimated $6.3 million favorable impact of currency translation.
During fiscal year 2007, the Company booked five large custom orders which
aggregated approximately $40 million. One large custom order totaling approximately $10 million, which was originally booked in fiscal year 2007, was cancelled during fiscal year 2007. The decrease in orders in fiscal year
2006 from fiscal year 2005 was primarily due to a decrease in large custom
orders in Europe and Asia, an $8.4 million reduction in volume associated with
the noise and vibration business, and an estimated $5.1 million unfavorable
impact of currency translation, partially offset by increased order volume in
North America. The Test segment booked 81.2% of total Company orders for fiscal
year 2007, compared to 82.4% of total Company orders for fiscal year 2006 and
84.8% for fiscal year 2005.

Orders for the
Sensors segment totaled $80.8 million for fiscal year 2007, an increase of
$14.6 million, or 22.1%, compared to orders of $66.2 million for fiscal year
2006. Orders for the Sensors segment in fiscal year 2005 totaled $61.5 million.
The increase in orders in fiscal year 2007 from fiscal year 2006 was primarily
due to continued worldwide growth and an estimated $2.8 million favorable
impact of currency translation. The increase in orders in fiscal year 2006 from
fiscal year 2005 was primarily due to increased volume in Europe and Asia,
partially offset by an estimated $1.8 million unfavorable impact of currency
translation. The Sensors segment booked 18.8% of total Company orders for
fiscal year 2007, compared to 17.6% of total Company orders for fiscal year
2006 and 15.2% for fiscal year 2005.

Orders in
North America totaled $151.9 million during fiscal year 2007, down $2.0, or 1.3%,
compared to orders of $153.9 million for fiscal year 2006. Orders in North
America during fiscal year 2005 totaled $130.4 million. Orders in Europe
totaled $138.2 million during fiscal year 2007, an increase of $8.4 million, or
6.5%, compared to orders of $129.8 million for fiscal year 2006. Orders in
Europe during fiscal year 2005 totaled $135.0 million. Orders in Asia totaled
$139.4 million during fiscal year 2007, an increase of $46.6 million, or 50.2%,
compared to orders of $92.8 million for fiscal year 2006. Orders in Asia during
fiscal year 2005 totaled $138.6 million. Other international orders totaled
$0.6 million, $0.4 million, and $0.4 million, respectively, for fiscal years
2007, 2006, and 2005.

Backlog of undelivered orders
at September 29, 2007 totaled $206.1 million, an increase of approximately
$14.3 million, or 7.5%, compared to backlog of $191.8 million at September 30,
2006. Backlog at the end of fiscal year 2005 totaled $219.7 million. The
increase in backlog in fiscal year 2007 from fiscal year 2006 was primarily due
to increased order volume in both segments. The decrease in backlog in fiscal
year 2006 from fiscal year 2005 was primarily due to decreased 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 $192 million of the backlog at September 29, 2007
will be converted to revenue during fiscal year 2008.

|        |  |                          |         |      |   |         |  |   |         | 
|------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|Revenue |  |                          |         |      |   |         |  |   |         | 
|       
|        |  | 2007                     |         | 2006 |   | 2005    | 
|       
|        |  | (expressed in thousands) |        
|Revenue |  | $                        | 420,504 |      | $ | 396,785 |  | $ | 374,377 | 
|       

Revenue for
fiscal year 2007 totaled $420.5 million, an increase of $23.7 million, or 6.0%,
compared to revenue of $396.8 million for fiscal year 2006. Revenue for fiscal
year 2005 totaled $374.4 million. The increase in revenue in fiscal year 2007
from fiscal 2006 was primarily due to increases in standard product and service
business in the Test segment, continued growth in the Sensors segment, and an
estimated $11.6 million favorable impact of currency translation. The increase
in revenue in fiscal year 2006 from fiscal year 2005 was primarily due to
higher beginning backlog, increased standard product and service business in
the Test segment, and continued growth in the Sensors segment, partially offset
by a $7.7 million reduction in revenue associated with the noise and vibration
business, which the Company exited at the end of fiscal year 2005, and an
estimated $9.6 million unfavorable impact of currency translation.

16

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Revenue for
the Test segment totaled $343.6 million for fiscal year 2007, compared to
revenue of $332.6 million for fiscal year 2006 and revenue of $313.5 million
for fiscal year 2005. The increase in revenue for fiscal 2007 from fiscal year
2006 was primarily due to an increase in standard product and service business
and an estimated $8.7 million favorable impact of currency translation. The
increase in revenue for fiscal year 2006 was primarily due to increased
standard product and service business, partially offset by a $7.7 million
reduction in revenue associated with the noise and vibration business and an
estimated $7.8 million unfavorable impact of currency translation.

Revenue for
the Sensors segment totaled $76.9 million for fiscal year 2007, compared to $64.2
million for fiscal year 2006 and $60.9 million for fiscal year 2005. The
increase in revenue in fiscal year 2007 from fiscal year 2006 was primarily due
to higher worldwide order volume and an estimated $2.9 million favorable impact
of currency translation. The increase in revenue in fiscal year 2006 from
fiscal year 2005 was
primarily due to higher order volume in Europe and Asia, partially offset by an
estimated $1.8 million unfavorable impact of currency translation.

Revenue of
$153.2 million in North America for fiscal year 2007 increased $17.3 million,
or 12.7%, compared to revenue of $135.9 million for fiscal year 2006. Revenue
in North America for fiscal year 2005 totaled $119.8 million. Revenue in Europe
of $150.9 million for fiscal year 2007 increased $8.3 million, or 5.8%,
compared to $142.6 million for fiscal year 2006. Revenue in Europe for fiscal
year 2005 totaled $134.2 million. Revenue of $115.9 million in Asia for fiscal
year 2007 decreased $2.0 million, or 1.7%, compared to $117.9 million for
fiscal year 2006. Revenue in Asia for fiscal year 2005 totaled $119.9 million.
Other international revenue totaled $0.5 million, $0.4 million, and $0.5
million, respectively, for fiscal years 2007, 2006, and 2005.

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

|              |  |                          |         |      |   |         |   |   |         |  
|------------- |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|Gross
 Profit |  |                          |         |      |   |         |   |   |         |  
|             
|              |  | 2007                     |         | 2006 |   | 2005    |  
|             
|              |  | (expressed in thousands) |        
|Gross Profit  |  | $                        | 178,216 |      | $ | 172,665 |   | $ | 163,582 |  
|             
|% of Revenue  |  |                          | 42.4    | %    |   | 43.5    | % |   | 43.7    | %
|             

Gross profit
as a percentage of revenue decreased to 42.4% for fiscal year 2007 from 43.5%
for fiscal year 2006. Gross profit as a percentage of revenue was 43.7% for
fiscal year 2005. The decrease in gross profit as a percentage of revenue for
fiscal year 2007 from fiscal year 2006 was primarily due to unplanned custom
project costs and unfavorable product mix in the Test segment, as well as a 0.3
percentage point unfavorable impact of currency translation, partially offset
by increased operating efficiency in the Sensors segment. The decrease in gross
profit as a percentage of revenue for fiscal year 2006 from fiscal year 2005
was primarily due to product mix, increased manufacturing and engineering costs
in the Test segment, and a 0.3 percentage point unfavorable impact of $1.1
million of stock compensation expense in the Test segment, partially offset by
a 1.0 percentage point favorable impact of $3.6 million in fiscal year 2005 costs
associated with the exit of the noise and vibration business, reduced warranty
charges, and an estimated 0.6 percentage points favorable impact of currency
translation.

Gross profit
as a percentage of revenue for the Test segment was 39.4% for fiscal year 2007,
a decrease compared to 41.6% for fiscal year 2006 and 42.8% for fiscal year
2005. The decrease in gross profit rate in fiscal year 2007 was primarily due
to unplanned custom project costs and unfavorable product mix, as well as a 0.5
percentage point unfavorable impact of currency translation. The decrease in
gross profit rate in fiscal year 2006 was primarily due to unfavorable product
mix, increased manufacturing and engineering costs, and a 0.3 percentage point
unfavorable impact of $1.1 million of stock compensation expense, partially
offset by a 1.1 percentage point favorable impact of $3.6 million in fiscal
year 2005 costs associated with the exit of the noise and vibration business,
reduced warranty charges, and an estimated 0.5 percentage points favorable
impact of currency translation.

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Table of Contents

Gross profit as a percentage of
revenue for the Sensors segment was 55.6% for fiscal year 2007, an increase
from 53.6% and 48.5% for fiscal years 2006 and 2005, respectively. The gross
profit rate increase in fiscal 2007 was primarily due to increased volume and
improved operational efficiency. The gross profit rate increase in fiscal year
2006 was primarily due to increased volume and fiscal year 2005 charges
associated with excess and obsolete inventory in the Sensors business that
resulted from product line changes made in fiscal year 2005. There was no
significant impact on gross profit rate due to currency translation in fiscal
years 2007, 2006 or 2005.

|                                             |  |                          |         |      |   |        |   |   |        |  
|-------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------ | - | - | ------ | -
|Selling,
 General and Administrative Expense |  |                          |         |      |   |        |  
|                                            
|                                             |  | 2007                     |         | 2006 |   | 2005   |  
|                                            
|                                             |  | (expressed in thousands) |        
|Selling                                      |  | $                        | 70,245  |      | $ | 65,117 |   | $ | 65,254 |  
|General &
 Administrative                    |  |                          | 33,364  |      |   | 34,175 |   |   | 30,417 |  
|                                            
|Total                                        |  | $                        | 103,609 |      | $ | 99,292 |   | $ | 95,671 |  
|                                            
|% of Revenue                                 |  |                          | 24.6    | %    |   | 25.0   | % |   | 25.6   | %
|                                            

Selling
expense increased $5.1 million for fiscal year 2007, primarily due to $3.2
million increased compensation, benefits and commissions in the Test segment,
primarily due to normal annual merit increases as well as increased order volume,
$1.8 million planned investment in strategic sales and marketing initiatives in
the Sensors segment, and an estimated $1.6 million unfavorable impact of
currency translation, partially offset by a $1.5 million reduction in selling
costs associated with the exit of the noise and vibration business. Selling
expense decreased in fiscal year 2006 compared to fiscal year 2005, primarily
due to a $4.1 million reduction in selling costs associated with the exited
noise and vibration business and an estimated $1.1 million favorable impact of
currency translation, partially offset by $2.6 million increased spending on
sales and marketing initiatives in the Test segment, $1.4 million increased
sales incentives and commissions due to higher revenue in the Sensors segment,
and $1.1 million stock-based compensation expense.

General and
administrative expense decreased $0.8 million for fiscal year 2007, primarily
due to $3.2 million decrease in consulting and professional fees, partially
offset by a $1.8 million increase in compensation and benefits and an estimated
$0.6 million unfavorable impact of currency translation. General and
administrative expense increased $3.8 million in fiscal year 2006 compared to
fiscal year 2005, primarily due to $1.9 million stock-based compensation
expense, $1.6 million increased consulting and other professional fees, $1.1
million increased legal expenses, and $0.2 million increased bad debt expense,
partially offset by $0.9 reduced expense associated with the exited noise and
vibration business and an estimated $0.3 million favorable impact of currency
translation.

Selling, general
and administrative (SG&A) expense for the Test segment increased slightly
to $79.8 million in fiscal year 2007 from $79.7 million and $77.6 million in
fiscal years 2006 and 2005, respectively. A $3.2 million increase in
compensation, benefits and commissions, as well as an estimated $1.6 million
unfavorable impact of currency translation in fiscal year 2007 was mainly
offset by $3.2 million decreased consulting and other professional fees, and
$1.5 million reduced expense associated with the exited noise and vibration
business. The increase in fiscal year 2006 was primarily due to $2.7 million
stock-based compensation expense, $2.6 million increased consulting, legal, and
other professional fees, and $2.6 million increased sales and marketing initiatives,
partially offset by $5.0 million reduced expense associated with the exited
noise and vibration business and an estimated $0.9 million favorable impact of
currency translation.

SG&A
expense for the Sensors segment increased to $23.8 million in fiscal year 2007
from $19.6 million and $18.1 million for fiscal years 2006 and 2005,
respectively. The increase in SG&A expense in fiscal year 2007 was
primarily due to $3.5 million increased compensation, benefits and other costs
to support investment in strategic initiatives, and an estimated $0.7 million
unfavorable impact of currency translation. The increase in SG&A expense in
fiscal year 2006 was primarily due to $1.6 million increased staffing and related
expenses and $0.3 million stock-based compensation expense, partially offset by
an estimated $0.4 million unfavorable impact of currency translation.

18

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Table of Contents

|                                  |  |                          |        |      |   |        |   |   |        |  
|--------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|Research
 and Development Expense |  |                          |        |      |   |        |   |   |        |  
|                                 
|                                  |  | 2007                     |        | 2006 |   | 2005   |  
|                                 
|                                  |  | (expressed in thousands) |       
|Research & Development            |  | $                        | 19,874 |      | $ | 18,413 |   | $ | 14,936 |  
|                                 
|% of Revenue                      |  |                          | 4.7    | %    |   | 4.6    | % |   | 4.0    | %
|                                 

Research and
development (R&D) expense includes expenses for both equipment and
software development in the Test and Sensors segments. R&D expense as a
percentage of revenue increased slightly in fiscal year 2007, primarily due to
a planned increase in expenditures for new product development in both the Test
and Sensors segments. The increase in R&D expense as a percentage of
revenue in fiscal year 2006 from fiscal year 2005 was primarily due to a
planned increase in expenditures for new product development in both the Test
and Sensors segments, partially offset by a $0.4 million decrease in expense
associated with the noise and vibration business.

During fiscal
year 2007, approximately 78.7% of the Companys total R&D spending was in
the Test Segment, compared to 80.0% and 79.5% in fiscal years 2006 and 2005,
respectively.

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

|                           |  |                          |        |      |   |        |   |   |        |  
|-------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|Interest
 (Expense) Income |  |                          |        |      |   |        |   |   |        |  
|                          
|                           |  | 2007                     |        | 2006 |   | 2005   |  
|                          
|                           |  | (expressed in thousands) |       
|Interest Expense           |  | $                        | (1,309 | )    | $ | (1,716 | ) | $ | (2,128 | )
|Interest Income            |  | $                        | 3,899  |      | $ | 3,595  |   | $ | 2,348  |  
|                          

Interest
expense of $1.3 million for fiscal year 2007 decreased from $1.7 million and
$2.1 million for fiscal years 2006 and 2005, respectively, due to reductions in
outstanding debt. Interest income of $3.9 million in fiscal year 2007 increased
from $3.6 million and $2.3 million for fiscal years 2006 and 2005,
respectively, as higher global interest rates more than offset declines in the
Companys average balances of cash, cash equivalents, and short-term
investments in the previous years.

Other Income (Expense), netOther income
for fiscal year 2007 was $0.1 million, compared to other income of $1.0 million
and other expense of $1.4 million for fiscal years 2006 and 2005, respectively.
Other income for fiscal 2007 included the favorable legal settlement of a
dispute involving intellectual property. This income was partially offset by a
net loss of $0.5 million related to currency transactions, as losses from
currency hedging activities more than offset foreign currency transaction
gains. Other income for fiscal year 2006 primarily reflected a net gain of $0.8
million related to currency transactions.

19

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Table of Contents

|                                                         |  |                          |        |      |   |        |   |   |        |  
|-------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|Operating
 Results                                       |  |                          |        |      |   |        |   |   |        |  
|                                                        
|                                                         |  | 2007                     |        | 2006 |   | 2005   |  
|                                                        
|                                                         |  | (expressed in thousands) |       
|Income Before Income Taxes
 and Discontinued Operations  |  | $                        | 58,166 |      | $ | 58,759 |   | $ | 51,814 |  
|% of Revenue                                             |  |                          | 13.8   | %    |   | 14.8   | % |   | 13.8   | %
|                                                        
|Effective Income Tax Rate                                |  |                          | 27.8   | %    |   | 33.9   | % |   | 29.4   | %
|                                                        
|Income Before Discontinued
 Operations                   |  | $                        | 41,996 |      | $ | 38,862 |   | $ | 36,569 |  
|                                                        
|Income Before Discontinued
 Operations per Diluted Share |  | $                        | 2.29   |      | $ | 2.02   |   | $ | 1.79   |  
|                                                        

Income before income taxes and discontinued operations
totaled $58.2 million for fiscal year 2007, compared to $58.8 million
for fiscal year 2006. The fiscal year 2007 decrease was primarily due to
planned increases in sales, marketing, and R&D spending to support
strategic initiatives, as well as $1.3 million unfavorable impact of foreign currency
transaction losses, partially offset by higher gross profit, $0.7 million
favorable net interest, and an estimated $1.2 million favorable impact of
currency translation. The fiscal year 2006 increase was primarily driven by
increased gross profit in both segments, $5.4 million reduced operating
expenses associated with the noise and vibration business, a $0.9 million
fiscal year 2006 gain on sale of assets of the noise and vibration business, an
estimated $2.1 million favorable net impact of foreign currency transaction
gains, and $1.7 million favorable net interest. These increases were partially
offset by $10.8 million planned increases in operating expenses, $4.2 million
of stock compensation expense, and an estimated $1.4 million unfavorable impact
of currency translation. Income before income taxes and discontinued operations
for fiscal year 2005 was $51.8 million.

Income from
operations for the Test segment was $40.7 million for fiscal year 2007, a
decrease of $4.0 million, or 8.9%, compared to $44.7 million for fiscal year
2006. Income from operations for fiscal year 2005 was $44.6 million. Income
from operations for fiscal year 2007 decreased from fiscal 2006 due to
decreased gross profit and $2.6 million planned increases in operating expenses,
partially offset by $1.5 million reduced operating expenses associated with the
noise and vibration business, and an estimated $0.3 million favorable impact of
currency translation. Income from operations for fiscal year 2006 decreased
from fiscal year 2005 due to $8.5 million planned increases in operating
expenses, $3.8 million stock compensation expense, and an estimated $0.4
million unfavorable impact of currency translation. These decreases were offset
by increased gross profit, $5.4 million reduced operating expenses associated
with the noise and vibration business, and a $0.9 million gain on sale of
assets of the noise and vibration business.

Income from
operations for the Sensors segment was $14.8 million for fiscal year 2007, an
increase of $3.7 million, or 33.3%, compared to $11.1 million for fiscal year
2006. Income from operations for the Sensors segment totaled $8.4 million for
fiscal year 2005. The increase in income from operations for fiscal year 2007
compared to fiscal year 2006 is primarily due to increased gross profit and an
estimated $0.7 million favorable impact of currency translation, partially
offset by $4.7 million planned increases in operating expenses to support
strategic initiatives. The increase in income from operations for fiscal year
2006 compared to fiscal year 2005 is primarily due to increased gross profit
resulting from higher volume, partially offset by $0.4 million of stock
compensation expense, increased SG&A expense, and an estimated $0.5 million
unfavorable impact of currency translation.

The general
level of inflation impacts the Companys operating costs. The Company does not
believe that inflation has had a significant impact on its historical operating
results and does not expect any significant near-term inflationary impact. If
the Companys operating costs were to become subject to significant
inflationary pressures, it may not be able to fully offset such higher costs
through price increases.

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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,
tax-exempt investments, research and development credits, and qualified domestic production activities. The effective tax rate is
unfavorably impacted by certain stock option and other non-deductible business expenses. The Companys effective income tax
rate for fiscal year 2007 decreased 6.1 percentage points to 27.8% compared to the effective income tax rate for fiscal year 2006
of 33.9%. This decrease was primarily due to favorable tax legislation passed during fiscal year 2007 in the U.S. and Germany, as
well as expanded R&D tax credits. The tax legislation in Germany decreased the German tax rate and entitled the primary German
subsidiary to a corporate tax refund. As a result, the German subsidiaries recorded $2.4 million of tax benefits during the fiscal
year 2007. The U.S. R&D tax credit legislation was extended during fiscal year 2007 with an effective date retroactive to
January 1, 2006. Accordingly, the Company recorded $1.2 million of tax benefits during fiscal year 2007. During fiscal year 2006,
the Company favorably resolved tax audits and other previously accrued tax matters and accordingly released $1.8 million of
previously accrued tax contingencies. As a result of fiscal year 2005 changes in 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 $2.9
million of previously accrued tax contingencies.

Fiscal year
2007 income before discontinued operations of $42.0 million, or $2.29 per
diluted share, increased from income before discontinued operations of $38.9
million, or $2.02 per diluted share, and income before discontinued operations
of $36.6 million, or $1.79 per diluted share, for fiscal years 2006 and 2005,
respectively.

Discontinued
OperationsIn fiscal year 2005, the Company sold substantially
all of the net assets of its engine test business, which 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 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 are excluded from the results of
operations of the Test segment and are reported as discontinued operations for
the fiscal years ended September 30, 2006 and October 1, 2005.

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 fiscal year 2005. The AeroMet subsidiary was historically
included in the Companys Industrial segment (now the Sensors segment) for
financial reporting. The loss on disposition of the AeroMet business and its
results of operations are excluded from the results of operations of the
Sensors segment and are reported as discontinued operations for the fiscal
years ended September 30, 2006 and October 1, 2005.

The Company does not allocate
interest income or interest expense to discontinued operations. There was no effect on the Companys net income in fiscal year
2007 related to discontinued operations. Operating results of the discontinued operations included in the Companys results
for the fiscal years ended September 30, 2006 and October 1, 2005 were as follows:

|                                                                               |  |                           |     |      |   |        |  
|------------------------------------------------------------------------------ |  | ------------------------- | --- | ---- | - | ------ | -
|                                                                               |  | 2006                      |     | 2005 |  
|                                                                               |  |                           |     |      |  
|                                                                               |  | (expressed
 in thousands) |    
|Revenue                                                                        |  | $                         |    |      | $ | 15,982 |  
|Income (loss) on discontinued operations before taxes and gain (loss)
 on sale |  |                           | 629 |      |   | (3,918 | )
|Provision (benefit) for
 income taxes                                          |  |                           | 168 |      |   | (1,329 | )
|                                                                               |  |                           |     |      |   |        |  
|Income (loss) from
 discontinued operations, net of tax                        |  | $                         | 461 |      | $ | (2,589 | )
|                                                                               |  |                           |     |      |   |        |  

The assets of discontinued
operations at September 30, 2006 were as follows:

|                                                              |  |                           |     | 
|------------------------------------------------------------- |  | ------------------------- | --- | 
|                                                              |  | 2006                      |    
|                                                              |  |                           |    
|                                                              |  | (expressed
 in thousands) |    
|Accounts receivable, net of
 allowances for doubtful accounts |  | $                         | 635 | 
|Other current assets                                          |  |                           | 168 | 
|                                                              |  |                           |     | 
|Total assets of
 discontinued operations                      |  | $                         | 803 | 
|                                                              |  |                           |     | 

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Cash FlowTotal cash and cash equivalents increased $6.4 million
during fiscal year 2007, primarily due to strong earnings, net proceeds from
the conversion of short-term investments to cash and cash equivalents, proceeds
from the exercise of stock options, and a favorable impact of currency
translation, partially offset by purchases of the Companys common stock,
increased working capital requirements, repayment of long-term debt, and
dividend payments. Total cash and cash equivalents increased $14.8 million
during fiscal year 2006, primarily due to strong earnings, net proceeds from
the conversion of short-term investments to cash and cash equivalents, and
proceeds from the exercise of stock options, partially offset by purchases of
the Companys common stock, increased working capital requirements, repayment
of long-term debt, and dividend payments. 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.

Cash flow from
operating activities provided cash of $44.9 million during
fiscal year 2007, compared to cash provided of $38.2 million and $56.4 million
in fiscal years 2006 and 2005, respectively. Fiscal year 2007 cash flow from
operating activities was primarily due to strong earnings and a $7.7 million
increase in income taxes payable, partially offset by $9.5 million increased
working capital requirements and a $4.6 net increase in deferred tax assets.
Operating cash flow in fiscal year 2006 primarily resulted from strong earnings
and a net decrease in deferred tax assets of $2.3 million, partially offset by
$11.2 million increased working capital requirements. Fiscal year 2005 cash
flow from operating activities was primarily due to strong earnings, a $6.0
million decrease in working capital requirements, and $6.2 million tax benefit
from the exercise of stock options.

Cash flow from
investing activities required a use of cash of $5.2
million during fiscal year 2007, compared to cash provided of $47.5 million
during fiscal year 2006 and a use of cash of $7.5 million during fiscal year
2005. During fiscal year 2007, the Company invested $12.7 million in property
and equipment additions, and received net proceeds of $6.5 million and $1.0
million from the maturity of short-term investments and the sale of assets
associated with the Companys linear friction welding technology, respectively.
During fiscal year 2006, the Company received net proceeds of $53.1 million
from the maturity of short-term investments and $1.9 million related to the
fiscal year 2005 sale of discontinued businesses and invested $7.5 million in
property and equipment additions. During fiscal year 2005, the Company invested
$14.3 million in net purchases of short-term investments and $7.1 million in
property and equipment additions and received $14.2 million net proceeds from
the sale of discontinued businesses.

Cash flow from
financing activities required a use of cash of $41.5
million during fiscal year 2007, compared to $73.6 million and $30.9 million
used in fiscal years 2006 and 2005, respectively. During fiscal year 2007, the
Companys cash usage primarily resulted from purchases of the Companys common
stock of $38.2 million, net repayment of interest-bearing debt of $6.7 million,
and payment of cash dividends of $8.0 million, partially offset by $9.3 million
received from stock option exercises and stock purchases under the Companys
employee stock purchase plan, and $2.1 million excess tax benefits from
stock-based compensation. The cash usage in fiscal year 2006 primarily resulted
from purchases of the Companys common stock of $64.5 million, net repayment of
interest-bearing debt of $8.0 million, and payment of cash dividends of $7.6
million, partially offset by $1.2 million excess tax benefits from stock-based
compensation, and $5.2 million received from stock option exercises and stock
purchases under the Companys employee stock purchase plan. During fiscal year
2005, the Companys cash usage 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 stock option exercises and purchases of
stock under the Companys employee stock purchase plan.

During fiscal
year 2007, 2006, and 2005 the Company purchased approximately 1.0 million, 1.8
million, and 1.0 million shares of its common stock, respectively, for $38.2
million, $64.5 million, and $33.7 million, respectively.

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Liquidity and Capital
ResourcesThe Company had cash, cash equivalents and short-term
investments of $121.4 million at September 29, 2007. Of this amount,
approximately $31.7 million was located in North America, $66.2 million in
Europe, and $23.5 million in Asia. The North American balance was primarily invested
in U.S. municipal securities directly or through money market funds, as well as
in taxable money market funds and in bank deposits. In Europe, the balances
were primarily invested in a Euro money market fund and bank deposits. In Asia,
the balances were primarily invested in bank deposits.

At September
29, 2007, the Companys capital structure was comprised of $0.3 million in
short-term debt, $9.0 million in long-term debt, and $189.7 million in
Shareholders Investment. Total interest-bearing debt at September 29, 2007 was
$9.0 million, down from $15.7 million at September 30, 2006, due to scheduled
long term debt payments. Shareholders Investment increased by $20.4 million
during fiscal year 2007, primarily due to strong operating results, $9.3 million
received from stock option exercises and stock purchases under the Companys
employee stock purchase plan, $9.3 million of foreign currency translation
gains, $5.1 million in stock-based compensation, and $2.7 million excess tax
benefits from stock-based compensation, partially offset by $38.2 million in
purchases of the Companys common stock, and $8.7 million in dividends
declared.

The Company
believes its liquidity, represented by cash, cash equivalents, short-term
investments, anticipated cash from operations, and capital structure 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 acquisitions.

At September 29, 2007, 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                            |  | $     | 265    |                   | $                                                | 265         |  | $           |       |                    | $ |      |  | $ |       | 
|Long-Term Debt Obligations               |  |       | 8,991  |                   |                                                  | 6,683       |  |             | 2,308  |                    |   |      |  |   |       | 
|Capital Lease Obligations                |  |       | 24     |                   |                                                  | 19          |  |             | 5      |                    |   |      |  |   |       | 
|Operating Lease Obligations              |  |       | 18,654 |                   |                                                  | 5,324       |  |             | 7,105  |                    |   | 3,256 |  |   | 2,969  | 
|Interest Payable                         |  |       | 718    |                   |                                                  | 589         |  |             | 129    |                    |   |      |  |   |       | 
|Pension and Other Long-Term
 Obligations |  |       | 15,684 |                   |                                                  | 346         |  |             | 1,106  |                    |   | 680   |  |   | 13,552 | 
|                                         |  |       |        |                   |                                                  |             |  |             |        |                    |   |       |  |   |        | 
|Total                                    |  | $     | 44,336 |                   | $                                                | 13,226      |  | $           | 10,653 |                    | $ | 3,936 |  | $ | 16,521 | 
|                                         |  |       |        |                   |                                                  |             |  |             |        |                    |   |       |  |   |        | 

Notes payable outstanding at September 29, 2007 and September 30, 2006 consisted of
non-interest bearing notes payable to vendors by the Companys Japanese Sensors
subsidiary. Under the terms of its long-term debt agreements, the Company has
agreed to certain financial covenants. At September 29, 2007, the Company was
in compliance with the financial terms and conditions of its long-term debt
agreements.

At September
29, 2007, the Company had letters of credit and guarantees outstanding totaling
$57.2 million and $1.2 million, respectively, primarily to bond advance
payments and performance related to customer contracts in the Test segment. The
Companys operating leases are primarily for office space and automobiles.

Off-Balance Sheet
ArrangementsAt the end of fiscal year 2007, the Company did not
have any off-balance sheet arrangements, as such term is defined in rules
promulgated by the SEC, that have or are reasonably likely to have a current or
future effect on the Companys financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.

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Restructuring and
Other Charges 
In fiscal year 2005, the Company decided to exit its noise and vibration
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
exit costs of $4.5 million recorded, $3.6 million, $0.7 million and $0.2
million were included in Cost of Sales, Selling Expense, and General and
Administrative Expense, respectively, on the Consolidated Statements of Income
for fiscal year 2005. These expenses were reported within the results of
operations of the Companys Test segment. Substantially all of the severance
costs were paid in fiscal year 2006, with the remaining balance being paid in
fiscal year 2007.

The Company had no significant
restructuring activities in fiscal years 2007 or 2006. For the fiscal years
ending September 29, 2007, September 30, 2006, and October 1, 2005, the reserve
for restructuring was as follows:

|                                |  |                          |        |                                |   |       |   |   |        |  
|------------------------------- |  | ------------------------ | ------ | ------------------------------ | - | ----- | - | - | ------ | -
|                                |  | Severance
 Charges       |        | Contract
 Termination
 Charges |   | Total |  
|                                |  |                          |        |                                |   |       |  
|                                |  | (expressed in thousands) |       
|Balances at October 1, 2005     |  | $                        | 1,267  |                                | $ | 52    |   | $ | 1,319  |  
|Provision                       |  |                          | 30     |                                |   |      |   |   | 30     |  
|Write-off/payments              |  |                          | (1,257 | )                              |   | (52   | ) |   | (1,309 | )
|                                |  |                          |        |                                |   |       |   |   |        |  
|Balances at September 30,
 2006 |  |                          | 40     |                                |   |      |   |   | 40     |  
|                                |  |                          |        |                                |   |       |   |   |        |  
|Provision                       |  |                          |       |                                |   |      |   |   |       |  
|Write-off/payments              |  |                          | (40    | )                              |   |      |   |   | (40    | )
|                                |  |                          |        |                                |   |       |   |   |        |  
|Balances at September 29,
 2007 |  | $                        |       |                                | $ |      |   | $ |       |  
|                                |  |                          |        |                                |   |       |   |   |        |  

Critical Accounting
PoliciesThe 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, 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
see Summary of Significant Accounting Policies and Stock-Based Compensation
under Notes 1 and 2, respectively, to the Consolidated Financial Statements,
appearing under Item 8 of this Annual Report on Form 10-K.

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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Stock-Based
Compensation: For purposes of determining estimated fair value of stock-based
payment awards on the date of grant, the Company utilizes a Black-Scholes
option pricing model. The Black-Scholes model requires the input of certain
assumptions that require management judgment. Because the Companys employee
stock options and restricted stock awards have characteristics significantly
different from those of traded options, and because changes in the input
assumptions can materially affect fair value estimates, existing models may not
provide a reliable single measure of the fair value of employee stock options or
restricted stock awards. Management will continue to assess the assumptions and
methodologies used to calculate estimated fair value of stock-based
compensation. Circumstances may change and additional data may become available
over time that could result in changes to these assumptions and methodologies
and thereby materially impact the fair value determination. If factors change
and the Company employs different assumptions in future periods, the
compensation expense may differ significantly from the expense recorded in the
current period.

Income Taxes:
The Company records a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax
assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in
which those deferred tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance
to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The Company believes it is more
likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies,
together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable
value of its deferred tax assets. In the event that all or part of the net deferred tax assets are
determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period
such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact
of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with
managements expectations could have a material impact on the Companys financial condition and operating results.

Recent Accounting
PronouncementsIn July 2006, the FASB issued FIN No. 48, Accounting
for Uncertainty in Income Taxes. FIN 48 defines the threshold for recognizing
the benefits of tax positions in the financial statements as
more-likely-than-not to be sustained upon examination. The interpretation
also provides guidance on the de-recognition, measurement and classification of
income tax uncertainties, along with any related interest and penalties. FIN 48
also includes guidance concerning accounting for income tax uncertainties in
interim periods and increases the level of required disclosures associated with
any recorded income tax uncertainties. The differences between the amounts
recognized in the statements of financial position prior to the adoption of FIN
48 and the amounts reported after adoption are to be accounted for as a
cumulative-effect adjustment recorded to the beginning balance of retained
earnings. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company will adopt the provisions of FIN 48 in the first quarter of
fiscal year 2008, as required. Management does not currently expect that
adoption will have a material impact on the Companys consolidated results of
operations or financial position.

In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under this statement, fair value measurements are
required to be separately disclosed, by level, within the fair value hierarchy.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
The Company is evaluating the impact of the adoption of SFAS No. 157 on its
consolidated financial statements.

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In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 159 allows entities to
choose, at specified election dates, to measure eligible financial assets and
liabilities at fair value in situations in which they are not otherwise
required to be measured at fair value. If a company elects the fair value
option for an eligible item, changes in
that items fair value in subsequent reporting periods must be recognized in
current period earnings. SFAS No. 159 also establishes presentation and
disclosure requirements designed to draw comparison between entities that elect
different measurement attributes for similar assets and liabilities. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007. The
Company is evaluating the impact of the adoption of SFAS No. 159 on its
consolidated financial statements.

Quarterly Financial InformationRevenue 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 method of revenue recognition. 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 September 29, 2007
and September 30, 2006 was as follows:

|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|------------------------------------------------------ |  | ----------------------------------------------- | ------ | ---------------- | - | --------------- |  | ---------------- | ------- | ------------ | - | ------- |  | - | ------- | 
|                                                       |  | First
  Quarter                                 |        | Second
  Quarter |   | Third
  Quarter |  | Fourth
  Quarter |         | Total
  Year |  
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |  
|                                                       |  | (expressed in thousands, except per share data) |       
|                                                      
|2007                                                   |  |                                                 |       
|Revenue                                                |  | $                                               | 99,056 |                  | $ | 101,830         |  | $                | 108,555 |              | $ | 111,063 |  | $ | 420,504 | 
|Gross profit                                           |  |                                                 | 42,108 |                  |   | 45,869          |  |                  | 42,791  |              |   | 47,448  |  |   | 178,216 | 
|Income before income taxes                             |  |                                                 | 13,284 |                  |   | 16,424          |  |                  | 12,680  |              |   | 15,778  |  |   | 58,166  | 
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Net income                                             |  | $                                               | 10,117 |                  | $ | 10,331          |  | $                | 10,005  |              | $ | 11,543  |  | $ | 41,996  | 
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Earnings per share:                                    |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Basic                                                  |  | $                                               | 0.55   |                  | $ | 0.57            |  | $                | 0.57    |              | $ | 0.65    |  | $ | 2.34    | 
|Diluted                                                |  | $                                               | 0.54   |                  | $ | 0.56            |  | $                | 0.55    |              | $ | 0.64    |  | $ | 2.29    | 
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|                                                      
|2006                                                   |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Revenue                                                |  | $                                               | 91,843 |                  | $ | 102,868         |  | $                | 95,887  |              | $ | 106,187 |  | $ | 396,785 | 
|Gross profit                                           |  |                                                 | 40,569 |                  |   | 45,781          |  |                  | 40,967  |              |   | 45,348  |  |   | 172,665 | 
|Income before income taxes and discontinued operations |  |                                                 | 12,567 |                  |   | 17,787          |  |                  | 12,775  |              |   | 15,630  |  |   | 58,759  | 
|Income before discontinued operations                  |  |                                                 | 7,956  |                  |   | 11,299          |  |                  | 8,489   |              |   | 11,118  |  |   | 38,862  | 
|Discontinued operations, net of tax                    |  |                                                 |       |                  |   |                |  |                  |        |              |   | 461     |  |   | 461     | 
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Net income                                             |  | $                                               | 7,956  |                  | $ | 11,299          |  | $                | 8,489   |              | $ | 11,579  |  | $ | 39,323  | 
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Earnings per share:                                    |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Basic                                                 
|Income before discontinued operations                  |  | $                                               | 0.41   |                  | $ | 0.59            |  | $                | 0.46    |              | $ | 0.62    |  | $ | 2.08    | 
|Discontinued operations, net of tax                    |  |                                                 |       |                  |   |                |  |                  |        |              |   | 0.02    |  |   | 0.02    | 
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Earnings per share                                     |  | $                                               | 0.41   |                  | $ | 0.59            |  | $                | 0.46    |              | $ | 0.64    |  | $ | 2.10    | 
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Diluted                                                |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Income before discontinued operations                  |  | $                                               | 0.40   |                  | $ | 0.58            |  | $                | 0.45    |              | $ | 0.59    |  | $ | 2.02    | 
|Discontinued operations, net of tax                    |  |                                                 |       |                  |   |                |  |                  |        |              |   | 0.02    |  |   | 0.02    | 
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 
|Earnings per share                                     |  | $                                               | 0.40   |                  | $ | 0.58            |  | $                | 0.45    |              | $ | 0.61    |  | $ | 2.04    | 
|                                                       |  |                                                 |        |                  |   |                 |  |                  |         |              |   |         |  |   |         | 

26

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|         |                                                             
|-------- | ------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative
  Disclosures About Market Risk

Foreign Currency Exchange RiskApproximately
65-70% of the Companys revenue is derived from shipments to customers outside
the U.S. and about 65% of this revenue (approximately 45% of the Companys
total revenue) is denominated in currencies other than the U.S. dollar. The
Companys international subsidiaries have functional currencies other than the
Companys U.S. dollar reporting currency and transact business in currencies
other than their functional currencies. This exposes the Company to market risk
related to the local currency value of foreign currency denominated assets,
liabilities and cash flows.

The
strengthening of the U.S. dollar relative to foreign currencies decreases the
value of foreign currency-denominated revenue and earnings when translated into
U.S. dollars. Conversely, a weakening of the U.S. dollar increases the value of
foreign currency-denominated revenue and earnings. The following table
illustrates financial results utilizing currency exchange rates from the prior
year to estimate the impact of currency on the following financial items:

Foreign Currency Exchange Rates

|                                                  |  |                          |        |      |   |        |   |   |       | 
|------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ----- | 
|                                                  |  | 2007                     |        | 2006 |   | 2005   |  
|                                                  |  |                          |        |      |   |        |  
|                                                  |  | (expressed in thousands) |       
|Increase (decrease) from currency translation on: |  |                          |        |      |   |        |   |   |       | 
|Orders                                            |  | $                        | 9,107  |      | $ | (6,901 | ) | $ | 7,883 | 
|Revenue                                           |  |                          | 11,593 |      |   | (9,590 | ) |   | 7,392 | 
|Net Income                                        |  | $                        | 868    |      | $ | (895   | ) | $ | 436   | 
|                                                  |  |                          |        |      |   |        |   |   |       | 

The net effect
of currency translation on orders, revenue, and net income was favorable in
fiscal year 2007, as the value of the U.S. dollar decreased by approximately
11% against the Euro and by approximately 3% against the Japanese Yen. The U.S.
dollar also decreased against most other foreign currencies in fiscal year
2007.

A hypothetical
10% appreciation or depreciation in foreign currencies against the U.S. dollar,
assuming all other variables are held constant, would result in an increase or
decrease in fiscal year 2007 revenue of approximately $18.0 million.

The Company
has operational procedures to mitigate these non-functional currency exposures.
The Company also utilizes committed and optional foreign currency exchange
contracts to exchange currencies at set exchange rates on future dates to
offset expected gains or losses on specifically identified exposures. See Note
1 to the Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K.

Gains and
losses on foreign currency transactions are included in Other Income (Expense),
net in the accompanying Consolidated Statements of Income, and was a net loss
of $0.5 million in fiscal year 2007, a net gain of $0.8 million in fiscal year
2006, and a net loss of $1.3 million in fiscal year 2005. 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 associated mark-to-market gains
and losses are reclassified from Accumulated Other Comprehensive Income to
Other Income (Expense), net on the Consolidated Statements of Income.

27

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Interest RatesThe Company is also directly exposed to changes in
market interest rates on cash, cash equivalents, short-term investments, and
debt and is indirectly exposed to the impact of market interest rates on
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 investments, 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 September
29, 2007, the Company had cash, cash equivalents, and short-term investments of
$121 million. Most of this balance was invested in interest-bearing bank
deposits, money market funds, or long-term U.S. municipal bonds. For virtually
all these investments, interest rates re-set every 1-49 days. A hypothetical
increase or decrease of 1% in market interest rates, assuming all other
variables were held constant, would increase or decrease interest income by
approximately $1.2 million.

The Companys
short-term debt outstanding at the end of fiscal year 2007 is non-interest
bearing and therefore is not impacted by the effect of increases or decreases
in market interest rates on interest expense. The Companys long-term debt has
fixed rates of interest. Therefore, changes in market interest rates have no
impact on interest expense associated with this debt.

A discount
rate of 5.4% 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
the non-contributory, unfunded defined benefit pension plan of one of the
Companys international subsidiaries.

|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

The Companys
audited financial statements and notes thereto described in Item 15(1) of this
Annual Report on Form 10-K, and appearing on pages F-1 through F-28 of this
report, are incorporated by reference herein. See also Quarterly Financial
Data in Managements Discussion and Analysis under Item 7 of this Annual
Report on 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 September 29, 2007.
Based on that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in the reports it files or submits under the 1934 Act is
recorded, processed, summarized, and reported within the time periods specified
in the SECs rules and forms.

There have
been no changes in internal control over financial reporting during the fiscal
quarter ended September 29, 2007 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

28

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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 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 September 29, 2007. 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
September 29, 2007.

|         |                  
|-------- | -----------------
|Item 9B. | Other Information

On November 27, 2007, the Board of Directors of the Company amended Article VIII of the Companys
Bylaws to allow the Companys shares to be either certificated or uncertificated. This change was required
in order for the Company to be eligible to participate in the Direct Registration System, which allows
shareowners to have shares registered in their names without the issuance of physical certificates, as well as
electronically transfer securities to broker-dealers in order to effect transactions
without the risks and delays associated with transferring physical certificates.

The Amended and Restated Bylaws of the Company, as amended on November 27, 2007 to reflect new
Article VIII, are filed as Exhibit 3.b to this Form 10-K.

PART III

|         |                                               
|-------- | ----------------------------------------------
|Item 10. | Directors and Executive Officers of Registrant

The required
information with respect to the directors of the Company, the Companys Code of
Business Conduct and compliance with Section 16(a) of the Securities Exchange
Act of 1934, is incorporated herein by reference to the information set forth
under the headings Election of Directors and Other Information in the
Companys Proxy Statement for the Annual Meeting of Shareowners scheduled to be
held on January 15, 2008. Information regarding the Companys executive
officers is contained under Item 1 of this Annual Report on Form 10-K.

|         |                       
|-------- | ----------------------
|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 Companys Proxy Statement for the Annual
Meeting of Shareowners scheduled to be held on January 15, 2008.

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

Equity Compensation Plan Information:

The following
table sets forth the aggregate information regarding grants under all equity
compensation plans as of September 29, 2007:

|                                                             |  |                                                                                                                         |       |                                                                                    |   |                                                                                                                                                                             |  |  |       | 
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | 
|Plan Category                                                |  | Number
  of Securities to
  be Issued Upon Exercise of
  Outstanding Options, Warrants
  and Rights
  (in thousands)(a) |       | Weighted-
  Average
  Exercise
  Price of
  Outstanding
  Warrants and
  Rights(b) |   | Number
  of Securities
  Remaining Available for
  Future Issuance Under
  Equity Compensation Plans
  (Excluding Securities Reflected
  in Column (a))(1)(in thousands)(c) | 
|                                                             |  |                                                                                                                         |       |                                                                                    |   |                                                                                                                                                                             |  |  |       | 
|Equity compensation plans
  approved by security holders     |  |                                                                                                                         | 1,610 |                                                                                    | $ | 34.12                                                                                                                                                                       |  |  | 2,144 | 
|Equity compensation plans not approved by
  security holders |  |                                                                                                                         |      |                                                                                    | $ |                                                                                                                                                                            |  |  |      | 
|                                                             |  |                                                                                                                         |       |                                                                                    |   |                                                                                                                                                                             |  |  |       | 
|                                                             |  |                                                                                                                         |       |                                                                                    |   |                                                                                                                                                                             |  |  |       | 
|Total                                                        |  |                                                                                                                         | 1,610 |                                                                                    | $ | 34.12                                                                                                                                                                       |  |  | 2,144 | 
|                                                             |  |                                                                                                                         |       |                                                                                    |   |                                                                                                                                                                             |  |  |       | 

(1) Includes 535 shares available for issuance under
the 2002 Employee Stock Purchase Plan as of September 29, 2007.

29

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Certain other
information required by this Item is incorporated herein by reference to the
information set forth under the heading Other Information - Security Ownership
of Principal Shareowners and Management in the Companys Proxy Statement for
the Annual Meeting of Shareowners scheduled to be held on January 15, 2008.

|         |                                                                             
|-------- | ----------------------------------------------------------------------------
|Item 13. | Certain Relationships and Related
  Transactions, and Directors Independence

The
information required by this Item is incorporated herein by reference to the
information set forth under headings Election of Directors and Other
Information  Related Party Transactions in the Companys Proxy Statement for
the Annual Meeting of Shareowners scheduled to be held on January 15, 2008.

|         |                                         
|-------- | ----------------------------------------
|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 Ratification of Appointment of
Independent Registered Public Accounting Firm in the Companys Proxy Statement
for the Annual Meeting of Shareowners scheduled to be held on January 15, 2008.

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  September 29, 2007 and September 30, 2006                                                             
|         |                                                             |                                              |                                                                                                                                       
|         |                                                             |                                              | Consolidated
  Statements of Income for the Years Ended
  September 29, 2007, September 30, 2006 and October 1, 2005                  
|         |                                                             |                                              |                                                                                                                                       
|         |                                                             |                                              | Consolidated
  Statements of Shareholders Investment for the Years Ended September 29,
  2007, September 30, 2006 and October 1, 2005
|         |                                                             |                                              |                                                                                                                                       
|         |                                                             |                                              | Consolidated
  Statements of Cash Flows for the Years Ended September 29,
  2007, September 30, 2006 and October 1, 2005              
|         |                                                             |                                              |                                                                                                                                       
|         |                                                             |                                              | Notes to
  Consolidated Financial Statements                                                                                          
|         |                                                             |                                              |                                                                                                                                       
|         |                                                             |                                              | Financial
  Statement Schedule                                                                                                        
|         |                                                             |                                              |                                                                                                                                       
|         |                                                             | (2)       Financial Statement Schedules:    
|         |                                                             |                                             
|         |                                                             |                                              | See
  accompanying Index to Financial Statements on page F-1.                                                                         

30

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| |                    
| | -------------------
| | (3)       Exhibits:

| |                  |  |                                                                                                                                                                                                                                                                           
| | ---------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit
  Number |  | Description                                                                                                                                                                                                                                                               
| |                  |  |                                                                                                                                                                                                                                                                           
| |                  |  |                                                                                                                                                                                                                                                                           
| | 3.a              |  | Restated and
  Amended Articles of Incorporation, incorporated herein by reference
  from Exhibit 3.a of the Companys Form 10-K for the fiscal year ended
  September 30, 1996.                                                                                          
| |                  |  |                                                                                                                                                                                                                                                                           
| | 3.b              |  | Amended and
  Restated Bylaws (Filed herewith).                                                                                                                                                                                                                           
| |                  |  |                                                                                                                                                                                                                                                                           
| | 10.a             |  | Executive
  Variable Compensation Plan, incorporated herein by reference to Exhibit 99.1
  of the Companys Form 8-K Current Report filed on November 30, 2004.                                                                                                           
| |                  |  |                                                                                                                                                                                                                                                                           
| | 10.b             |  | 1994 Stock
  Option Plan, as amended, incorporated herein by reference to Exhibit 10.e of
  the Company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 Companys Form 10-K filed for the fiscal year ended September 30, 1996
  and Exhibit 10.p of the Companys Form 10-K filed for the fiscal year ended
  September 30, 1999.
| |                  |  |                                                                                                                                                                                                                                                                           
| | 10.d             |  | 2002
  Employee Stock Purchase Plan, as amended, incorporated herein by reference to
  Exhibit 10.d of the Companys Form 10-K filed for the fiscal year ended
  October 1, 2005.                                                                                         
| |                  |  |                                                                                                                                                                                                                                                                           
| | 10.e             |  | 2006
  Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 of the
  Companys Form 8-K Current Report filed on February 7, 2006.                                                                                                                       
| |                  |  |                                                                                                                                                                                                                                                                           
| | 10.f             |  | Form of
  Notice of Grant of Restricted Stock under 2006 Stock Incentive Plan,
  incorporated herein by reference to Exhibit 99.2 of the Companys Form 8-K
  Current Report filed on February 7, 2006.                                                                   
| |                  |  |                                                                                                                                                                                                                                                                           
| | 10.g             |  | Uniform Terms
  and Conditions to Restricted Stock Awards under 2006 Stock Incentive Plan,
  incorporated herein by reference to Exhibit 99.3 of Companys Form 8-K
  Current Report filed on February 7, 2006.                                                           
| |                  |  |                                                                                                                                                                                                                                                                           
| | 10.h             |  | Severance
  Agreement, dated March 16, 1998, between the Company and Sidney W. Emery,
  Jr., incorporated herein by reference to Exhibit 10.r of the Companys Form
  10-K filed for the fiscal year ended September 30, 1998.                                            
| |                  |  |                                                                                                                                                                                                                                                                           
| | 10.i             |  | Severance
  Agreement dated January 3, 2000, between the Company and Kathleen M. Staby,
  incorporated herein by reference to Exhibit 10.x of the Companys Form 10-K
  filed for the fiscal year ended September 30, 2000.                                               
| |                  |  |                                                                                                                                                                                                                                                                           
| | 10.j             |  | Form of
  Change in Control Agreement between the Company and Sidney W. Emery, Jr.,
  Kathleen M. Staby, and Susan E. Knight, incorporated herein by reference to
  Exhibit 10.g of the Companys Form 10-K filed for the fiscal year ended
  October 1, 2005.            

31

---

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| |      |  |                                                                                                                                                                                                                                                                                  
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |  |                                                                                                                                                                                                                                                                                  
| | 10.k |  | Description
  of the terms of employment of Susan E. Knight, pursuant to an offer letter,
  incorporated by reference to Exhibit 10.r of the Companys Form 10-Q/A for
  the fiscal quarter ended December 31, 2001.                                                             
| |      |  |                                                                                                                                                                                                                                                                                  
| | 10.l |  | 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
  Companys Form 10-K for the fiscal year ended September 28, 2002.                                        
| |      |  |                                                                                                                                                                                                                                                                                  
| | 10.m |  | 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 Companys Form 10-K filed
  for fiscal year ended October 2, 2004.
| |      |  |                                                                                                                                                                                                                                                                                  
| | 10.n |  | 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
  Companys Form 10-K filed for fiscal year ended October 2, 2004.                                            
| |      |  |                                                                                                                                                                                                                                                                                  
| | 10.o |  | Change in
  Control Agreement, dated December 20, 2005, between the Company and Laura B.
  Hamilton, incorporated herein by reference to Exhibit 99.1 of the Companys
  Form 8-K Current Report filed on December 23, 2005.                                                     
| |      |  |                                                                                                                                                                                                                                                                                  
| | 10.p |  | Form of
  Indemnification Agreement between the Company and each of its directors and
  executive officers, incorporated herein by reference to Exhibit 10.1 of the
  Companys Form 8-K Current Report filed on September 1, 2006.                                              
| |      |  |                                                                                                                                                                                                                                                                                  
| | 21.  |  | Subsidiaries
  of the Company (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).                                                                                                                                                     

32

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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.

| |                           |  |                                                   | 
| | ------------------------- |  | ------------------------------------------------- | 
| | MTS SYSTEMS
  CORPORATION
| |                           |  |                                                   | 
| | By:                       |  | /s/ SIDNEY
  W. EMERY, JR.                       
| |                           |  |                                                   | 
| |                           |  | Sidney W.
  Emery, Jr.                           
| |                           |  | Chairman,
  Chief Executive Officer and President

Date: November
27, 2007

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 and
  Chief      |  | November 27
  2007 
|                          |  |                           |  |                    
|Sidney
  W. Emery, Jr.    |  | Executive
  Officer       |  |                    
|                          |  |                           |  |                    
|/s/
  SUSAN E. KNIGHT     |  | Chief
  Financial Officer |  | November 27,
  2007
|                          |  |                           |  |                    
|Susan
  E. Knight         |  | and Vice
  President      |  |                    
|                          |  |                           |  |                    
|/s/
  RICARDO ARTIGAS     |  | Director                  |  | November 27,
  2007
|                          |  |                           |  |                    
|Ricardo
  Artigas         |  |                           |  |                    
|                          |  |                           |  |                    
|/s/
  JEAN-LOU CHAMEAU    |  | Director                  |  | November 27,
  2007
|                          |  |                           |  |                    
|Jean-Lou
  Chameau        |  |                           |  |                    
|                          |  |                           |  |                    
|/s/
  MERLIN E. DEWING    |  | Director                  |  | November 27,
  2007
|                          |  |                           |  |                    
|Merlin
  E. Dewing        |  |                           |  |                    
|                          |  |                           |  |                    
|/s/
  LAURA B. HAMILTON   |  | Director                  |  | November 27,
  2007
|                          |  |                           |  |                    
|Laura
  B. Hamilton       |  |                           |  |                    
|                          |  |                           |  |                    
|/s/
  BRENDAN C. HEGARTY  |  | Director                  |  | November 27,
  2007
|                          |  |                           |  |                    
|Brendan
  C. Hegarty      |  |                           |  |                    
|                          |  |                           |  |                    
|/s/
  LOIS M. MARTIN      |  | Director                  |  | November 27,
  2007
|                          |  |                           |  |                    
|Lois
  M. Martin          |  |                           |  |                    
|                          |  |                           |  |                    
|/s/
  BARB J. SAMARDZICH  |  | Director                  |  | November 27,
  2007
|                          |  |                           |  |                    
|Barb
  J. Samardzich      |  |                           |  |                    

33

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MTS Systems Corporation and Subsidiaries

Index to Financial Statements

|                                                                                                                                                                       |                                                                                         |                    | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------ | 
|CONSOLIDATED
FINANCIAL STATEMENTS                                                                                                                                      | Page                                                                                   
|                                                                                                                                                                       |                                                                                        
|                                                                                                                                                                       |                                                                                         |                   
|Report of Independent Registered Public Accounting Firm                                                                                                                | F-2                                                                                    
|                                                                                                                                                                       |                                                                                         |                   
|Report of Independent Registered Public Accounting Firm                                                                                                                | F-3                                                                                    
|                                                                                                                                                                       |                                                                                         |                   
|Consolidated Balance Sheets  September 29, 2007 and September 30,
  2006                                                                                              | F-4                                                                                    
|                                                                                                                                                                       |                                                                                         |                   
|Consolidated Statements of Income for the Years Ended September 29,
  2007, September 30, 2006 and October 1, 2005                                                     | F-5                                                                                    
|                                                                                                                                                                       |                                                                                         |                   
|Consolidated Statements of Shareholders Investment and Comprehensive
  Income (Loss) for the Years Ended September 29, 2007, September 30, 2006 and
  October 1, 2005 | F-6                                                                                    
|                                                                                                                                                                       |                                                                                         |                   
|Consolidated Statements of Cash Flows for the Years Ended September
  29, 2007, September 30, 2006 and October 1, 2005                                                 | F-7                                                                                    
|                                                                                                                                                                       |                                                                                         |                   
|Notes to Consolidated Financial Statements                                                                                                                             |                                                                                         | F-8 through
  F-28
|                                                                                                                                                                       |                                                                                         |                   
|Financial
  Statement Schedule                                                                                                                                         |                                                                                        
|                                                                                                                                                                       |                                                                                         |                   
|Schedule                                                                                                                                                               | Description                                                                             |                    | 
|                                                                                                                                                                       |                                                                                         |                    | 
|                                                                                                                                                                       |                                                                                         |                   
|II                                                                                                                                                                     | Summary of Consolidated Allowances
  For Doubtful Accounts and Restructuring
  Reserves | F-29              
|                                                                                                                                                                       |                                                                                        

F-1

---

Table of Contents

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 September 29, 2007, and September 30, 2006, 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 September 29, 2007.
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
II 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MTS Systems
Corporation and subsidiaries as of September 29, 2007, and September 30, 2006,
and the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended September 29, 2007, 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 have
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 September 29, 2007, based on criteria
established inInternal Control - Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated November 27, 2007, expressed
an unqualified opinion on the
effectiveness of the Companys internal
control over financial reporting.

| |             
| | ------------
| | /S/ KPMG LLP

Minneapolis,
Minnesota
November 27, 2007

F-2

---

Table of Contents

Report of Independent Registered Public
Accounting Firm

The Board of Directors and Shareholders
MTS Systems Corporation:

We have
audited MTS Systems Corporation and subsidiaries internal control over
financial reporting as of September 29, 2007, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).MTS Systems Corporation
and subsidiaries management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial Reporting appearing
under Item 9A of this Form 10-K. Our responsibility is to express an opinion on
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, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included 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, MTS Systems Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of September
29, 2007, 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 MTS Systems
Corporation and subsidiaries as of September 29, 2007, and September 30, 2006,
and the related consolidated statements of operations, shareholders investment
and comprehensive income (loss), and cash flows for each of the fiscal years in the
three-year period ended September 29, 2007, and our report dated November 27, 2007, expressed an unqualified opinion on those
consolidated financial statements.

| |             
| | ------------
| | /S/ KPMG LLP

Minneapolis,
Minnesota
November 27, 2007

F-3

---

Table of Contents

Consolidated Balance Sheets(September 29 and
September 30, respectively)

|                                                                                                         |  |                          |         |      |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | -
|Assets                                                                                                   |  | 2007                     |         | 2006 |  
|                                                                                                         |  |                          |         |      |  
|                                                                                                         |  | (expressed
in thousands) |        
|Current
  Assets:                                                                                        |  |                          |         |      |   |         |  
|Cash and cash equivalents                                                                                |  | $                        | 104,345 |      | $ | 97,962  |  
|Short-term investments                                                                                   |  |                          | 17,050  |      |   | 23,575  |  
|Accounts receivable, net of
  allowance for doubtful accounts of $1,518 and $1,350, respectively         |  |                          | 75,828  |      |   | 72,997  |  
|Unbilled accounts
  receivable                                                                           |  |                          | 41,026  |      |   | 27,132  |  
|Inventories                                                                                              |  |                          | 43,483  |      |   | 40,480  |  
|Prepaid expenses and other
  current assets                                                              |  |                          | 3,870   |      |   | 4,245   |  
|Current deferred tax assets                                                                              |  |                          | 6,924   |      |   | 5,134   |  
|Assets of discontinued
  operations                                                                      |  |                          |        |      |   | 803     |  
|                                                                                                         |  |                          |         |      |   |         |  
|Total current
  assets                                                                                   |  |                          | 292,526 |      |   | 272,328 |  
|                                                                                                         |  |                          |         |      |   |         |  
|                                                                                                         |  |                          |         |      |   |         |  
|Property
  and Equipment:                                                                                |  |                          |         |      |   |         |  
|Land                                                                                                     |  |                          | 1,668   |      |   | 1,668   |  
|Buildings and improvements                                                                               |  |                          | 45,525  |      |   | 42,072  |  
|Machinery and equipment                                                                                  |  |                          | 90,586  |      |   | 78,651  |  
|Accumulated depreciation                                                                                 |  |                          | (86,879 | )    |   | (78,777 | )
|                                                                                                         |  |                          |         |      |   |         |  
|Total
  property and equipment, net                                                                      |  |                          | 50,900  |      |   | 43,614  |  
|                                                                                                         |  |                          |         |      |   |         |  
|Goodwill                                                                                                 |  |                          | 4,571   |      |   | 4,466   |  
|Other assets                                                                                             |  |                          | 3,664   |      |   | 2,102   |  
|Non-current deferred tax
  assets                                                                        |  |                          | 1,320   |      |   | 1,613   |  
|                                                                                                         |  |                          |         |      |   |         |  
|Total
  assets                                                                                           |  | $                        | 352,981 |      | $ | 324,123 |  
|                                                                                                         |  |                          |         |      |   |         |  
|                                                                                                         |  |                          |         |      |   |         |  
|Liabilities
  and Shareholders Investment                                                               |  |                          |         |      |   |         |  
|                                                                                                         |  |                          |         |      |   |         |  
|                                                                                                         |  |                          |         |      |   |         |  
|Current
  Liabilities:                                                                                   |  |                          |         |      |   |         |  
|Notes payable                                                                                            |  | $                        | 265     |      | $ | 222     |  
|Current maturities of
  long-term debt                                                                   |  |                          | 6,683   |      |   | 6,683   |  
|Accounts payable                                                                                         |  |                          | 22,813  |      |   | 17,090  |  
|Accrued payroll and related
  costs                                                                      |  |                          | 29,635  |      |   | 29,273  |  
|Advance payments from
  customers                                                                        |  |                          | 51,927  |      |   | 51,356  |  
|Accrued warranty costs                                                                                   |  |                          | 6,265   |      |   | 5,894   |  
|Accrued income taxes                                                                                     |  |                          | 8,184   |      |   | 512     |  
|Current deferred income
  taxes                                                                          |  |                          | 3,564   |      |   | 4,643   |  
|Other accrued liabilities                                                                                |  |                          | 15,446  |      |   | 15,125  |  
|                                                                                                         |  |                          |         |      |   |         |  
|Total
  current liabilities                                                                              |  |                          | 144,782 |      |   | 130,798 |  
|                                                                                                         |  |                          |         |      |   |         |  
|Deferred income taxes                                                                                    |  |                          | 846     |      |   | 2,487   |  
|Long-term debt, less
  current maturities                                                                |  |                          | 2,308   |      |   | 8,990   |  
|Pension benefit plan                                                                                     |  |                          | 12,777  |      |   | 10,391  |  
|Other long-term liabilities                                                                              |  |                          | 2,567   |      |   | 2,136   |  
|                                                                                                         |  |                          |         |      |   |         |  
|Total
  liabilities                                                                                      |  |                          | 163,280 |      |   | 154,802 |  
|                                                                                                         |  |                          |         |      |   |         |  
|                                                                                                         |  |                          |         |      |   |         |  
|Shareholders
  Investment:                                                                              |  |                          |         |      |   |         |  
|Common stock, 25¢ par value; 64,000 shares authorized: 17,704 and
  18,216 shares issued and outstanding |  |                          | 4,426   |      |   | 4,554   |  
|Retained earnings                                                                                        |  |                          | 164,862 |      |   | 152,657 |  
|Accumulated other
  comprehensive income                                                                 |  |                          | 20,413  |      |   | 12,110  |  
|                                                                                                         |  |                          |         |      |   |         |  
|Total
  shareholders investment                                                                         |  |                          | 189,701 |      |   | 169,321 |  
|                                                                                                         |  |                          |         |      |   |         |  
|Total
  liabilities and shareholders investment                                                         |  | $                        | 352,981 |      | $ | 324,123 |  
|                                                                                                         |  |                          |         |      |   |         |  

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

F-4

---

Table of Contents

Consolidated Statements of Income(For the Fiscal Years
Ended September 29, September 30 and October 1, respectively)

|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|------------------------------------------------------------- |  | ------------------------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                              |  | 2007                                              |         | 2006 |   | 2005    |  
|                                                              |  |                                                   |         |      |   |         |  
|                                                              |  | (expressed in thousands,
  except per share data) |        
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Revenue:                                                      |  |                                                   |         |      |   |         |   |   |         |  
|Product                                                       |  | $                                                 | 360,569 |      | $ | 343,867 |   | $ | 328,514 |  
|Service                                                       |  |                                                   | 59,935  |      |   | 52,918  |   |   | 45,863  |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Total Revenue                                                 |  |                                                   | 420,504 |      |   | 396,785 |   |   | 374,377 |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Cost of Sales:                                                |  |                                                   |         |      |   |         |   |   |         |  
|Product                                                       |  |                                                   | 211,902 |      |   | 197,674 |   |   | 187,261 |  
|Service                                                       |  |                                                   | 30,386  |      |   | 26,446  |   |   | 23,534  |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Total Cost
  of Sales                                         |  |                                                   | 242,288 |      |   | 224,120 |   |   | 210,795 |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Gross
  Profit                                                |  |                                                   | 178,216 |      |   | 172,665 |   |   | 163,582 |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Operating
  Expenses:                                         |  |                                                   |         |      |   |         |   |   |         |  
|Selling                                                       |  |                                                   | 70,245  |      |   | 65,117  |   |   | 65,254  |  
|General and administrative                                    |  |                                                   | 33,364  |      |   | 34,175  |   |   | 30,417  |  
|Research and development                                      |  |                                                   | 19,874  |      |   | 18,413  |   |   | 14,936  |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Total Operating
  Expenses                                    |  |                                                   | 123,483 |      |   | 117,705 |   |   | 110,607 |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Gain on sale of assets                                        |  |                                                   | 742     |      |   | 872     |   |   |        |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Income
  From Operations                                      |  |                                                   | 55,475  |      |   | 55,832  |   |   | 52,975  |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Interest expense                                              |  |                                                   | (1,309  | )    |   | (1,716  | ) |   | (2,128  | )
|Interest income                                               |  |                                                   | 3,899   |      |   | 3,595   |   |   | 2,348   |  
|Other income (expense), net                                   |  |                                                   | 101     |      |   | 1,048   |   |   | (1,381  | )
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Income
  Before Income Taxes and Discontinued Operations      |  |                                                   | 58,166  |      |   | 58,759  |   |   | 51,814  |  
|Provision for Income Taxes                                    |  |                                                   | 16,170  |      |   | 19,897  |   |   | 15,245  |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Income
  Before Discontinued Operations                       |  |                                                   | 41,996  |      |   | 38,862  |   |   | 36,569  |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Discontinued
  Operations:                                    |  |                                                   |         |      |   |         |   |   |         |  
|Income (loss) from
  discontinued operations, net of tax      |  |                                                   |        |      |   | 461     |   |   | (2,589  | )
|Net gain on disposal of
  discontinued businesses, net of tax |  |                                                   |        |      |   |        |   |   | 3,078   |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Income
  from Discontinued Operations, net of tax             |  |                                                   |        |      |   | 461     |   |   | 489     |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Net Income                                                    |  | $                                                 | 41,996  |      | $ | 39,323  |   | $ | 37,058  |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Earnings
  Per Share                                          |  |                                                   |         |      |   |         |   |   |         |  
|Basic:                                                        |  |                                                   |         |      |   |         |   |   |         |  
|Income Before Discontinued
  Operations                       |  | $                                                 | 2.34    |      | $ | 2.08    |   | $ | 1.86    |  
|Discontinued Operations:                                      |  |                                                   |         |      |   |         |   |   |         |  
|Income (loss) from discontinued operations, net of
tax        |  |                                                   |        |      |   | 0.02    |   |   | (0.13   | )
|Net gain on disposal of discontinued businesses,
net of tax   |  |                                                   |        |      |   |        |   |   | 0.15    |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Income
  from Discontinued Operations, net of tax             |  |                                                   |        |      |   | 0.02    |   |   | 0.02    |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Earnings
  Per Share - Basic                                  |  | $                                                 | 2.34    |      | $ | 2.10    |   | $ | 1.88    |  
|                                                              |  |                                                   |         |      |   |         |  
|Diluted:                                                      |  |                                                   |         |      |   |         |   |   |         |  
|Income Before Discontinued
  Operations                       |  | $                                                 | 2.29    |      | $ | 2.02    |   | $ | 1.79    |  
|Discontinued Operations:                                      |  |                                                   |         |      |   |         |   |   |         |  
|Income (loss) from discontinued operations, net of
tax        |  |                                                   |        |      |   | 0.02    |   |   | (0.13   | )
|Net gain on disposal of discontinued businesses,
net of tax   |  |                                                   |        |      |   |        |   |   | 0.15    |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Income
  from Discontinued Operations, net of tax             |  |                                                   |        |      |   | 0.02    |   |   | 0.02    |  
|                                                              |  |                                                   |         |      |   |         |   |   |         |  
|Earnings
  Per Share - Diluted                                |  | $                                                 | 2.29    |      | $ | 2.04    |   | $ | 1.81    |  
|                                                              |  |                                                   |         |      |   |         |  

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


|
|
|

F-5

---

Table of Contents

Consolidated Statements of Shareholders Investment
and Comprehensive Income (Loss)

(For the Fiscal Years Ended September 29, September 30, October 1,
respectively, expressed in thousands)


|                                            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  
|------------------------------------------- |  | --------------- | ------ | ------------------------------ | - | ----- | ---------------- | --------------------------------------------------- | ------- | ---------------------------------- | - | ------- | - | - | ------ | - | - | ------- | -
|                                            |  | Common Stock    |        | Additional
  Paid-In
  Capital |   |       |                  | Accumulated
  Other
  Comprehensive
  Income (Loss) |         | Total
  Shareholders
  Investment |  
|                                            |  |                 |        |                                |   |       |                  |                                                    
|                                            |  | Shares
  Issued |        |                                |   |       | RetainedEarnings |                                                     |         |                                   
|                                            |  |                 | Amount |                                |   |       |                  |                                                    
|                                            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |  
|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  |  
|Stock-based 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 from            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  
|discontinued operations                     |  |                 |       |                                |   |      |                  |                                                     | 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 |  
|                                            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  
|Net income                                  |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   | 39,323  |   |   |       |   |   | 39,323  |  
|Foreign currency
  translation              |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   |        |   |   | 2,927  |   |   | 2,927   |  
|Minimum pension liability
  adjustment      |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   |        |   |   | 115    |   |   | 115     |  
|Derivative instruments                      |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   |        |   |   | (961   | ) |   | (961    | )
|                                            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  
|Total comprehensive income                  |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   | 39,323  |   |   | 2,081  |   |   | 41,404  |  
|Exercise of stock options                   |  |                 | 288    |                                |   | 72    |                  |                                                     | 4,600   |                                    |   |        |   |   |       |   |   | 4,672   |  
|Stock-based compensation                    |  |                 | 13     |                                |   | 3     |                  |                                                     | 4,677   |                                    |   |        |   |   |       |   |   | 4,680   |  
|Tax benefit from equity
  compensation      |  |                 |       |                                |   |      |                  |                                                     | 1,686   |                                    |   |        |   |   |       |   |   | 1,686   |  
|Issuance for employee stock
  purchase plan |  |                 | 20     |                                |   | 5     |                  |                                                     | 572     |                                    |   |        |   |   |       |   |   | 577     |  
|Common stock purchased and
  retired        |  |                 | (1,769 | )                              |   | (442  | )                |                                                     | (11,535 | )                                  |   | (52,564 | ) |   |       |   |   | (64,541 | )
|Dividends, $0.41 per share                  |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   | (7,589  | ) |   |       |   |   | (7,589  | )
|                                            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  
|Balance, September 30, 2006                 |  |                 | 18,216 |                                |   | 4,554 |                  |                                                     |        |                                    |   | 152,657 |   |   | 12,110 |   |   | 169,321 |  
|                                            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  
|Net income                                  |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   | 41,996  |   |   |       |   |   | 41,996  |  
|Foreign currency
  translation              |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   |        |   |   | 9,298  |   |   | 9,298   |  
|Minimum pension liability
  adjustment      |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   |        |   |   | 738    |   |   | 738     |  
|Derivative instruments                      |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   |        |   |   | (735   | ) |   | (735    | )
|                                            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  
|Total comprehensive income                  |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   | 41,996  |   |   | 9,301  |   |   | 51,297  |  
|Adjustment to initially
  apply FASB        |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  
|Statement No. 158                           |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   |        |   |   | (998   | ) |   | (998    | )
|Exercise of stock options                   |  |                 | 426    |                                |   | 107   |                  |                                                     | 8,448   |                                    |   |        |   |   |       |   |   | 8,555   |  
|Stock-based compensation                    |  |                 | 12     |                                |   | 3     |                  |                                                     | 5,052   |                                    |   |        |   |   |       |   |   | 5,055   |  
|Tax benefit from equity
  compensation      |  |                 |       |                                |   |      |                  |                                                     | 2,675   |                                    |   |        |   |   |       |   |   | 2,675   |  
|Issuance for employee stock
  purchase plan |  |                 | 21     |                                |   | 5     |                  |                                                     | 696     |                                    |   |        |   |   |       |   |   | 701     |  
|Common stock purchased and
  retired        |  |                 | (971   | )                              |   | (243  | )                |                                                     | (16,871 | )                                  |   | (21,122 | ) |   |       |   |   | (38,236 | )
|Dividends, $0.48 per share                  |  |                 |       |                                |   |      |                  |                                                     |        |                                    |   | (8,669  | ) |   |       |   |   | (8,669  | )
|                                            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  
|Balance, September 29, 2007                 |  |                 | 17,704 |                                | $ | 4,426 |                  | $                                                   |        |                                    | $ | 164,862 |   | $ | 20,413 |   | $ | 189,701 |  
|                                            |  |                 |        |                                |   |       |                  |                                                     |         |                                    |   |         |   |   |        |   |   |         |  

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

F-6

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Table of Contents

Consolidated Statements of Cash Flows(For the Fiscal
Years Ended September 29, September 30 and October 1, respectively)

|                                                                                       |  |                            |         |      |   |         |   |   |          |  
|-------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ---- | - | ------- | - | - | -------- | -
|                                                                                       |  | 2007                       |         | 2006 |   | 2005    |  
|                                                                                      
|                                                                                       |  | (expressed
  in thousands) |        
|                                                                                       |  |                            |        
|Cash Flows from Operating Activities:                                                  |  |                            |         |      |   |         |   |   |          |  
|Net income                                                                             |  | $                          | 41,996  |      | $ | 39,323  |   | $ | 37,058   |  
|Adjustments to reconcile
  net income to net cash 
  provided by operating activities: |  |                            |         |      |   |         |   |   |          |  
|(Income) loss from discontinued
operations                                             |  |                            |        |      |   | (461    | ) |   | 2,589    |  
|Net gain on disposal of discontinued
operations                                        |  |                            |        |      |   |        |   |   | (3,078   | )
|Gain on sale of assets                                                                 |  |                            | (742    | )    |   | (872    | ) |   |         |  
|Stock-based compensation                                                               |  |                            | 5,065   |      |   | 4,415   |   |   | 178      |  
|Excess tax benefits from stock-based
compensation                                      |  |                            | (2,123  | )    |   | (1,249  | ) |   | 6,153    |  
|Depreciation and amortization                                                          |  |                            | 8,149   |      |   | 7,863   |   |   | 8,638    |  
|Deferred income taxes                                                                  |  |                            | (4,590  | )    |   | 2,252   |   |   | (2,310   | )
|Bad debt provision                                                                     |  |                            | 320     |      |   | 352     |   |   | 201      |  
|Changes in operating assets
  and liabilities:                                         |  |                            |         |      |   |         |   |   |          |  
|Accounts and unbilled contracts
receivable                                             |  |                            | (12,219 | )    |   | (11,708 | ) |   | 5,481    |  
|Inventories                                                                            |  |                            | (1,582  | )    |   | (1,643  | ) |   | (3,260   | )
|Prepaid expenses                                                                       |  |                            | 884     |      |   | (1,287  | ) |   | 1,837    |  
|Other assets                                                                           |  |                            | (3,883  | )    |   | 1,033   |   |   | (2,446   | )
|Accounts payable                                                                       |  |                            | 5,172   |      |   | 796     |   |   | 1,933    |  
|Accrued payroll and related costs                                                      |  |                            | (629    | )    |   | (1,884  | ) |   | 882      |  
|Advance payments from customers                                                        |  |                            | (924    | )    |   | 1,316   |   |   | 1,823    |  
|Accrued warranty costs                                                                 |  |                            | 152     |      |   | 467     |   |   | (424     | )
|Other current liabilities                                                              |  |                            | 9,083   |      |   | (962    | ) |   | 3,589    |  
|Operating activities of discontinued
operations                                        |  |                            | 786     |      |   | 478     |   |   | (2,436   | )
|                                                                                      
|Net Cash Provided by Operating Activities                                              |  |                            | 44,915  |      |   | 38,229  |   |   | 56,408   |  
|                                                                                      
|Cash Flows from Investing Activities:                                                  |  |                            |         |      |   |         |   |   |          |  
|Additions to property and
  equipment                                                  |  |                            | (12,735 | )    |   | (7,505  | ) |   | (7,094   | )
|Proceeds from maturity of
  short-term investments                                     |  |                            | 71,260  |      |   | 130,857 |   |   | 175,305  |  
|Purchases of short-term
  investments                                                  |  |                            | (64,735 | )    |   | (77,782 | ) |   | (189,600 | )
|Net proceeds from sale of
  businesses                                                 |  |                            | 1,000   |      |   | 1,882   |   |   | 14,241   |  
|Investing activities of
  discontinued operations                                      |  |                            |        |      |   |        |   |   | (368     | )
|                                                                                      
|Net Cash (Used in) Provided by Investing Activities                                    |  |                            | (5,210  | )    |   | 47,452  |   |   | (7,516   | )
|                                                                                      
|Cash Flows from Financing Activities:                                                  |  |                            |         |      |   |         |   |   |          |  
|Net receipts under
  short-term borrowings                                             |  |                            | 36      |      |   | 161     |   |   | 141      |  
|Proceeds received under
  notes payable                                                |  |                            |        |      |   |        |   |   | 1,525    |  
|Payments of notes payable                                                              |  |                            |        |      |   | (1,477  | ) |   | (1,541   | )
|Repayments of long-term
  debt                                                         |  |                            | (6,683  | )    |   | (6,708  | ) |   | (6,840   | )
|Excess tax benefits from
  stock-based compensation                                    |  |                            | 2,123   |      |   | 1,249   |   |   |         |  
|Cash dividends                                                                         |  |                            | (7,988  | )    |   | (7,576  | ) |   | (4,785   | )
|Proceeds from exercise of
  stock options and employee stock purchase plan             |  |                            | 9,256   |      |   | 5,249   |   |   | 14,363   |  
|Payments to purchase and
  retire common stock                                         |  |                            | (38,236 | )    |   | (64,541 | ) |   | (33,736  | )
|                                                                                      
|Net Cash Used in Financing Activities                                                  |  |                            | (41,492 | )    |   | (73,643 | ) |   | (30,873  | )
|                                                                                      
|Effect of Exchange Rate Changes on Cash and Cash
  Equivalents                         |  |                            | 8,170   |      |   | 2,781   |   |   | (1,824   | )
|                                                                                      
|Cash and Cash Equivalents:                                                             |  |                            |         |      |   |         |   |   |          |  
|Increase during the year                                                               |  |                            | 6,383   |      |   | 14,819  |   |   | 16,195   |  
|Balance, beginning of year                                                             |  |                            | 97,962  |      |   | 83,143  |   |   | 66,948   |  
|                                                                                      
|Balance, end of year                                                                   |  | $                          | 104,345 |      | $ | 97,962  |   | $ | 83,143   |  
|                                                                                      
|Supplemental Disclosures of Cash Flows:                                                |  |                            |         |      |   |         |   |   |          |  
|Cash paid during the year
  for:                                                       |  |                            |         |      |   |         |   |   |          |  
|Interest                                                                               |  | $                          | 1,052   |      | $ | 1,591   |   | $ | 2,074    |  
|Income taxes                                                                           |  |                            | 11,702  |      |   | 17,348  |   |   | 12,303   |  
|                                                                                      

F-7

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Table of Contents

Notes to Consolidated Financial Statements

1. Summary of Significant
Accounting Policies:

Nature of OperationsMTS Systems Corporation is a
leading global supplier of mechanical test systems and high-performance
industrial position sensors. The Companys testing solutions help customers
accelerate and improve their design, 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.

Fiscal YearThe Companys fiscal year
ends on the Saturday closest to September 30. The Companys fiscal years ended
September 29, 2007, September 30, 2006 and October 1, 2005 each consisted of 52
weeks.

ConsolidationThe 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 RecognitionOrders 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 for which payment is deemed contingent
upon delivery of these elements, which amount is deferred until customer
acceptance. Fair value is determined based upon the sale price of similar
products sold individually. 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.

Certain contractual
arrangements require longer production periods, generally longer than six
months (long-term contracts), and may contain non-routine installations and
special acceptance protocols. These arrangements often include hardware,
software, installation services, training and support. In certain arrangements
software may be essential to the functionality of the system deliverable. For
these arrangements the Company considers Emerging Issues Task Force (EITF)
No. 03-05, Applicability of AICPA Statement of Position 97-2 to Non-Software
Deliverables in an Arrangement Containing More-Than-Incidental Software, to identify
components of the arrangement which are considered software-related. For
software and software-related components, the Company applies the requirements
of SOP No. 97-2, Software Revenue Recognition, when recognizing revenue.
Contractual arrangements in which software is essential to system functionality
typically include significant production, modification, and customization. For
arrangements with essential software and all other long-term arrangements with
complex installations and/or unusual acceptance protocols, revenue is
recognized using the percentage-of-completion method prescribed by Statement of
Position (SOP) No. 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, based on the cost incurred to-date relative
to estimated total cost of the contract. Elements of an arrangement that do not
separately fall within the scope of SOP No. 81-1 (e.g. software maintenance and
training) are accounted for as the service is provided based on fair value as determined
by standalone sales.

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.

F-8

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Table of Contents

Revenue is recorded net of
taxes collected from customers that are remitted to governmental authorities,
with the collected taxes recorded as current liabilities until remitted to the
relevant government authority.

Shipping and HandlingFreight revenue billed to
customers is reported within Revenue on the Consolidated Statements of Income,
and expenses incurred for shipping products to customers are reported within
Cost of Sales on the Consolidated Statements of Income.

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

Foreign CurrencyThe 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 fiscal period-end exchange rates, and statements of income are
translated using average exchange rates for the fiscal year, with the resulting
translation adjustments recorded as a separate component of Shareholders
Investment. The Company recorded gains/(losses) on foreign currency translation
in Comprehensive Income of $9.3 million, $2.9 million, and ($1.6) million for
fiscal years 2007, 2006, and 2005 respectively. Gains and losses from foreign
currency transactions are recognized in the Consolidated Statements of Income.
The Company recorded net foreign currency transaction (losses)/gains of ($0.5)
million, $0.8 million, and ($1.3) million in fiscal years 2007, 2006, and 2005,
respectively.

Cash EquivalentsCash equivalents represent
cash, demand deposits, and highly liquid investments with original maturities
of three months or less and are recorded at cost, which approximates fair
value. Cash is invested in money market funds and bank deposits. Cash
equivalents outside the United States are invested in local currency money
market funds and bank deposits.

Short-Term InvestmentsThe Companys short-term
investments consisted of U.S. municipal bonds with maturity dates ranging from
2016 through 2041. All these bonds carry double-A or higher credit ratings from
at least one of the three globally recognized credit rating services. The
interest rates on these bonds are re-set each 7, 28, or 35 days in a market
auction process such that yields typically reflect current market interest
rates. The Company classifies these investments as available-for-sale, as it
intends to liquidate them to fund current operations, acquisitions, or the
return of capital to shareholders. 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 within
Shareholders Investment on the Consolidated Balance Sheets. At September 29,
2007 and September 30, 2006, there were no material unrealized gains or losses
associated with any of the Companys short-term investments, as the fair value
of each investment approximates amortized cost.

Accounts Receivable and Long-Term ContractsThe Company grants credit to
customers, but it 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 allowance for doubtful accounts is based on managements
assessment of the collectibility of specific customer accounts and includes
consideration of the credit worthiness and financial condition of those
specific customers. The Company records an allowance to reduce receivables to the amount that is reasonably believed to be collectible and
considers factors such as the financial condition of the customer and the aging
of the receivables. If there is a
deterioration of a customers financial condition, if the Company becomes aware
of additional information related to the credit worthiness of a customer, or if
future actual default rates on trade receivables in general differ from those
currently anticipated, the Company may have to adjust its allowance for
doubtful accounts, which would affect earnings in the period the adjustments
were made.

F-9

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Table of Contents

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 September 29,
2007 are expected to be invoiced during fiscal year 2008.

InventoriesInventories consist of
material, labor, and overhead costs and are stated at the lower of cost or
market value, determined under the first-in, first-out accounting method.
Inventories at September 29, 2007 and September 30, 2006 were as follows:

|                                                    |  |                          |        |      |   |        | 
|--------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | 
|                                                    |  | 2007                     |        | 2006 |  
|                                                   
|                                                    |  | (expressed in thousands) |       
|Customer projects in
  various stages of completion |  | $                        | 14,759 |      | $ | 14,046 | 
|                                                    |  |                          |        |      |   |        | 
|Components, assemblies and
  parts                  |  |                          | 28,724 |      |   | 26,434 | 
|                                                   
|Total                                               |  | $                        | 43,483 |      | $ | 40,480 | 
|                                                   

Impairment of Long-lived AssetsIn accordance with Statement
of Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment
or Disposal of Long-Lived Assets, the Company reviews the carrying value of
long-lived assets, such as property and equipment and intangibles subject to
amortization, 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.

Property and EquipmentProperty 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 10 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.

GoodwillGoodwill represents the
excess of acquisition costs over the fair value of the net assets of businesses
acquired. 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 September 29, 2007
or September 30, 2006. At both September 29, 2007 and September 30, 2006, $2.9
million of goodwill was associated with the Test segment. At September 29, 2007
and September 30, 2006, $1.7 million and $1.6 million, respectively, of
goodwill was associated with the Sensors segment. There was no change in these
Goodwill balances over the three-year period ending September 29, 2007, other
than changes associated with the effect of currency translation.

F-10

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Table of Contents

Other AssetsOther assets include patents
and other intellectual property. These intangible assets are amortized on a
straight-line basis over the expected period to be benefited by future cash
flows, up to 25 years. The Company evaluates the estimated useful lives of all
intangible assets and periodically revises such estimates based on current
events.

At September 29, 2007 and
September 30, 2006, the carrying value of intangible assets, net of accumulated
amortization, was $0.3 million. Annual amortization of other intangible assets
was less than $0.1 million, $0.3 million, and $0.5 million in fiscal years
2007, 2006, and 2005, respectively. The anticipated amortization expense
related to other intangible assets for the next five fiscal years is as
follows:

|                                    |  |                          |    |      |   |      |  |      |    |      |   |    |  |   |    | 
|----------------------------------- |  | ------------------------ | -- | ---- | - | ---- |  | ---- | -- | ---- | - | -- |  | - | -- | 
|                                    |  | 2008                     |    | 2009 |   | 2010 |  | 2011 |    | 2012 |  
|                                    |  |                         
|                                    |  | (expressed in thousands) |   
|Amortization of intangible
  assets |  | $                        | 22 |      | $ | 16   |  | $    | 13 |      | $ | 13 |  | $ | 13 | 

Warranty ObligationsSales 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 twelve to 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 claims experience over the
preceding twelve-month period. Both the experience percentage and the warranty
liability are evaluated on an ongoing basis for adequacy. Warranty provisions
and claims for the years ended September 29, 2007 and September 30, 2006, were
as follows:

|                       |  |                          |        |      |   |        |  
|---------------------- |  | ------------------------ | ------ | ---- | - | ------ | -
|                       |  | 2007                     |        | 2006 |  
|                      
|                       |  | (expressed in thousands) |       
|Beginning balance      |  | $                        | 5,894  |      | $ | 5,333  |  
|Warranty provisions    |  |                          | 7,216  |      |   | 6,440  |  
|Warranty claims        |  |                          | (7,197 | )    |   | (6,021 | )
|Translation adjustment |  |                          | 352    |      |   | 142    |  
|                      
|Ending balance         |  | $                        | 6,265  |      | $ | 5,894  |  
|                      

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

Currency exchange contracts
utilized to maintain the U.S. dollar value of expected financial transactions
denominated in foreign currencies are designated as foreign currency cash flow
hedges. Gains and losses related to changes in the market value of the
contracts are recorded in Accumulated Other Comprehensive Income within
Shareholders Investment on the Consolidated Balance Sheets until they are
recognized in earnings at the time income or loss is recognized on the
underlying expected transaction. The Company periodically assesses whether the
contracts are effective in offsetting the changes in the U.S. dollar value of
the expected transactions. When a contract is no longer effective as a hedge,
the Company discontinues hedge accounting prospectively. Subsequent changes in
the market value of the contract are recognized in Other Income (Expense), net
on the Consolidated Statement of Income in the current period.

F-11

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Table of Contents

The Company also uses
currency contracts to hedge the functional currency value of monetary assets
and liabilities denominated in foreign currencies. The gains and losses related
to the changes in the market value of these contracts are included in Other
Income (Expense), net on the Consolidated Statement of Income in the current
period.

At September 29, 2007 and
September 30, 2006, the Company had outstanding currency exchange contracts
with gross notional U.S. dollar equivalent amounts of $121.0 million and $118.8
million, respectively. Netting offsetting contracts to sell foreign currencies
against contracts to purchase foreign currencies, irrespective of contract
maturity dates, the net notional amount of contracts outstanding in U.S. dollar
equivalent amounts were $33.5 million and $10.1 million at September 29, 2007
and September 30, 2006, respectively. At September 29, 2007 and September 30,
2006, the market value of the foreign currency exchange contracts was a
liability of $0.7 million and an asset of $0.7 million, respectively. The amount
recognized in earnings as a result of the ineffectiveness of cash flow hedges
was less than $0.1 million and $0.1 million in fiscal year ended September 29,
2007 and September 30, 2006, respectively. At September 29, 2007 and September
30, 2006, the amount projected to be reclassified from Accumulated Other
Comprehensive Income into earnings in the next 12 months was a loss of $0.4
million and a gain of $0.6 million, respectively. The maximum remaining
maturity of any currency contract at September 29, 2007 and September 30, 2006
was 1.6 years and 1.0 years, respectively.

Income TaxesThe Company records a tax
provision for the anticipated tax consequences of the reported results of
operations. Deferred tax assets and liabilities are measured using the
currently enacted tax rates that apply to taxable income in effect for the
years in which those deferred tax assets and liabilities are expected to be
realized or settled. The Company records a valuation allowance to reduce
deferred tax assets to the amount that is believed more likely than not to be
realized. The Company believes it is more likely than not that forecasted
income, including income that may be generated as a result of certain tax
planning strategies, together with the tax effects of the deferred tax
liabilities, will be sufficient to fully recover the remaining net realizable value of its deferred tax
assets. In the event that all or part of the net deferred tax assets are
determined not to be realizable in the future, an adjustment to the valuation
allowance would be charged to earnings in the period such determination is
made. In addition, the calculation of tax liabilities involves significant
judgment in estimating the impact of uncertainties in the application of
complex tax laws. Resolution of these uncertainties in a manner inconsistent
with managements expectations could have a material impact on the Companys
financial condition and operating results.

Earnings Per Common ShareBasic earnings per share are
computed by dividing net earnings by the daily weighted average number of
common shares outstanding during the applicable periods. Diluted earnings per
share includes the potentially dilutive effect of common shares issued in
connection with outstanding stock-based compensation options and grants using the
treasury stock method. Stock options to acquire 0.5 million and 0.6 million
weighted common shares have been excluded from the diluted weighted shares
outstanding calculation at September 29, 2007 and September 30, 2006,
respectively, because under the treasury stock method, the exercise of these
options would lead to a net reduction in common shares outstanding. The number
of options excluded from the diluted weighted average shares outstanding
calculation was not material for the year ended October 1, 2005. The
potentially dilutive effect of common shares issued in connection with
outstanding stock options is determined based on income before discontinued
operations. A reconciliation of these amounts is as follows:

|                                                  |  |                                                 |        |      |   |        |  |   |        | 
|------------------------------------------------- |  | ----------------------------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                                  |  | 2007                                            |        | 2006 |   | 2005   | 
|                                                 
|                                                  |  | (expressed in thousands, except per share data) |       
|Income before discontinued
  operations           |  | $                                               | 41,996 |      | $ | 38,862 |  | $ | 36,569 | 
|Income from discontinued
  operations, net of tax |  |                                                 |       |      |   | 461    |  |   | 489    | 
|                                                 
|Net income                                        |  | $                                               | 41,996 |      | $ | 39,323 |  | $ | 37,058 | 
|                                                 
|Weighted average common
  shares outstanding      |  |                                                 | 17,980 |      |   | 18,749 |  |   | 19,714 | 
|Dilutive potential common
  shares                |  |                                                 | 350    |      |   | 480    |  |   | 795    | 
|                                                 
|Total dilutive common
  shares                    |  |                                                 | 18,330 |      |   | 19,229 |  |   | 20,509 | 
|                                                 
|Earnings per share:                               |  |                                                 |        |      |   |        |  |   |        | 
|Basic:                                            |  |                                                 |        |      |   |        |  |   |        | 
|Income before discontinued operations             |  | $                                               | 2.34   |      | $ | 2.08   |  | $ | 1.86   | 
|Income from discontinued operations, net of
tax   |  |                                                 |       |      |   | 0.02   |  |   | 0.02   | 
|                                                 
|Earnings per share                                |  | $                                               | 2.34   |      | $ | 2.10   |  | $ | 1.88   | 
|                                                 
|Diluted:                                          |  |                                                 |        |      |   |        |  |   |        | 
|Income before discontinued operations             |  | $                                               | 2.29   |      | $ | 2.02   |  | $ | 1.79   | 
|Income from discontinued operations, net of
tax   |  |                                                 |       |      |   | 0.02   |  |   | 0.02   | 
|                                                 
|Earnings per share                                |  | $                                               | 2.29   |      | $ | 2.04   |  | $ | 1.81   | 
|                                                 

F-12

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Table of Contents

Stock-Based CompensationEffective October 2, 2005,
the Company adopted the provisions of the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R, Share-Based Payment, using the modified
prospective method. 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. Upon adoption of SFAS 123R, the Company
applied an estimated forfeiture rate to unvested awards. Previously, the Company
recorded forfeitures as incurred. Results of operations for the fiscal year
ended October 1, 2005 and prior annual periods have not been restated to reflect recognition of
stock-based compensation expense.

SFAS 123R also requires the
benefit of tax deductions in excess of recognized compensation expense to be
reported as a financing cash flow, rather than as an operating cash flow as
prescribed under previous accounting rules. This requirement reduces net
operating cash flows and increases net financing cash flows in periods
subsequent to adoption. Total cash flows remain unchanged from those reported
under previous accounting rules.

Prior to the adoption of
SFAS 123R, the Company followed the intrinsic value method in accordance with
Accounting Principles Bulletin (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, to account for its employee stock options and employee
share purchase plan. Accordingly, no compensation expense was recognized for
share purchase rights granted in connection with the issuance of stock options
under the Companys employee stock option plan or employee stock purchase plan;
however, compensation expense was recognized in connection with the issuance of
restricted shares granted. The adoption of SFAS 123R primarily resulted in a
change in the Companys method of recognizing stock-based compensation and
estimating forfeitures for unvested awards. See Note 2 to the Consolidated
Financial Statements for additional information on stock-based compensation.

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 unrealized gains or
losses from available-for-sale securities at September 29, 2007, September 30,
2006, or October 1, 2005.

Effective September 29,
2007, the Company adopted the recognition and disclosure provisions of SFAS No.
158, which resulted in the recognition of the funded status of a defined
benefit retirement plan located at one of its German subsidiaries. Upon
adoption of SFAS No. 158, the unrealized portion of the incremental increase in
the retirement plan liability was recognized as a component of Accumulated
Other Comprehensive Income (Loss). See Note 7 to the Consolidated Financial
Statements for additional information on the Companys defined benefit
retirement plan.

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

F-13

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Table of Contents

|                                                                            |  |                                                    |        |                                                                        |   |                                      |   |                                                 |        |   |   |        |  
|--------------------------------------------------------------------------- |  | -------------------------------------------------- | ------ | ---------------------------------------------------------------------- | - | ------------------------------------ | - | ----------------------------------------------- | ------ | - | - | ------ | -
|                                                                            |  | DerivativeFinancialInstrumentUnrealizedGain (Loss) |        | Minimum
 Pension
 Liability
 and
 FASB
 Statement
 No. 158
 Adjustment |   | ForeignCurrencyTranslationAdjustment |   | TotalAccumulatedOtherComprehensiveIncome (Loss) |       
|                                                                           
|                                                                            |  | (expressed in thousands)                          
|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, net
 of tax of $623                              |  |                                                    | 1,034  |                                                                        |   |                                     |   |                                                 |       |   |   | 1,034  |  
|Realized loss, net of tax of
 $248                                          |  |                                                    | 412    |                                                                        |   |                                     |   |                                                 |       |   |   | 412    |  
|                                                                            |  |                                                    |        |                                                                        |   |                                      |   |                                                 |        |   |   |        |  
|Balances at October 1, 2005                                                 |  | $                                                  | 1,304  |                                                                        | $ | (865                                 | ) | $                                               | 9,590  |   | $ | 10,029 |  
|                                                                            |  |                                                    |        |                                                                        |   |                                      |   |                                                 |        |   |   |        |  
|Foreign exchange translation
 adjustments                                   |  |                                                    |       |                                                                        |   |                                     |   |                                                 | 2,927  |   |   | 2,927  |  
|Minimum pension liability
 adjustment, net of tax of $72                    |  |                                                    |       |                                                                        |   | 115                                  |   |                                                 |       |   |   | 115    |  
|Change in unrealized gain, net
 of tax of $371                              |  |                                                    | 621    |                                                                        |   |                                     |   |                                                 |       |   |   | 621    |  
|Realized gain, net of tax of
 ($945)                                        |  |                                                    | (1,582 | )                                                                      |   |                                     |   |                                                 |       |   |   | (1,582 | )
|                                                                            |  |                                                    |        |                                                                        |   |                                      |   |                                                 |        |   |   |        |  
|Balances at September 30, 2006                                              |  | $                                                  | 343    |                                                                        | $ | (750                                 | ) | $                                               | 12,517 |   | $ | 12,110 |  
|                                                                            |  |                                                    |        |                                                                        |   |                                      |   |                                                 |        |   |   |        |  
|Foreign exchange translation adjustments                                    |  |                                                    |       |                                                                        |   | (91                                  | ) |                                                 | 9,389  |   |   | 9,298  |  
|Minimum pension liability adjustment, net of
 tax of $490                   |  |                                                    |       |                                                                        |   | 738                                  |   |                                                 |       |   |   | 738    |  
|Change in unrealized loss, net of tax of
 ($366)                            |  |                                                    | (612   | )                                                                      |   |                                     |   |                                                 |       |   |   | (612   | )
|Realized loss, net of tax of ($74)                                          |  |                                                    | (123   | )                                                                      |   |                                     |   |                                                 |       |   |   | (123   | )
|Adjustment to initially apply FASB
 Statement No. 158, net of tax of ($431) |  |                                                    |       |                                                                        |   | (998                                 | ) |                                                 |       |   |   | (998   | )
|                                                                            |  |                                                    |        |                                                                        |   |                                      |   |                                                 |        |   |   |        |  
|Balances at September 29, 2007                                              |  | $                                                  | (392   | )                                                                      | $ | (1,101                               | ) | $                                               | 21,906 |   | $ | 20,413 |  
|                                                                            |  |                                                    |        |                                                                        |   |                                      |   |                                                 |        |   |   |        |  

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 as of 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 ultimate costs of these contracts versus estimates.


Recent Accounting Pronouncements


In
July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes. FIN 48 defines the threshold for recognizing the benefits of tax
positions in the financial statements as more-likely-than-not to be sustained
upon examination. The interpretation also provides guidance on the
de-recognition, measurement and classification of income tax uncertainties,
along with any related interest and penalties. FIN 48 also includes guidance
concerning accounting for income tax uncertainties in interim periods and
increases the level of required disclosures associated with any recorded income
tax uncertainties. The differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and the
amounts reported after adoption are to be accounted for as a cumulative-effect
adjustment recorded
to the beginning balance of retained earnings. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company will adopt the provisions
of FIN 48 in the first quarter of fiscal year 2008, as required. Management
does not currently expect that adoption will have a material impact on the
Companys consolidated results of operations or financial position.


F-14

---

Table of Contents

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset or liability
and establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under this statement, fair value measurements are
required to be separately disclosed, by level, within the fair value hierarchy.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
The Company is evaluating the impact of the adoption of SFAS No. 157 on its
consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. SFAS
No. 159 allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value in situations in which
they are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that items fair
value in subsequent reporting periods must be recognized in current period
earnings. SFAS No. 159 also establishes presentation and disclosure
requirements designed to draw comparison between entities that elect different
measurement attributes for similar assets and liabilities. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company is
evaluating the impact of the adoption of SFAS No. 159 on its consolidated
financial statements.

2. Stock-Based Compensation:

The
Company compensates officers, directors, and employees with stock-based
compensation under four stock plans approved by the Companys shareholders in
1994, 1997, 2002 and 2006, and administered under the supervision of the
Companys Board of Directors. During the years ended September 29, 2007,
September 30, 2006, and October 1, 2005, the Company awarded stock options,
employee stock purchase plan shares, and restricted stock under these plans. At
September 29, 2007, a total of 2,144,023 shares were available for future grant
under these plans.

Stock-Based Compensation Expense


The effect of
recording stock-based compensation expense for the years ended September 29,
2007 and September 30, 2006 was as follows (in thousands, except per share
data):


|                                                                              |  |      |        |      |   |        |  
|----------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                                              |  | 2007 |        | 2006 |  
|                                                                              |  |      |        |      |  
|                                                                              |  |      |        |      |   |        |  
|Stock-based compensation expense by type of
 award:                           |  |      |        |      |   |        |  
|Employee stock options                                                        |  | $    | 4,426  |      | $ | 4,090  |  
|Employee stock purchase plan (ESPP)                                           |  |      | 193    |      |   | 161    |  
|Restricted stock units (1)                                                    |  |      | 441    |      |   | 429    |  
|Amounts capitalized as inventory                                              |  |      | (1,080 | )    |   | (977   | )
|Amounts recognized in income for amounts
 previously capitalized as inventory |  |      | 1,085  |      |   | 712    |  
|                                                                              |  |      |        |      |   |        |  
|                                                                             
|Total stock-based compensation included in
 income from operations            |  |      | 5,065  |      |   | 4,415  |  
|Income tax benefit on stock-based
 compensation                               |  |      | (1,682 | )    |   | (1,175 | )
|                                                                              |  |      |        |      |   |        |  
|Net compensation expense included in net
 income                              |  | $    | 3,383  |      | $ | 3,240  |  
|                                                                              |  |      |        |      |   |        |  
|Earnings per share:                                                           |  |      |        |      |   |        |  
|Basic                                                                         |  | $    | 0.19   |      | $ | 0.17   |  
|Diluted                                                                       |  | $    | 0.18   |      | $ | 0.17   |  
|                                                                              |  |      |        |      |   |        |  
|Tax effect on:                                                                |  |      |        |      |   |        |  
|Cash flows from operating activities                                          |  | $    | (2,123 | )    | $ | (1,249 | )
|Cash flows from financing activities                                          |  | $    | 2,123  |      | $ | 1,249  |  

(1)
Stock-based compensation expense related to restricted stock awards would also have
been recorded under the provision of APB 25.

F-15

---

Table of Contents

At
September 29, 2007, there was $5.4 million of total stock option expense
related to non-vested awards not yet recognized, which is expected to be
recognized over a weighted average period of approximately 1.4 years. At
September 29, 2007, there was $0.4 million of total restricted stock expense
related to non-vested awards not yet recognized, which is expected to be
recognized over a weighted average period of approximately 1.7 years.

Results of
operations for the fiscal year ended October 1, 2005 have not been restated to
reflect recognition of stock-based compensation expense. Had the Company
recognized compensation expense under SFAS No. 123, Accounting for Stock Based
Compensation, during the fiscal year ended October 1, 2005, the Companys net
income and earnings per share would have been reported as shown below
(expressed in thousands, except per share data):

|                                                                                       |  |      |        |  
|-------------------------------------------------------------------------------------- |  | ---- | ------ | -
|                                                                                       |  | 2005 |       
|                                                                                       |  |      |        |  
|Net
 Income                                                                            |  |      |        |  
|As Reported                                                                            |  | $    | 37,058 |  
|Add: Stock-based compensation expense
 included in reported net income, net of tax (1) |  |      | 111    |  
|Deduct: fair value of stock-based
 compensation expense, net of tax                    |  |      | (3,243 | )
|                                                                                       |  |      |        |  
|Pro Forma                                                                              |  | $    | 33,926 |  
|                                                                                       |  |      |        |  
|Basic
 Earnings Per Share                                                              |  |      |        |  
|As Reported                                                                            |  | $    | 1.88   |  
|Pro Forma                                                                              |  | $    | 1.72   |  
|                                                                                       |  |      |        |  
|Diluted
 Earnings Per Share                                                            |  |      |        |  
|As Reported                                                                            |  | $    | 1.81   |  
|Pro Forma                                                                              |  | $    | 1.66   |  
|                                                                                       |  |      |        |  

(1)
Stock-based compensation expense related to restricted stock awards.

The fair value of
stock options granted under stock-based compensation programs has been estimated
as of the date of each grant using the multiple option form of the
Black-Scholes valuation model, based on the grant price and assumptions
regarding the expected grant life, stock price volatility, dividends, and
interest rates. Each vesting period of an option award is valued separately,
with this value being recognized evenly over the vesting period. While the
multiple option form of the valuation model generally yields a lower valuation
than the single option form, it also allocates proportionally more of the
option expense to the early years of the option. The weighted average per share
fair value of stock options granted during the fiscal years ended September 29,
2007, September 30, 2006 and October 1, 2005 was $10.51, $11.85 and $9.55,
respectively. The weighted average assumptions used to determine fair value of
stock options granted during those fiscal years were as follows:

F-16

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Table of Contents

|                          |  |      |      |      |  |      |   |  |      |  
|------------------------- |  | ---- | ---- | ---- |  | ---- | - |  | ---- | -
|                          |  | 2007 |      | 2006 |  | 2005 |  
|                          |  |      |      |     
|Expected
 life (in years) |  |      | 2.6  |      |  | 3.5  |   |  | 2.7  |  
|Risk-free
 interest rate  |  |      | 4.9  | %    |  | 5.1  | % |  | 3.8  | %
|Expected
 volatility      |  |      | 31.1 | %    |  | 35.6 | % |  | 39.3 | %
|Dividend
 yield           |  |      | 1.0  | %    |  | 1.0  | % |  | 1.2  | %
|                          |  |      |      |     

The
expected life represents the period that the stock option awards are expected
to be outstanding. In fiscal year 2007, the expected life was determined based
on historical and anticipated future exercise and expiration patterns. In
fiscal year 2006, the Company used the simplified method for determining the
expected life, as specified in Staff Accounting Bulletin (SAB) No. 107,
Valuation of Share-Based Payment Arrangements for Public Companies, which
bases the expected life calculation on the average of the vesting term and the
expiration of the awards. In fiscal year 2005, the expected life was determined
based on historical exercise patterns. The risk-free interest rate used is
based on the yield of constant maturity U.S. Treasury bonds on the grant date
with a remaining term equal to the expected life of the grant. The Company
estimates stock price volatility based on a historical weekly price
observation. The dividend yield assumption is based on the annualized current
dividend divided by the share price on the grant date.

Related
to the sale of the Companys engine test business in fiscal year 2005, the
Company accelerated the vesting schedule of options held by employees of this
business to the date of the divestiture. The fair value of the options was
re-measured to the difference between the market price and the historical
option price of the stock on the date of the accelerated vesting date.
Stock-based compensation expense of $0.4 million, net of tax, was recorded in
Income (Loss) from Discontinued Operations in the fourth quarter of fiscal year
2005.

Restricted
stock awards are valued based on the market value of the Companys shares at
the date of grant. The value of restricted stock awards is allocated to expense
evenly over the restricted period. Employee stock purchase plan share awards
are valued based on the value of the discount feature plus the fair value of
the optional features, which is determined as of the date of grant using the
Black-Scholes valuation model. The value of these share awards is allocated to
expense evenly over each purchase period.

Stock Options


Stock
options 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 on
the first three anniversaries of the grant date and expire five years from the
grant date.


Stock option
activity for the fiscal years ended September 29, 2007, September 30, 2006, and
October 1, 2005 was as follows (in thousands, except per share amounts):

|                                          |  |        |       |       |   |        |  |       |       |        |   |       |  |  |        |   |   |       | 
|----------------------------------------- |  | ------ | ----- | ----- | - | ------ |  | ----- | ----- | ------ | - | ----- |  |  | ------ | - | - | ----- | 
|                                          |  | 2007   |       | 2006  |   | 2005   | 
|                                          |  |        |       |      
|                                          |  | Shares |       | WAEP* |   | Shares |  | WAEP* |       | Shares |   | WAEP* | 
|                                          |  |        |       |      
|Options
 outstanding at beginning of year |  |        | 1,667 |       | $ | 28.06  |  |       | 1,686 |        | $ | 22.63 |  |  | 2,229  |   | $ | 15.08 | 
|Granted                                   |  |        | 416   |       | $ | 45.49  |  |       | 436   |        | $ | 39.08 |  |  | 560    |   | $ | 35.19 | 
|Exercised                                 |  |        | (426  | )     | $ | 20.08  |  |       | (288  | )      | $ | 16.19 |  |  | (1,005 | ) | $ | 13.62 | 
|Forfeited
 or expired                     |  |        | (69   | )     | $ | 31.92  |  |       | (167  | )      | $ | 22.89 |  |  | (98    | ) | $ | 15.12 | 
|                                          |  |        |       |       |   |        |  |       |       |        |   |       |  |  |        |   |   |       | 
|Options
 outstanding at end of year       |  |        | 1,588 |       | $ | 34.60  |  |       | 1,667 |        | $ | 28.06 |  |  | 1,686  |   | $ | 22.63 | 
|                                          |  |        |       |       |   |        |  |       |       |        |   |       |  |  |        |   |   |       | 
|Options
 subject to exercise at year-end  |  |        | 763   |       | $ | 27.05  |  |       | 780   |        | $ | 20.13 |  |  | 650    |   | $ | 14.80 | 
|                                          |  |        |       |      
|*Weighted
Average Exercise Price          |  |        |       |       |   |        |  |       |       |        |   |       |  |  |        |   |   |       | 

Options
outstanding at September 29, 2007 had a weighted average remaining contractual
term of 3.1 years, and an aggregate intrinsic value of $12.8 million. Options
subject to exercise at September 29, 2007 had a weighted average remaining
contractual term of 2.1 years, and an aggregate intrinsic value of $11.1
million.

F-17

---

Table of Contents

The
total intrinsic value of stock options exercised during the fiscal years ended
September 29, 2007, September 30, 2006, and October 1, 2005 were $9.6 million,
$6.7 million and $20.3 million, respectively.

Restricted Stock


The
Company awards directors and key employees restricted stock grants that vest
over three years. Participants are entitled to cash dividends and voting rights
on awarded shares, but the sale and transfer of these shares is restricted
during the vesting period.


Restricted stock
activity for the fiscal years ended September 29, 2007, September 30, 2006, and
October 1, 2005 was as follows (in thousands, except per share amounts):

|                                        |  |        |     |         |   |        |  |         |    |        |   |         |  |  |    |   |   |       | 
|--------------------------------------- |  | ------ | --- | ------- | - | ------ |  | ------- | -- | ------ | - | ------- |  |  | -- | - | - | ----- | 
|                                        |  | 2007   |     | 2006    |   | 2005   | 
|                                        |  |        |     |        
|                                        |  | Shares |     | WAGDFV* |   | Shares |  | WAGDFV* |    | Shares |   | WAGDFV* | 
|                                        |  |        |     |        
|Unvested
 shares at beginning of year   |  |        | 22  |         | $ | 34.06  |  |         | 19 |        | $ | 25.97   |  |  | 8  |   | $ | 11.05 | 
|Granted                                 |  |        | 11  |         | $ | 42.49  |  |         | 13 |        | $ | 36.65   |  |  | 15 |   | $ | 29.95 | 
|Vested                                  |  |        | (11 | )       | $ | 33.57  |  |         | (9 | )      | $ | 21.55   |  |  | (4 | ) | $ | 11.05 | 
|Forfeited                               |  |        |    |         | $ |       |  |         | (1 | )      | $ | 29.95   |  |  |   |   | $ |      | 
|                                        |  |        |     |         |   |        |  |         |    |        |   |         |  |  |    |   |   |       | 
|Unvested
 shares at end of year         |  |        | 22  |         | $ | 38.64  |  |         | 22 |        | $ | 34.06   |  |  | 19 |   | $ | 25.97 | 
|                                       
|*Weighted
Average Grant Date Fair Value |  |        |     |         |   |        |  |         |    |        |   |         |  |  |    |   |   |       | 

Employee Stock Purchase Plan


The
Companys U.S. employees are eligible to participate in the Companys Employee
Stock Purchase Plan (ESPP). Employee purchases of Company stock are funded by
payroll deductions over calendar six-month periods. The 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 eighteen months subsequent to the purchase. Two purchase periods closed
in fiscal year 2007 with the combined issuance of 21,351 shares at an average
price of $32.83. In fiscal years 2006 and 2005, purchases were 19,772 and
29,379 shares, respectively, with average share prices of $29.19 and $22.85,
respectively. At September 29, 2007, the number of shares remaining for
issuance under the ESPP was 535,202.


3. Discontinued Operations:

In
fiscal year 2005, the Company sold substantially all of the net assets of its
engine test business, which 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 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 are excluded from the results of operations of the Test segment and
are reported as discontinued operations for the fiscal years ended September
30, 2006 and October 1, 2005.

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 fiscal year 2005. The AeroMet subsidiary was historically
included in the Companys Industrial segment (now the Sensors segment) for
financial reporting. The loss on disposition of the AeroMet business and its
results of operations are excluded from the results of operations of the
Sensors segment and are reported as discontinued operations for all fiscal
years ended September 30, 2006 and October 1, 2005.

The
Company does not allocate interest income or interest expense to discontinued
operations. There was no effect on the Companys net income in fiscal year 2007
related to discontinued operations. Operating results of the discontinued
operations included in the Companys results for the fiscal years ended
September 30, 2006 and October 1, 2005 were as follows:

F-18

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Table of Contents

|                                                                                |  |                          |     |      |   |        |  
|------------------------------------------------------------------------------- |  | ------------------------ | --- | ---- | - | ------ | -
|                                                                                |  | 2006                     |     | 2005 |  
|                                                                               
|                                                                                |  | (expressed in thousands) |    
|Revenue                                                                         |  | $                        |    |      | $ | 15,982 |  
|Income
 (loss) on discontinued operations before taxes
 and gain (loss) on sale |  |                          | 629 |      |   | (3,918 | )
|Provision
 (benefit) for income taxes                                           |  |                          | 168 |      |   | (1,329 | )
|                                                                                |  |                          |     |      |   |        |  
|Income
 (loss) from discontinued operations, net of tax                         |  | $                        | 461 |      | $ | (2,589 | )
|                                                                               

The assets of
discontinued operations at September 30, 2006 were as follows:

|                                                              |  |                          |     | 
|------------------------------------------------------------- |  | ------------------------ | --- | 
|                                                              |  | 2006                     |    
|                                                             
|                                                              |  | (expressed in thousands) |    
|Accounts
 receivable, net of allowances for doubtful accounts |  | $                        | 635 | 
|Other
 current assets                                         |  |                          | 168 | 
|                                                              |  |                          |     | 
|Total
 assets of discontinued operations                      |  | $                        | 803 | 
|                                                              |  |                          |     | 

4. Business Segment Information:

The
Companys Chief Executive Officer and management regularly review financial
information for the Companys discrete business units. Based on similarities in
the 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 Sensors. During
the first quarter of fiscal year 2007, the former Industrial segment was
re-named the Sensors segment. This change was a change in name only; there
was no underlying change in the components or the operations of the segment. The Test segment
provides testing equipment, systems, and services to the ground vehicles,
aerospace, and infrastructure markets. The Sensors segment provides 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 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 September 29,
2007, September 30, 2006, and October 1, 2005, were as follows:

F-19

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Table of Contents

|                               |  |                          |         |      |   |         |  |   |         | 
|------------------------------ |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|                               |  | 2007                     |         | 2006 |   | 2005    | 
|                              
|                               |  | (expressed in thousands) |        
|Revenue                        |  |                          |         |      |   |         |  |   |         | 
|Test                           |  | $                        | 343,598 |      | $ | 332,561 |  | $ | 313,498 | 
|Sensors                        |  |                          | 76,906  |      |   | 64,224  |  |   | 60,879  | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Total
 Revenue                 |  | $                        | 420,504 |      | $ | 396,785 |  | $ | 374,377 | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Income from Operations         |  |                          |         |      |   |         |  |   |         | 
|Test                           |  | $                        | 40,718  |      | $ | 44,724  |  | $ | 44,596  | 
|Sensors                        |  |                          | 14,757  |      |   | 11,108  |  |   | 8,379   | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Total
 Income from Operations  |  | $                        | 55,475  |      | $ | 55,832  |  | $ | 52,975  | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Identifiable Assets            |  |                          |         |      |   |         |  |   |         | 
|Test                           |  | $                        | 269,117 |      | $ | 256,042 |  | $ | 276,849 | 
|Sensors                        |  |                          | 83,864  |      |   | 67,278  |  |   | 73,173  | 
|Discontinued
 Operations       |  |                          |        |      |   | 803     |  |   | 1,710   | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Total
 Assets                  |  | $                        | 352,981 |      | $ | 324,123 |  | $ | 351,732 | 
|                              
|Other Segment Data             |  |                          |         |      |   |         |  |   |         | 
|Test:                          |  |                          |         |      |   |         |  |   |         | 
|Goodwill                       |  | $                        | 2,929   |      | $ | 2,929   |  | $ | 2,929   | 
|Capital
 expenditures          |  | $                        | 9,603   |      | $ | 5,667   |  | $ | 5,696   | 
|Depreciation
 and amortization |  | $                        | 6,454   |      | $ | 6,289   |  | $ | 6,804   | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Sensors:                       |  |                          |         |      |   |         |  |   |         | 
|Goodwill                       |  | $                        | 1,642   |      | $ | 1,537   |  | $ | 1,494   | 
|Capital
 expenditures          |  | $                        | 3,132   |      | $ | 1,838   |  | $ | 1,398   | 
|Depreciation
 and amortization |  | $                        | 1,695   |      | $ | 1,574   |  | $ | 1,834   | 
|                               |  |                          |         |      |   |         |  |   |         | 

Geographic
information was as follows:

|                                   |  |                          |         |      |   |         |  |   |         | 
|---------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|                                   |  | 2007                     |         | 2006 |   | 2005    | 
|                                  
|                                   |  | (expressed in thousands) |        
|Revenue                            |  |                          |         |      |   |         |  |   |         | 
|United
 States                     |  | $                        | 139,150 |      | $ | 119,648 |  | $ | 106,730 | 
|Germany                            |  |                          | 51,059  |      |   | 54,865  |  |   | 44,906  | 
|Europe,
 excluding Germany         |  |                          | 99,881  |      |   | 87,713  |  |   | 89,322  | 
|Japan                              |  |                          | 43,316  |      |   | 61,859  |  |   | 63,377  | 
|Asia,
 excluding Japan             |  |                          | 72,583  |      |   | 56,081  |  |   | 56,528  | 
|Other                              |  |                          | 14,515  |      |   | 16,619  |  |   | 13,514  | 
|                                   |  |                          |         |      |   |         |  |   |         | 
|Total
 Revenue                     |  | $                        | 420,504 |      | $ | 396,785 |  | $ | 374,377 | 
|                                   |  |                          |         |      |   |         |  |   |         | 
|Property and Equipment, Net        |  |                          |         |      |   |         |  |   |         | 
|United
 States                     |  | $                        | 36,465  |      | $ | 32,015  |  | $ | 31,648  | 
|Europe                             |  |                          | 12,403  |      |   | 10,570  |  |   | 10,478  | 
|Asia                               |  |                          | 2,032   |      |   | 1,029   |  |   | 827     | 
|                                   |  |                          |         |      |   |         |  |   |         | 
|Total
 Property and Equipment, Net |  | $                        | 50,900  |      | $ | 43,614  |  | $ | 42,953  | 
|                                   |  |                          |         |      |   |         |  |   |         | 

Revenue
by geographic area is presented based on customer location. No countries other
than the United States, Germany and Japan had revenue in excess of 10% 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.

5. Financing:

At
September 29, 2007 and September 30, 2006, the Companys outstanding short-term
borrowings of $0.3 million and $0.2 million, respectively, consisted of non-interest
bearing notes payable to vendors by the Companys Japanese Sensors subsidiary.

Long-term debt at
September 29, 2007 and September 30, 2006 was as follows:

F-20

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Table of Contents

|                                                                                      |  |                          |        |      |   |        |  
|------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | -
|                                                                                      |  | 2007                     |        | 2006 |  
|                                                                                     
|                                                                                      |  | (expressed in thousands) |       
|6.6%
 notes, unsecured, due in annual installments of $4,375, maturing July 2008      |  | $                        | 4,375  |      | $ | 8,750  |  
|7.5%
 note, unsecured, due in semi-annual installments of $1,154, maturing July
 2009 |  |                          | 4,616  |      |   | 6,923  |  
|                                                                                      |  |                          |        |      |   |        |  
|Total
 Long-Term Debt                                                                 |  | $                        | 8,991  |      | $ | 15,673 |  
|Less
 Current Maturities of Long-Term Debt                                            |  |                          | (6,683 | )    |   | (6,683 | )
|                                                                                      |  |                          |        |      |   |        |  
|Total
 Long-Term Debt, Less Current Maturities                                        |  | $                        | 2,308  |      | $ | 8,990  |  
|                                                                                     

Aggregate annual
maturities of long-term debt are as follows:

|     |  |                          |       | 
|---- |  | ------------------------ | ----- | 
|Year |  | Maturity                 |      
|    
|     |  | (expressed in thousands) |      
|2008 |  | $                        | 6,683 | 
|2009 |  |                          | 2,308 | 
|     |  |                          |       | 
|     |  | $                        | 8,991 | 
|     |  |                          |       | 

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 $0.2 million at September
29, 2007, due to lower current market interest rates relative to interest rates
paid on the debt.

The
Company is subject to financial covenants, among other restrictions, under the
6.6% and 7.5% note agreements, including, among other covenants, maximum total
debt related to total capital and interest and minimum net worth. At September
29, 2007 and September 30, 2006, the Company was in compliance with these
financial covenants.

At
September 29, 2007, the Company had letters of credit and guarantees
outstanding totaling $57.2 million and $1.2 million, respectively, primarily to
bond advance payments and performance related to customer contracts in the Test
segment.

6. Income Taxes:

The components of
income before income taxes for the fiscal years ended September 29, 2007,
September 30, 2006, and October 1, 2005 were as follows:

|                                                         |  |                          |        |      |   |        |  |   |        | 
|-------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------ | 
|                                                         |  | 2007                     |        | 2006 |   | 2005   | 
|                                                        
|                                                         |  | (expressed in thousands) |       
|Income
 before income taxes and discontinued operations: |  |                          |        |      |   |        |  |   |        | 
|Domestic                                                 |  | $                        | 32,773 |      | $ | 38,280 |  | $ | 35,466 | 
|Foreign                                                  |  |                          | 25,393 |      |   | 20,479 |  |   | 16,348 | 
|                                                         |  |                          |        |      |   |        |  |   |        | 
|Total                                                    |  | $                        | 58,166 |      | $ | 58,759 |  | $ | 51,814 | 
|                                                         |  |                          |        |      |   |        |  |   |        | 

The provision for
income taxes from continuing operations for the fiscal years ended September
29, 2007, September 30, 2006, and October 1, 2005 was as follows:

|                              |  |                          |        |      |   |        |  |   |        |  
|----------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------ | -
|                              |  | 2007                     |        | 2006 |   | 2005   | 
|                             
|                              |  | (expressed in thousands) |       
|Current
 provision (benefit): |  |                          |        |      |   |        |  |   |        |  
|Federal                       |  | $                        | 8,296  |      | $ | 8,682  |  | $ | 5,661  |  
|State                         |  |                          | 1,589  |      |   | 1,343  |  |   | 1,175  |  
|Foreign                       |  |                          | 10,472 |      |   | 7,100  |  |   | 10,892 |  
|Deferred                      |  |                          | (4,187 | )    |   | 2,772  |  |   | (2,483 | )
|                              |  |                          |        |      |   |        |  |   |        |  
|Total
 provision              |  | $                        | 16,170 |      | $ | 19,897 |  | $ | 15,245 |  
|                              |  |                          |        |      |   |        |  |   |        |  

F-21

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Table of Contents

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
September 29, 2007, September 30, 2006, and October 1, 2005 is as follows:

|                                                                   |  |      |    |      |  |      |   |  |    |  
|------------------------------------------------------------------ |  | ---- | -- | ---- |  | ---- | - |  | -- | -
|                                                                   |  | 2007 |    | 2006 |  | 2005 |  
|                                                                  
|                                                                  
|United States federal statutory income tax rate                    |  |      | 35 | %    |  | 35   | % |  | 35 | %
|Tax benefit
 of export sales                                       |  |      | (1 | )    |  | (2   | ) |  | (3 | )
|Foreign
 provision in excess of U.S. tax rate                      |  |      | (2 | )    |  | 2    |   |  | 2  |  
|Settlement
 of audits, favorable resolution of accrued tax matters |  |      |   |      |  | (3   | ) |  |   |  
|State income
 taxes, net of federal benefit                        |  |      | 1  |      |  | 2    |   |  | 2  |  
|Research and
 development tax credits                              |  |      | (5 | )    |  |     |   |  | (1 | )
|Domestic
 production activities deduction                          |  |      | (1 | )    |  | (1   | ) |  |   |  
|Foreign tax
 credits                                               |  |      |   |      |  |     |   |  | (5 | )
|Tax exempt
 income                                                 |  |      | (1 | )    |  | (1   | ) |  | (1 | )
|Nondeductible
 stock option expense and other permanent items      |  |      | 2  |      |  | 2    |   |  |   |  
|                                                                   |  |      |    |      |  |      |   |  |    |  
|Effective
 income tax rate                                         |  |      | 28 | %    |  | 34   | % |  | 29 | %
|                                                                   |  |      |    |      |  |      |   |  |    |  

A summary of
the deferred tax assets and liabilities for the fiscal years ended September
29, 2007, September 30, 2006, and October 1, 2005 is as follows:

|                                                     |  |                          |        |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                                                     |  | 2007                     |        | 2006 |   | 2005   |  
|                                                    
|                                                     |  | (expressed in thousands) |       
|Deferred Tax Asset:                                  |  |                          |        |      |   |        |   |   |        |  
|Accrued
 compensation and benefits                   |  | $                        | 6,907  |      | $ | 5,382  |   | $ | 4,441  |  
|Inventory
 reserves                                  |  |                          | 2,519  |      |   | 2,628  |   |   | 2,330  |  
|Intangible
 assets                                   |  |                          | 359    |      |   | 534    |   |   | 2,177  |  
|Allowance
 for doubtful accounts                     |  |                          | 215    |      |   | 175    |   |   | 124    |  
|Other assets                                         |  |                          | 655    |      |   | 425    |   |   | 547    |  
|Net
 operating loss carryovers                       |  |                          | 1,483  |      |   | 1,720  |   |   | 1,626  |  
|Unrealized
 derivative instrument losses             |  |                          | 119    |      |   |       |   |   |       |  
|Capital loss
 carryovers                             |  |                          | 34     |      |   |       |   |   |       |  
|Research and
 development and foreign tax credits    |  |                          | 305    |      |   |       |   |   | 1,081  |  
|                                                     |  |                          |        |      |   |        |   |   |        |  
|Total
 deferred tax asset before valuation allowance |  |                          | 12,596 |      |   | 10,864 |   |   | 12,326 |  
|Less
 valuation allowance                            |  |                          | (781   | )    |   | (669   | ) |   | (496   | )
|                                                     |  |                          |        |      |   |        |   |   |        |  
|Total Deferred Tax Asset                             |  | $                        | 11,815 |      | $ | 10,195 |   | $ | 11,830 |  
|                                                    
|                                                     |  |                          |        |      |   |        |   |   |        |  
|Deferred Tax Liability:                              |  |                          |        |      |   |        |   |   |        |  
|Property and
 equipment                              |  | $                        | 3,784  |      | $ | 4,531  |   | $ | 5,416  |  
|Unrealized
 derivative instrument gains              |  |                          |       |      |   | 811    |   |   | 789    |  
|Foreign
 deferred revenue and other                  |  |                          | 4,197  |      |   | 5,236  |   |   | 3,576  |  
|                                                     |  |                          |        |      |   |        |   |   |        |  
|Total Deferred Tax Liability                         |  | $                        | 7,981  |      | $ | 10,578 |   | $ | 9,781  |  
|                                                    
|Net Deferred Tax Asset (Liability)                   |  | $                        | 3,834  |      | $ | (383   | ) | $ | 2,049  |  
|                                                    

As of September 29, 2007,
the Companys French, Swedish and one of its German subsidiaries had net
operating loss carryovers of $3.1 million, $0.2 million and $2.0 million,
respectively. These net operating loss carryovers will not expire under local
tax law. The Company determined that it is more likely than not that it will
not be able to realize the benefit of the German subsidiarys net operating
loss carryover of $2.0 million. Accordingly, as of September 29, 2007, the
Company had a full valuation allowance against the German subsidiarys deferred
tax asset in the amount of $0.8 million, of which $0.1 million is related to a
fiscal year 2007 net operating loss.

The Companys German
subsidiaries benefited from tax legislation passed during fiscal year 2007. The
German subsidiaries recorded $2.4 million of tax benefits during fiscal year
2007 related to this legislation.

F-22

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The legislation decreased
the German tax rate applicable to future taxable temporary differences and
entitled the primary German subsidiary to a corporate tax refund. U.S. R&D
tax credit legislation was also extended during fiscal year 2007 with an
effective date retroactive to January 1, 2006. Accordingly, the Company recorded
tax benefits in the amount of $1.2 million related to the extension of the U.S
R&D tax credit legislation. During fiscal year 2006, the Company favorably
resolved tax audits and other previously accrued tax matters and accordingly
released $1.8 million of previously accrued tax contingencies. As a result of
fiscal year 2005 changes in 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 $2.9 million of previously accrued
tax contingencies. The decrease in the Companys effective income tax rate for
fiscal year 2007 compared to the effective income tax rate for fiscal year 2006
was primarily due to the favorable tax legislation passed during fiscal year
2007 in Germany and the U.S. and expanded R&D tax credits.

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 September 29, 2007, undistributed earnings
permanently reinvested in international subsidiaries were approximately $109
million. The Company has not provided for U.S. income taxes, or related foreign
tax credits, on these earnings.

In the fiscal years ended
September 29, 2007, September 30, 2006, and October 1, 2005, the Company
recognized tax benefits of $2.7 million, $1.7 million, and $6.2 million,
respectively, related to the Companys equity compensation plans. These
benefits were directly allocated to 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 was directly allocated to Accumulated Other Comprehensive Income
within Shareholders Investment. Under SFAS No. 87, Employers Accounting for
Pensions and SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, the deferred tax asset associated with the defined
benefit pension plan of one of the Companys German subsidiaries was also
directly allocated to Accumulated Other Comprehensive Income within
Shareholders Investment.

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
contributions were $2.0 million, $1.9 million, and $2.0 million in fiscal years
2007, 2006, and 2005, 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 $2.8 million, $2.6 million, and $3.0 million in fiscal
years 2007, 2006, and 2005, respectively.

One of the Companys German
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,

F-23

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Table of Contents

or death, as defined in the
plan. The Company uses a September 30 measurement date for this defined benefit
retirement plan.

Effective September 29,
2007, the Company adopted the recognition and disclosure provisions of FASB
issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and
Other Post Retirement Plans  an Amendment of FASB Statements No. 87,
Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, SFAS No. 106, Employers Accounting for Postretirement
Benefits Other Than Pensions, and SFAS No. 132(R), Employers Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 158 requires
employers to recognize the funded status of each defined benefit pension and
other postretirement plan in its statement of financial position, recognize
changes in that funded status in the year in which the changes occur through
comprehensive income, and measure a plans assets and its obligations that
determine its funded status as of the end of the employers fiscal year.

The following table shows
the incremental effect of applying SFAS No. 158 on individual line items in the
Consolidated Balance Sheet at September 29, 2007:

|                                        |  |                                        |         |                                     |   |                                       |   |   |         | 
|--------------------------------------- |  | -------------------------------------- | ------- | ----------------------------------- | - | ------------------------------------- | - | - | ------- | 
|                                        |  | Before 
 Application of 
 SFAS No. 158 |         | Adjustments
 
 Increase
 (Decrease) |   | After 
 Application of 
 SFAS No. 158 |  
|                                       
|                                        |  | (expressed
 in thousands)             
|Other assets                            |  | $                                      | 3,694   |                                     | $ | (30                                   | ) | $ | 3,664   | 
|Total assets                            |  |                                        | 353,011 |                                     |   | (30                                   | ) |   | 352,981 | 
|Deferred income taxes                   |  |                                        | 1,277   |                                     |   | (431                                  | ) |   | 846     | 
|Pension benefit plan                    |  |                                        | 11,378  |                                     |   | 1,399                                 |   |   | 12,777  | 
|Total liabilities                       |  |                                        | 162,312 |                                     |   | 968                                   |   |   | 163,280 | 
|Accumulated other
 comprehensive income |  |                                        | 21,411  |                                     |   | (998                                  | ) |   | 20,413  | 
|Total shareholders investment          |  | $                                      | 190,699 |                                     | $ | (998                                  | ) | $ | 189,701 | 
|                                       

The pretax amounts
recognized in Accumulated Other Comprehensive Income as of September 29, 2007
consist of the following:

|                   |  |                           |       |  | 
|------------------ |  | ------------------------- | ----- |  | 
|                   |  | 2007                      |      
|                   |  |                           |      
|                   |  | (expressed
 in thousands) |      
|Actuarial net loss |  | $                         | 1,547 |  | 
|Prior service cost |  |                           | 30    |  | 
|                   |  |                           |       |  | 
|                   |  | $                         | 1,577 |  | 
|                   |  |                           |       |  | 

The portion of the pretax
amount in Accumulated Other Comprehensive Income that is expected to be
recognized as a component of net periodic retirement cost during the next
fiscal year is less than $0.1 million.

The following is a summary
of the changes in benefit obligations and plan assets during the fiscal years
ended September 29, 2007 and September 30, 2006:

F-24

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|                                                 |  |                           |        |      |   |        |  
|------------------------------------------------ |  | ------------------------- | ------ | ---- | - | ------ | -
|                                                 |  | 2007                      |        | 2006 |  
|                                                
|                                                 |  | (expressed
 in thousands) |       
|Change in
 benefit obligation:                   |  |                           |        |      |   |        |  
|Projected benefit
 obligation, beginning of year |  | $                         | 11,987 |      | $ | 10,811 |  
|Service cost                                     |  |                           | 513    |      |   | 474    |  
|Interest cost                                    |  |                           | 562    |      |   | 466    |  
|Exchange rate change                             |  |                           | 1,428  |      |   | 581    |  
|Actuarial gain                                   |  |                           | (1,116 | )    |   | (133   | )
|Benefits paid                                    |  |                           | (257   | )    |   | (212   | )
|                                                 |  |                           |        |      |   |        |  
|Projected benefit
 obligation, end of year       |  | $                         | 13,117 |      | $ | 11,987 |  
|                                                
|                                                 |  |                           |        |      |   |        |  
|Change in
 plan assets:                          |  |                           |        |      |   |        |  
|Fair value of plan assets,
 beginning of year    |  | $                         |       |      | $ |       |  
|Actual return on plan
 assets                    |  |                           |       |      |   |       |  
|Employer contributions                           |  |                           | 257    |      |   | 212    |  
|Benefits paid                                    |  |                           | (257   | )    |   | (212   | )
|                                                 |  |                           |        |      |   |        |  
|Fair value of plan assets,
 end of year          |  | $                         |       |      | $ |       |  
|                                                

The following is a summary
of the funded status of the defined benefit retirement plan and amounts
recognized in the Companys Consolidated Balance Sheets at September 29, 2007
and September 30, 2006:

|                                                            |  |                           |         |      |   |         |  
|----------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------- | -
|                                                            |  | 2007                      |         | 2006 |  
|                                                           
|                                                            |  | (expressed
 in thousands) |        
|Funded
 status:                                             |  |                           |         |      |   |         |  
|Funded status, end of year                                  |  | $                         | (13,117 | )    | $ | (11,987 | )
|Unrecognized actuarial net
 loss                            |  |                           |        |      |   | 2,553   |  
|Unrecognized prior service
 cost                            |  |                           |        |      |   | 40      |  
|Required adjustment to
 recognize minimum pension liability |  |                           |        |      |   | (1,228  | )
|                                                            |  |                           |         |      |   |         |  
|Net accrued benefit
 liability recognized                   |  |                           | (13,117 | )    |   | (10,622 | )
|Accumulated other
 comprehensive loss                       |  |                           | 1,577   |      |   | 1,228   |  
|                                                            |  |                           |         |      |   |         |  
|Net amount recognized                                       |  | $                         | (11,540 | )    | $ | (9,394  | )
|                                                           
|                                                            |  |                           |         |      |   |         |  
|Amounts
 recognized in consolidated balance sheets:         |  |                           |         |      |   |         |  
|Accrued payroll and related
 costs                          |  | $                         | (340    | )    | $ | (231    | )
|Pension benefit plan                                        |  |                           | (12,777 | )    |   | (10,391 | )
|                                                            |  |                           |         |      |   |         |  
|Total accrued benefit
 liability                            |  |                           | (13,117 | )    |   | (10,622 | )
|Deferred income taxes                                       |  |                           | 476     |      |   | 478     |  
|Accumulated other
 comprehensive income, net of tax         |  |                           | 1,101   |      |   | 750     |  
|                                                            |  |                           |         |      |   |         |  
|Net amount recognized                                       |  | $                         | (11,540 | )    | $ | (9,394  | )
|                                                           

The weighted average
assumptions used to determine the defined benefit retirement plan obligation at
September 29, 2007 and September 30, 2006 were as follows:

|                                                         |      |   |  |      |  
|-------------------------------------------------------- | ---- | - |  | ---- | -
|                                                         | 2007 |   |  | 2006 |  
|                                                        
|Discount rate                                            | 5.4  | % |  | 4.5  | %
|Expected rate of increase
 in future compensation levels | 3.2  | % |  | 3.2  | %
|                                                        

The discount rate is calculated
based on zero-coupon bond yields published by the Deutsche Bundesbank for
maturities that match the weighted average duration of the pension liability,
adjusted for the average credit spread of corporate bond rates above the
government bond yields.

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Table of Contents

The
accumulated benefit obligation of the Companys defined benefit retirement plan
as of September 29, 2007 and September 30, 2006 was $11.7 million and $10.6
million, respectively. The projected benefit obligation of the Companys defined benefit retirement plan
as of September 29, 2007 and September 30, 2006 was $13.1 million and $12.0 million, respectively.

Net periodic
benefit cost for the Companys defined retirement plan for the fiscal years
ended September 29, 2007, September 30, 2006 and October 1, 2005 included the
following components:

|                               |  |                          |       |      |   |       |  |   |     | 
|------------------------------ |  | ------------------------ | ----- | ---- | - | ----- |  | - | --- | 
|                               |  | 2007                     |       | 2006 |   | 2005  | 
|                              
|                               |  | (expressed in thousands) |      
|Service cost                   |  | $                        | 513   |      | $ | 474   |  | $ | 337 | 
|Interest cost                  |  |                          | 562   |      |   | 466   |  |   | 471 | 
|Net amortization and
 deferral |  |                          | 133   |      |   | 139   |  |   | 13  | 
|                              
|Net
 periodic benefit cost     |  | $                        | 1,208 |      | $ | 1,079 |  | $ | 821 | 
|                              

Prior to the
adoption of SFAS No. 158, the Company was required, under SFAS No. 87, to
recognize 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. For the fiscal year ended September 29, 2007, the Company recorded a
non-cash adjustment to Accumulated Other Comprehensive Income of $0.7 million,
or $1.2 million on a pre-tax basis. For the fiscal year ended September 30,
2006, the Company recorded a non-cash adjustment to Accumulated Other
Comprehensive Income of $0.1 million, or $0.2 million on a pre-tax basis.

The Company
expects to contribute approximately $0.3 million to its defined benefit
retirement plan in fiscal year 2008. The future pension benefit payments, which
reflect expected future service, for the next five fiscal years, and the
combined five fiscal years thereafter, are as follows:

Future Benefit payments:

|                   |  |                          |       | 
|------------------ |  | ------------------------ | ----- | 
|Fiscal Year        |  | Pension
 Benefits        |      
|                  
|                   |  | (expressed in thousands) |      
|2008               |  | $                        | 340   | 
|2009               |  |                          | 442   | 
|2010               |  |                          | 520   | 
|2011               |  |                          | 576   | 
|2012               |  |                          | 625   | 
|2013
 through 2017 |  |                          | 3,920 | 
|                   |  |                         
|                   |  | $                        | 6,423 | 
|                   |  |                         

8. Restructuring and Other Charges:

In fiscal year
2005, the Company decided to exit its noise and vibration 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 were 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 were reported within the results of operations of the Companys
Test segment. Substantially all of the severance costs were paid in fiscal year
2006, with the remaining balance being paid in fiscal year 2007.

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Table of Contents

The Company
had no significant restructuring activities in fiscal years 2007 or 2006. For
the fiscal years ending September 29, 2007, September 30, 2006, and October 1,
2005, the reserve for restructuring was as follows:

|                                |  |                          |        |                                |   |       |   |   |        |  
|------------------------------- |  | ------------------------ | ------ | ------------------------------ | - | ----- | - | - | ------ | -
|                                |  | Severance
 Charges       |        | Contract
 Termination
 Charges |   | Total |  
|                               
|                                |  | (expressed in thousands) |       
|Balances at October 1, 2005     |  | $                        | 1,267  |                                | $ | 52    |   | $ | 1,319  |  
|Provision                       |  |                          | 30     |                                |   |      |   |   | 30     |  
|Write-off/payments              |  |                          | (1,257 | )                              |   | (52   | ) |   | (1,309 | )
|                                |  |                         
|Balances at September 30,
 2006 |  |                          | 40     |                                |   |      |   |   | 40     |  
|                                |  |                         
|Provision                       |  |                          |       |                                |   |      |   |   |       |  
|Write-off/payments              |  |                          | (40    | )                              |   |      |   |   | (40    | )
|                                |  |                         
|Balances at September 29,
 2007 |  | $                        |       |                                | $ |      |   | $ |       |  
|                                |  |                         

9. Commitments and Contingencies:

Litigation:
The Company has been subject to investigations conducted by the U.S. Department
of Commerce and the U.S. Attorney for the District of Minnesota since 2000
concerning the Companys compliance with U.S. export control regulations. In
fiscal year 2006, the Company entered into a civil settlement with the U.S.
Department of Commerce, pursuant to which the Company paid a civil fine of less
than $0.1 million, while denying any violation of law. The separate criminal
inquiry by the U.S. Attorneys office has been ongoing and, during fiscal year
2007, the Company and the U.S. Attorneys office began discussing terms to
terminate the criminal inquiry. No formal litigation has been commenced against
the Company.

The Company
and its Audit Committee have independently investigated the matter and believe no willful or
material violation of applicable law has been committed. The Company believes that its maximum
exposure to any fine related to these matters is an additional $1.0 million,
plus the cost of its defense. The Company does not believe the final outcome of
these proceedings will have a material adverse effect on its consolidated
financial position or results of operations.

In addition to
the above legal matter, the Company is also 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. The Company expenses legal costs associated with
these matters as incurred.

Leases: Total
lease expense associated with continuing operations was $5.7 million, $5.3
million, and $4.7 million for fiscal years 2007, 2006, and 2005, respectively.
The Company has 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) |         
|2008       |  | $                        | 5,324    | 
|2009       |  |                          | 4,302    | 
|2010       |  |                          | 2,803    | 
|2011       |  |                          | 2,011    | 
|2012       |  |                          | 1,245    | 
|Thereafter |  |                          | 2,969    | 
|           |  |                         
|           |  | $                        | 18,654   | 
|           |  |                         

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10. Related Party Transactions:

During the
fiscal years ended September 29, 2007, September 30, 2006, and October 1, 2005,
MTS Sensors purchased mechanical components and remote-mechanic workbench
services from Mark-Tronik GmbH (Mark-Tronik) aggregating approximately $1.4
million, $1.2 million and $1.1 million, respectively. MTS Sensors is owned by
MTS Systems GmbH, a wholly-owned subsidiary of the Company. The owner and general
manager of Mark-Tronik is a related party to management of the Company. At
September 29, 2007 and September 30, 2006, net outstanding payments due to
Mark-Tronik by MTS Sensors were less than $0.1 million.

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Table of Contents

MTS SYSTEMS CORPORATION AND SUBSIDIARIES

SCHEDULE II - SUMMARY OF
CONSOLIDATED ALLOWANCES

FOR DOUBTFUL ACCOUNTS AND RESTRUCTURING
RESERVES

FOR THE FISCAL YEARS ENDED SEPTEMBER 29,
2007, SEPTEMBER 30, 2006, 
AND OCTOBER 1, 2005

(expressed in thousands)

|                                  |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|--------------------------------- |  | --------------------------- | ----- | ---------- | - | ------------------------------- |  | --------------------- | ------ | - | - | ----- | 
|                                  |  | Balance
 Beginning
 of Year |       | Provisions |   | Amounts
 Written-Off/
 Payments |  | Balance
 End of
 Year |       
|                                  |  |                             |       |            |   |                                 |  |                       |       
|                                  |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|Allowance
 for Doubtful Accounts: |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|                                  |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|2007                              |  | $                           | 1,350 |            | $ | 320                             |  | $                     | (152   | ) | $ | 1,518 | 
|                                  |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|2006                              |  |                             | 1,210 |            |   | 352                             |  |                       | (212   | ) |   | 1,350 | 
|                                  |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|2005                              |  |                             | 1,197 |            |   | 201                             |  |                       | (188   | ) |   | 1,210 | 
|                                  |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|Restructuring
 Reserves:          |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|                                  |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|2007                              |  | $                           | 40    |            | $ | 0                               |  | $                     | (40    | ) | $ | 0     | 
|                                  |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|2006                              |  |                             | 1,319 |            |   | 30                              |  |                       | (1,309 | ) |   | 40    | 
|                                  |  |                             |       |            |   |                                 |  |                       |        |   |   |       | 
|2005                              |  |                             |      |            |   | 1,319                           |  |                       |       |   |   | 1,319 | 

F-29

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