Table of Contents





UNITED STATES SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549


|          
|----------
|          
|FORM
 10-K
|          

(Mark One)

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

For the fiscal year ended September 27, 2008

OR

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

For the Transition Period from _____________
to ______________

Commission File No. 0-2382

|
|
|

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

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

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

Securities
registered pursuant to Section 12(b) of the Act:

|                                       |  |                                                           
|-------------------------------------- |  | ----------------------------------------------------------
|Title of each class                    |  | Name of each exchange on which registered                 
|Common Stock, $.25 par value per share |  | The NASDAQ Stock Market LLC
 (NASDAQ Global Select Market)

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

---

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

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

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

Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) 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, a
non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act.

|                          |                     |                         |                            
|------------------------- | ------------------- | ----------------------- | ---------------------------
|Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company 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: $573,275,948.

As of November 21, 2008, the
Registrant had outstanding 16,927,723
shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE: Portions
of the Proxy Statement for the Registrants Annual Meeting of Shareholders to
be held February 4, 2009 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 CorporationAnnual 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                                                                                         |  | 6 
|         | 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 |  | 11
|Item 6.  | Selected Financial Data                                                                                       |  | 14
|Item 7.  | Managements Discussion and Analysis of
 Financial Condition and Results of Operations                        |  | 15
|Item 7A. | Quantitative and Qualitative Disclosures
 About Market Risk                                                   |  | 30
|Item 8.  | Financial Statements and Supplementary
Data                                                                   |  | 31
|Item 9.  | Changes in and Disagreements With
 Accountants on Accounting and Financial Disclosure                         |  | 31
|Item 9A. | Controls and Procedures                                                                                       |  | 31
|Item 9B. | Other Information                                                                                             |  | 32
|         |                                                                                                               |  |   
|PART III
|         |                                                                                                               |  |   
|Item 10. | Directors and Executive Officers of
 Registrant                                                               |  | 32
|Item 11. | Executive Compensation                                                                                        |  | 32
|Item 12. | Security Ownership of Certain Beneficial
 Owners and Management and Related Stockholder Matters               |  | 32
|Item 13. | Certain Relationships and Related
 Transactions                                                               |  | 33
|Item 14. | Principal Accountant Fees and Services                                                                        |  | 33
|         |                                                                                                               |  |   
|PART IV 
|         |                                                                                                               |  |   
|Item 15. | Exhibits and Financial Statement
Schedules                                                                    |  | 33

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Table of Contents

PART 1

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. 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.

1

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|        |         
|------- | --------
|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: The Test segment provides
physical testing solutions including hardware, software and aftermarket
support. Products are used by customers in their development of new products
and in certain quality control applications to characterize the products
mechanical properties. The Companys products simulate forces and motions that
these customers expect their products to encounter in use. Mechanical testing
in a lab 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. Because 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 electro-mechanical 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. Generally, North America, Europe
and Asia each accounts for approximately one-third of revenue, as measured by
customer location.

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ground Vehicles: This market consists of
 automobile, truck, motorcycle, motorsports vehicles, construction equipment, agricultural
 equipment, and off-road vehicle manufacturers and their suppliers. Test
 segment system and service products are utilized in customer testing of
 vehicles, subsystems and components. System examples include road and track
 simulators, tire performance and transmission test systems. This is the
 largest Test segment market, representing approximately 50% of segment
 revenue.                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 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.
 Bio-medical 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 revenue.

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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
 to perform static and fatigue testing of aircraft and space vehicles as well
 as sub-systems, components and materials. This market represents
 approximately 15% of Test segment revenue.

Sensors Segment: The Sensors segment products
are used by industrial machinery and mobile equipment manufacturers to automate
the operation of their products for improved end-user productivity and safety.
Examples of customer industries include manufacturers of plastic injection
molding machines, steel mills, fluid power, oil and gas, medical, wood product
processing equipment, mobile equipment, and alternative energy. 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 the Companys 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, 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
2008, product orders in the Test segment ranged in value from a few hundred
dollars to $17 million on an equivalent United States dollar basis. The average
order size was approximately $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 2008 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 through 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 ranging from $25 to $3,500, with an average
sales price of approximately $500 on a United States dollar-

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equivalent
basis. While the average sales cycle for the Sensors segment is approximately
1-4 weeks for existing customers purchasing standard products, the sales cycle
for a new account can range from three months to two years.

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. Some smaller system assembly is performed at Company
locations in Berlin, Germany; Seoul, South Korea; and Shanghai, China.
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, 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 products 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 products
and services 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 Sensors 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 on time product
delivery. The Test segment may

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have varying
levels of work-in-process projects that are classified as inventory or unbilled
receivables, depending upon the production cycle timing of orders, project
revenue recognition and shipments to customers.

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.
Conversely, if revenue is recognized on a project 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
Accounts Receivable, Unbilled Accounts Receivable, Advance Payments from
Customers and Inventory. It has not been the Companys practice to provide
rights of return for its products. Payment terms vary and are subject to
negotiation.

Customers

The Company
does not have a significant concentration of sales with any individual
customer. Therefore, the loss of any one customer would not have a material
impact on the Company.

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
$235 million, $205 million, and $189 million at September 27, 2008, September
29, 2007 and September 30, 2006, respectively. The majority of this backlog is
related to the Test segment. Based on anticipated production schedules, the
Company estimates that approximately $204 million of the backlog at September
27, 2008 will be converted to revenue during fiscal 2009. 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 site 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 Contracts

No material
portion of the Companys business is subject to re-negotiation 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 $16.2 million, $19.3 million and $18.0
million for the fiscal years ended September 27, 2008, September 29, 2007 and
September 30, 2006, respectively. During the fiscal year ended September 27,
2008, the

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Company
allocated certain of its resources towards capitalized software development
activities. Total software development costs capitalized during the fiscal year
ended September 27, 2008 were $4.2 million.

Environmental Matters

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

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
|                                                                 
|                                                                 
|Laura B. Hamilton,
 Chair, President and
 Chief Executive Officer |  | Chair of the
 Board since September 2008, and Chief Executive Officer since January 2008.
 President since June 2007 and Chief Operating Officer from June 2007 to
 January 2008. Senior Vice President of Test from May 2003 to June 2007. |  | 47  |  | 2000           
|                                                                  |  |                                                                                                                                                                                                                                             |  |     |  |                
|Joachim Hellwig,Vice President                                    |  | Vice
 President of the Companys Sensors business since January 2003.                                                                                                                                                                       |  | 59  |  | 2003           
|                                                                  |  |                                                                                                                                                                                                                                             |  |     |  |                
|Susan E. Knight,
 Vice President and Chief Financial Officer      |  | Vice
 President and Chief Financial Officer since October 2001.                                                                                                                                                                             |  | 54  |  | 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.                                                                                                                   |  | 62  |  | 2000           

Employees

The Company had 1,660 employees as of
September 27, 2008, including approximately 543 employees located outside the
United States.

Available Information

The Companys annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act are available on the Investor Relations pages of
the Companys website, www.mts.com, as soon as reasonably practicable
after the Company files such material with, or furnishes it to, the Securities
and Exchange Commission (SEC). 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, Compensation, and Governance and Nominating Committees
of the Companys Board of Directors are also available free of charge on the
Investor Relations pages at www.mts.com. The Companys SEC filings are
also available at the SEC online EDGAR database at www.sec.gov.

6

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|         |              
|-------- | -------------
|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
risks 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 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, sell and service its
products. 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. In addition to market penetration, 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
business 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 Companys revenue in fiscal 2008.
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:

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

8

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Table of Contents

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.

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 market support. 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, purchase shares of the Companys common stock 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 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.

Volatility in the global economy could adversely affect results.Financial markets in the United States, Europe and Asia
have been experiencing extreme disruption in recent months, including, among
other things, volatility in security prices, diminished liquidity and credit
availability, rating downgrades of certain investments and declining valuations
of others. Currently, these conditions have not had a significant impact our
financial condition or results of operations. However, there can be no assurance
that there will not be further change, which could lead to challenges in our
business and negatively impact on our financial results. The current tightening
of credit in financial markets advversely affects the ability of our customers
and suppliers to obtain financing for significant purchases and operations and
could result in a decrease in orders and spending for our products and services.
We are unable to predict the likely duration and severity of the current
disruption in financial markets and adverse economic conditions and the effects
they may have our business and financial condition.

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

None.

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

The Companys
primary owned and leased facilities at September 27, 2008 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 and European
 sales and service administration                    |  | 80,000          |  |  | 

9

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Table of Contents

Leased
Property:

|                      |  |                                                                                                      |  |                 |  |  |               
|--------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --------------- |  |  | --------------
|Location              |  | Use of Facility                                                                                      |  | Square
 Footage |  |  | Lease
 Expires
|                      |  |                                                                                                      |  |                 |  |  |               
|                      |  |                                                                                                      |  |                 |  |  |               
|Chanhassen,
 MN USA   |  | Test segment manufacturing                                                                           |  | 97,000          |  |  | 2013          
|                      |  |                                                                                                      |  |                 |  |  |               
|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, service administration
 and assembly                                             |  | 7,784           |  |  | 2009          
|                      |  |                                                                                                      |  |                 |  |  |               
|Shanghai,
 China      |  | Test segment sales, service administration
 and assembly                                             |  | 13,257          |  |  | 2010          
|                      |  |                                                                                                      |  |                 |  |  |               
|Berlin,
 Germany      |  | Land under Berlin facility                                                                           |  | 29,520          |  |  | 2052          

The Company
also leases space in the United States, Europe and Asia for sales and service
administration for the Test segment, including locations in Madison Heights,
Michigan; Paris, France; Gloucester, United Kingdom; Gothenburg, Sweden; Turin,
Italy; Nagoya, Japan; Beijing 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 2009.

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

During the
second quarter of fiscal 2008, the Company settled the previously disclosed
investigations by the U.S. Department of Justice and the U.S. Department of
Commerce. A description of the settlements is contained in Item 8.01, Other
Events, of the Companys Current Report on Form 8-K filed with the SEC on March
12, 2008, which is incorporated by reference herein.

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

No matters
were submitted to a vote of shareholders during the fourth quarter of the
fiscal year ended September 27, 2008.

10

---

Table of Contents

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. *

|                    |  |   |       |  |      |       |       |   |        |  |  |            |  | 
|------------------- |  | - | ----- |  | ---- | ----- | ----- | - | ------ |  |  | ---------- |  | 
|Quarter
 Ended      |  |   | Low   |  | High |       | Close |   | Volume | 
|                    |  |   |       |  |      |       |       |   |        | 
|                    |  |   |       |  |      |       |       |   |        |  |  |            | 
|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  | 
|                    |  |   |       |  |      |       |       |   |        |  |  |            | 
|December 29,
 2007  |  | $ | 39.39 |  | $    | 46.29 |       | $ | 43.36  |  |  | 6,616,609  | 
|                    |  |   |       |  |      |       |       |   |        |  |  |            | 
|March 29,
 2008     |  | $ | 29.35 |  | $    | 44.67 |       | $ | 32.63  |  |  | 10,922,775 | 
|                    |  |   |       |  |      |       |       |   |        |  |  |            | 
|June 28,
 2008      |  | $ | 30.39 |  | $    | 39.68 |       | $ | 36.08  |  |  | 8,069,218  | 
|                    |  |   |       |  |      |       |       |   |        |  |  |            | 
|September
 27, 2008 |  | $ | 34.90 |  | $    | 43.88 |       | $ | 42.51  |  |  | 6,654,843  | 

* Source:
NASDAQ OnlineSM at www.nasdaq.net.

At November
21, 2008, there were 1,039 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.

11

---

Table of Contents

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 
 September 30, 2007 - December 29, 2007         |  |                                    | 108,000   |                                 | $ | 42.63                                                                                   |  |                                                                                       | 108,000   |  |  | 3,413,032 | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|Second Quarter
 December 30, 2007 - March 29, 2008             |  |                                    | 126,000   |                                 | $ | 35.31                                                                                   |  |                                                                                       | 126,000   |  |  | 3,287,032 | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|Third Quarter 
 March 30, 2008 - June 28, 2008                 |  |                                    | 775,994   |                                 | $ | 38.41                                                                                   |  |                                                                                       | 775,994   |  |  | 2,511,038 | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|Fourth Quarter 
 Fiscal Month 
 June 29, 2008 - August 2, 2008 |  |                                    |          |                                 | $ |                                                                                        |  |                                                                                       |          |  |  | 2,511,038 | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|August 3, 2008 - August 30,
 2008                              |  |                                    |          |                                 | $ |                                                                                        |  |                                                                                       |          |  |  | 2,511,038 | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|August 31, 2008 - September
 27, 2008                          |  |                                    |          |                                 | $ |                                                                                        |  |                                                                                       |          |  |  | 2,511,038 | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|Fourth Quarter                                                 |  |                                    |          |                                 |   |                                                                                        |  |                                                                                       |          |  |  | 2,511,038 | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 
|Fiscal Year 2008                                               |  |                                    | 1,009,994 |                                 | $ | 38.47                                                                                   |  |                                                                                       | 1,009,994 |  |  |           | 
|                                                               |  |                                    |           |                                 |   |                                                                                         |  |                                                                                       |           |  |  |           | 

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.

During fiscal
year 2008, 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 has been delegated
to management. The share purchase authorizations have no expiration date.

On April 28,
2008, the Companys Board of Directors authorized an accelerated share purchase
program to acquire shares of the Companys common stock up to an aggregate
purchase price of $50 million. On May 5, 2008, the Company entered into an
accelerated share purchase agreement with an unrelated third party investment
bank to purchase approximately 0.7 million shares of its common stock for $25
million. The transaction was accounted for as a share retirement resulting in a
reduction of common stock and retained earnings of $0.2 million and $24.8
million, respectively, at the share retirement date. The accelerated share
purchase agreement expired on September 22, 2008. Upon completion of the
transaction, the Company made a final settlement payment of $3.3 million, based on the
volume-weighted average price of the Companys common stock during the
contractual period, minus an agreed-upon discount. This settlement transaction
was accounted for as a reduction in retained earnings of $3.3 million.

12

---

Table of Contents

The Companys
dividend policy is to target a long-term payout ratio of approximately 25% of
net earnings. During fiscal year 2008, the Company paid quarterly cash
dividends of $0.15 per share to holders of its common stock.

The Companys
long term debt agreements include minimum net worth and book leverage covenants
that restrict its ability to pay dividends and purchase outstanding shares of
common stock. As of September 27, 2008 and September 29, 2007, 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.

Shareholder 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 27, 2003 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.

(LINE GRAPH)

13

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Table of Contents

|                                                                              |  |                   |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 
|----------------------------------------------------------------------------- |  | ----------------- | ------ | ------- | - | ------- |  | ------- | ------ | ------- | - | ------- |  | - | ------ |  | - | ------ | 
|                                                                              |  | FISCAL YEAR ENDED |       
|                                                                              |  |                   |       
|                                                                              |  | 9/27/03           |        | 10/2/04 |   | 10/1/05 |  | 9/30/06 |        | 9/29/07 |   | 9/27/08 | 
|                                                                              |  |                   |        |         |   |         |  |         |        |         |   |         | 
|MTS Systems Corporation                                                       |  | $                 | 100.00 |         | $ | 154.41  |  | $       | 266.30 |         | $ | 230.66  |  | $ | 300.31 |  | $ | 311.83 | 
|                                                                              |  |                   |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 
|Russell 2000 Index                                                            |  |                   | 100.00 |         |   | 119.37  |  |         | 140.79 |         |   | 154.77  |  |   | 173.86 |  |   | 154.19 | 
|                                                                              |  |                   |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 
|*SIC Code 3820 Peer Group (Modified to remove non-exchange
 traded companies) |  |                   | 100.00 |         |   | 117.87  |  |         | 133.68 |         |   | 147.17  |  |   | 188.25 |  |   | 154.94 | 
|                                                                              |  |                   |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 

|        |                         
|------- | ------------------------
|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
in Items 7 and 8 of this Annual Report on Form 10-K. The statement of income
data for each of the three fiscal years ended September 27, 2008, September 29,
2007, and September 30, 2006 and the balance sheet data at September 27, 2008 and
September 29, 2007 are derived from the audited Consolidated Financial
Statements included elsewhere in this report. The statement of income data for
the fiscal years ended October 1, 2005 and October 2, 2004 and the balance
sheet data at September 30, 2006, October 1, 2005 and October 2, 2004 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 27, 2008;
September 29, 2007; September 30, 2006; October 1, 2005; and October 2, 2004)(expressed in thousands,
except per share data and numbers of shareholders and employees)

|                                                                           |  |      |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|-------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | ---- | ------- | ----- | - | ------- | - | - | ------- | -
|                                                                           |  | 2008 |         | 2007 |   | 2006    |   | 2005 |         | 20041 |  
|                                                                           |  |      |         |      |   |         |   |      |         |       |  
|Operations                                                                 |  |      |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Revenue                                                                    |  | $    | 460,515 |      | $ | 410,091 |   | $    | 387,924 |       | $ | 367,950 |   | $ | 330,271 |  
|Gross profit                                                               |  |      | 190,253 |      |   | 173,638 |   |      | 168,235 |       |   | 160,557 |   |   | 134,086 |  
|Gross profit as a % of revenue                                             |  |      | 41.3    | %    |   | 42.3    | % |      | 43.4    | %     |   | 43.6    | % |   | 40.6    | %
|Research and development expense                                           |  | $    | 16,232  |      | $ | 19,285  |   | $    | 17,969  |       | $ | 14,199  |   | $ | 11,906  |  
|Research and development as a % of revenue                                 |  |      | 3.5     | %    |   | 4.7     | % |      | 4.6     | %     |   | 3.9     | % |   | 3.6     | %
|Effective income tax rate                                                  |  |      | 28.0    | %    |   | 27.5    | % |      | 33.7    | %     |   | 29.4    | % |   | 36.7    | %
|Income before discontinued operations                                      |  | $    | 47,110  |      | $ | 41,041  |   | $    | 37,969  |       | $ | 36,725  |   | $ | 26,538  |  
|Net income                                                                 |  |      | 49,191  |      |   | 41,996  |   |      | 39,323  |       |   | 37,058  |   |   | 28,983  |  
|Net income as a % of revenue                                               |  |      | 10.7    | %    |   | 10.2    | % |      | 10.1    | %     |   | 10.1    | % |   | 8.8     | %
|Diluted earnings per share of common stock before discontinued
 operations |  | $    | 2.68    |      | $ | 2.24    |   | $    | 1.97    |       | $ | 1.79    |   | $ | 1.24    |  
|Diluted earnings per share of common stock                                 |  |      | 2.80    |      |   | 2.29    |   |      | 2.04    |       |   | 1.81    |   |   | 1.35    |  
|Weighted average dilutive shares outstanding during the
year2              |  |      | 17,544  |      |   | 18,330  |   |      | 19,229  |       |   | 20,509  |   |   | 21,464  |  
|Net interest income (expense)                                              |  | $    | 2,950   |      | $ | 2,590   |   | $    | 1,879   |       | $ | 220     |   | $ | (909    | )
|Depreciation and amortization                                              |  |      | 9,207   |      |   | 7,985   |   |      | 7,302   |       |   | 8,100   |   |   | 7,890   |  
|                                                                           |  |      |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Financial Position                                                         |  |      |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|                                                                           |  |      |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Cash, cash equivalents and short-term investments                          |  | $    | 114,099 |      | $ | 121,395 |   | $    | 121,537 |       | $ | 159,793 |   | $ | 129,303 |  
|Property and equipment, net                                                |  |      | 50,534  |      |   | 49,747  |   |      | 42,972  |       |   | 42,351  |   |   | 43,956  |  
|Total assets                                                               |  |      | 399,157 |      |   | 352,981 |   |      | 324,123 |       |   | 351,732 |   |   | 341,635 |  
|Interest-bearing debt3                                                     |  |      | 26,308  |      |   | 8,991   |   |      | 15,673  |       |   | 23,963  |   |   | 30,718  |  
|Total shareholders investment                                             |  |      | 204,942 |      |   | 189,701 |   |      | 169,321 |       |   | 188,432 |   |   | 171,796 |  
|Interest-bearing debt as a % of shareholders investment                   |  |      | 12.8    | %    |   | 4.7     | % |      | 9.3     | %     |   | 12.7    | % |   | 17.9    | %
|Return on
 equity4                                                         |  |      | 25.9    | %    |   | 24.8    | % |      | 20.9    | %     |   | 21.6    | % |   | 16.5    | %
|                                                                           |  |      |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Other Statistics                                                           |  |      |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|                                                                           |  |      |         |      |   |         |   |      |         |       |   |         |   |   |         |  
|Number of common shareholders of record at
year-end5                       |  |      | 1,043   |      |   | 1,092   |   |      | 1,201   |       |   | 1,471   |   |   | 1,644   |  
|Number of employees at year-end                                            |  |      | 1,660   |      |   | 1,575   |   |      | 1,474   |       |   | 1,516   |   |   | 1,471   |  
|Orders                                                                     |  | $    | 485,274 |      | $ | 421,437 |   | $    | 366,626 |       | $ | 397,642 |   | $ | 380,621 |  
|Backlog of orders at year-end                                              |  |      | 234,710 |      |   | 204,558 |   |      | 189,000 |       |   | 217,982 |   |   | 184,805 |  
|Cash dividends paid per share                                              |  |      | 0.60    |      |   | 0.48    |   |      | 0.41    |       |   | 0.34    |   |   | 0.26    |  

|                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------
|1The fiscal year ended October 2, 2004 was
a 53-week fiscal year, whereas all other fiscal years presented were 52-week
periods.
|2 Assumes the conversion of potential common
shares using the treasury stock method.                                            
|3Consists of short-term borrowings 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.                             

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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 and development processes and are used for
determining the mechanical behavior of materials, components, and structures.
MTS high-performance position sensors provide controls for a variety of
industrial and mobile hydraulic applications. MTS had 1,660 employees and
revenue of $461 million for the fiscal year ended September 27, 2008.

Fiscal YearThe Companys fiscal year ends on the Saturday closest
to September 30. The fiscal years ended September 27, 2008, September 29, 2007
and September 30, 2006 consisted of 52 weeks.

Summary of ResultsOrders for fiscal year 2008 increased 15.2%, to $485.3
million, compared to orders of $421.4 million for fiscal year 2007. In fiscal
year 2006, orders totaled $366.6 million. The increase in orders in fiscal year
2008 from fiscal year 2007 represents growth of 14.4% and 18.2% in the Test and
Sensors segment, respectively, and includes an estimated $21.1 million
favorable impact of currency translation. The increase in orders in fiscal year
2007 from fiscal year 2006 represents growth of 13.4% and 22.1% in the Test and
Sensors segments, respectively, and includes an estimated $9.1 million
favorable impact of currency translation. Backlog of undelivered orders at
September 27, 2008 increased 14.7%, to $234.7 million, compared to backlog of
$204.6 million at September 29, 2007. Backlog at the end of fiscal year 2006
totaled $189.0 million.

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Revenue of
$460.5 million for fiscal year 2008 increased 12.3%, compared to revenue of
$410.1 million for fiscal year 2007. Revenue for fiscal year 2006 totaled
$387.9 million. The increase in revenue in fiscal year 2008 from fiscal year
2007 represents growth of 9.3% and 25.4% in the Test and Sensors segments,
respectively, and includes an estimated $22.1 million favorable impact of
currency translation. The increase in revenue in fiscal year 2007 from fiscal
year 2006 represents growth of 2.9% and 19.8% in the Test and Sensors segments,
respectively, and includes an estimated $11.6 million favorable impact of
currency translation.

Gross profit
for fiscal year 2008 was $190.3 million, an increase of 9.6% compared to gross
profit of $173.6 million for fiscal year 2007. This increase included an
estimated $7.2 million favorable impact of currency translation. The $5.4
million increase in fiscal year 2007 gross profit compared to $168.2 million of
gross profit for fiscal year 2006 included an estimated $3.4 million favorable
impact of currency translation. Gross profit as a percentage of revenue for
fiscal year 2008 was 41.3%, a decrease of 1.0 percentage point compared to
42.3% for fiscal year 2007. Gross profit as a percentage of revenue for fiscal
year 2006 was 43.4%. The decrease in the gross profit rate for fiscal year 2008
compared to fiscal year 2007 was driven by unfavorable product mix and higher
custom project costs in the Test segment, partially offset by higher volume.
The decrease in the gross margin rate for fiscal year 2007 compared to fiscal
year 2006 was driven by higher custom project costs and unfavorable product mix
in the Test segment.

Income from
operations for fiscal year 2008 increased 14.4%, to $61.8 million, compared to
$54.0 million for fiscal year 2007. Income from operations for fiscal year 2006
totaled $54.4 million. The increase in fiscal year 2008 from fiscal year 2007
was primarily due to higher gross profit and lower research and development
expense, partially offset by planned increases in operating expenditures to
support strategic initiatives. The decrease in fiscal year 2007 compared to
fiscal year 2006 was primarily due to planned increases in sales, marketing,
and research and development spending to support strategic initiatives,
primarily offset by higher gross profit.

Income before
discontinued operations for fiscal year 2008 increased 14.9%, to $47.1 million,
compared to $41.0 million for fiscal year 2007. Income before discontinued
operations for fiscal year 2006 totaled $38.0 million. The increase in fiscal
year 2008 from fiscal year 2007 was primarily due to stronger operating
performance in both segments, and $1.0 million favorable currency transaction
gains, partially offset by higher income tax expense of $2.8 million. The
higher income tax expense is primarily due to increased operating income. The
increase in fiscal year 2007 from fiscal year 2006 was primarily due $3.8
million lower income tax expense, partially offset by $1.4 million of
unfavorable currency transaction losses. The lower income tax expense resulted
from the enactment of favorable tax legislation in Germany and the United
States.

Net income was
$49.2 million, or $2.80 per diluted share, for fiscal year 2008, an increase of
17.1% compared to $42.0 million, or $2.29 per diluted share, for fiscal year
2007, and increased from $39.3 million, or $2.04 per diluted share, for fiscal
year 2006. The increase in net income in fiscal year 2008 from fiscal year 2007
was primarily the result of higher income before discontinued operations and
$1.1 million increased income from discontinued operations associated with a
gain on the sale of the Nano product line during fiscal year 2008. The increase
in net income in fiscal year 2007 from fiscal year 2006 was primarily due to
increased income before discontinued operations.

During fiscal
year 2008, 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 $0.12 for fiscal year 2008.

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Detailed Financial Results

Orders and Backlog

|                               |  |                          |         |      |   |         |  |   |         | 
|------------------------------ |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|                               |  | 2008                     |         | 2007 |   | 2006    | 
|                               |  |                          |         |      |   |         | 
|                               |  | (expressed in thousands) |        
|Orders                         |  | $                        | 485,274 |      | $ | 421,437 |  | $ | 366,626 | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Backlog of Undelivered
 Orders |  | $                        | 234,710 |      | $ | 204,558 |  | $ | 189,000 | 
|                               |  |                          |         |      |   |         |  |   |         | 

Orders for
fiscal year 2008 totaled $485.3 million, an increase of $63.9 million, or
15.2%, compared to orders of $421.4 million for fiscal year 2007. In fiscal
year 2006, orders totaled $366.6 million. The increase in orders in fiscal year
2008 from fiscal year 2007 is primarily driven by Test segment orders in Europe
and North America, and worldwide growth in the Sensors segment, as well as an
estimated $21.1 million favorable impact of currency translation. 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.

Orders for the
Test segment totaled $389.8 million for fiscal year 2008, an increase of $49.2
million, or 14.4%, compared to orders of $340.6 million for fiscal year 2007.
Test segment orders for fiscal year 2006 totaled $300.4 million. The increase
in orders in fiscal year 2008 from fiscal year 2007 was primarily due to
increased volume in Europe and North America, and an estimated $14.1 million
favorable impact of currency translation. During fiscal year 2008, the Company
booked six large custom orders which aggregated to approximately $52 million.
During fiscal year 2007, the Company booked five large custom orders which
aggregated to approximately $41 million. The Company considers an individual
order valued at an amount equal to or greater than $5 million a significant
order. The increase in orders in fiscal year 2007 from fiscal year 2006 was
primarily due to increased volume in Asia and an estimated $6.3 million
favorable impact of currency translation. The Test segment booked 80.3% of
total Company orders for fiscal year 2008, compared to 80.8% of total Company
orders for fiscal year 2007 and 81.9% for fiscal year 2006.

Orders for the
Sensors segment totaled $95.5 million for fiscal year 2008, an increase of
$14.7 million, or 18.2%, compared to orders of $80.8 million for fiscal year
2007. Orders for the Sensors segment in fiscal year 2006 totaled $66.2 million.
The increase in orders in fiscal year 2008 from fiscal year 2007 was primarily
due to continued worldwide growth and an estimated $7.0 million favorable impact
of currency translation. The increase in orders in fiscal year 2007 from fiscal
year 2006 was primarily due to worldwide growth and an estimated $2.8 million
favorable impact of currency translation. The Sensors segment booked 19.7% of
total Company orders for fiscal year 2008, compared to 19.2% of total Company
orders for fiscal year 2007 and 18.1% for fiscal year 2006.

Orders in the
Americas totaled $176.2 million during fiscal year 2008, up $26.8 million, or
17.9%, compared to orders of $149.4 million for fiscal year 2007. Orders in the
Americas during fiscal year 2006 totaled $149.9 million. Orders in Europe
totaled $168.4 million during fiscal year 2008, an increase of $33.9 million,
or 25.2%, compared to orders of $134.5 million for fiscal year 2007. Orders in
Europe during fiscal year 2006 totaled $126.6 million. Orders in Asia totaled
$140.2 million during fiscal year 2008, an increase of $3.2 million, or 2.3%,
compared to orders of $137.0 million for fiscal year 2007. Orders in Asia
during fiscal year 2006 totaled $89.9 million. Other international orders
totaled $0.5 million, $0.5 million, and $0.2 million, respectively, for fiscal
years 2008, 2007, and 2006.

Backlog of
undelivered orders at September 27, 2008 totaled $234.7 million, an increase of
approximately $30.1 million, or 14.7%, compared to backlog of $204.6 million at
September 29, 2007. Backlog at the end of fiscal year 2006 totaled $189.0
million. The increase in backlog in fiscal year 2008 from fiscal year 2007 was
primarily due to increased order volume in both segments, and an estimated $5.4
million favorable impact of currency translation. The increase in backlog in
fiscal year 2007 from fiscal year 2006 was also primarily due to increased
order volume in both segments. 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.
Historically, the Company seldomly has experienced cancellations of orders larger than
$1.0 million. Based on anticipated production

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schedules and
other factors, the Company believes that approximately $204 million of the
backlog at September 27, 2008 will be converted to revenue during fiscal year
2009.

Revenue

|        |  |                          |         |      |   |         |  |   |         | 
|------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|        |  | 2008                     |         | 2007 |   | 2006    | 
|        |  |                          |         |      |   |         | 
|        |  | (expressed in thousands) |        
|Revenue |  | $                        | 460,515 |      | $ | 410,091 |  | $ | 387,924 | 
|        |  |                          |         |      |   |         |  |   |         | 

Revenue for
fiscal year 2008 totaled $460.5 million, an increase of $50.4 million, or
12.3%, compared to revenue of $410.1 million for fiscal year 2007. Revenue for
fiscal year 2006 totaled $387.9 million. The increase in revenue in fiscal year
2008 from fiscal 2007 was primarily due to an increase in custom business in
the Test segment, continued growth in the Sensors segment, and an estimated
$22.1 million favorable impact of currency translation. The increase in revenue
in fiscal year 2007 from fiscal year 2006 was primarily due to increases in
standard product and service business in the Test segment, growth in the Sensors
segment, and an estimated $11.6 million favorable impact of currency
translation.

Revenue for
the Test segment totaled $364.1 million for fiscal year 2008, compared to
revenue of $333.2 million for fiscal year 2007 and revenue of $323.7 million
for fiscal year 2006. The increase in revenue for fiscal year 2008 from fiscal
year 2007 was primarily due to an increase in custom business and an estimated
$14.7 million favorable impact of currency translation. The increase in revenue
for fiscal year 2007 was primarily due to an increase in standard product and
service business and an estimated $8.7 million favorable impact of currency
translation.

Revenue for
the Sensors segment totaled $96.4 million for fiscal year 2008, compared to
$76.9 million for fiscal year 2007 and $64.2 million for fiscal year 2006. The
increase in revenue in fiscal year 2008 from fiscal year 2007 was primarily due
to higher beginning backlog, increased worldwide order volume, and an estimated
$7.4 million favorable impact of currency translation. The increase in revenue
in fiscal year 2007 from fiscal year 2006 was primarily due to higher order
volume, and an estimated $2.9 million favorable impact of currency translation.

Revenue of
$168.6 million in the Americas for fiscal year 2008 increased $19.8 million, or
13.3%, compared to revenue of $148.8 million for fiscal year 2007. Revenue in
the Americas for fiscal year 2006 totaled $132.5 million. Revenue in Europe of
$152.0 million for fiscal year 2008 increased $4.5 million, or 3.1%, compared
to $147.5 million for fiscal year 2007. Revenue in Europe for fiscal year 2006
totaled $139.9 million. Revenue of $139.5 million in Asia for fiscal year 2008
increased $26.2 million, or 23.1%, compared to $113.3 million for fiscal year
2007. Revenue in Asia for fiscal year 2006 totaled $115.1 million. Other
international revenue totaled $0.4 million, $0.5 million, and $0.4 million,
respectively, for fiscal years 2008, 2007, and 2006.

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

|             |  |                          |         |      |   |         |   |   |         |  
|------------ |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|             |  | 2008                     |         | 2007 |   | 2006    |  
|             |  |                          |         |      |   |         |  
|             |  | (expressed in thousands) |        
|Gross Profit |  | $                        | 190,253 |      | $ | 173,638 |   | $ | 168,235 |  
|             |  |                          |         |      |   |         |   |   |         |  
|% of Revenue |  |                          | 41.3    | %    |   | 42.3    | % |   | 43.4    | %
|             |  |                          |         |      |   |         |   |   |         |  

Gross profit
as a percentage of revenue decreased to 41.3% for fiscal year 2008 from 42.3%
for fiscal year 2007. Gross profit as a percentage of revenue was 43.4% for
fiscal year 2006. The decrease in gross profit as a percentage of revenue for
fiscal year 2008 from fiscal year 2007 was primarily due to unfavorable product
mix and higher custom project costs in the Test segment, as well as a 0.5
percentage point unfavorable impact of currency translation, partially offset
by increased volume. The decrease in gross profit as a percentage of revenue
for fiscal year 2007 from fiscal year 2006 was primarily due to higher custom
project costs and unfavorable product mix in the Test segment, as well

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as a 0.3
percentage point unfavorable impact of currency translation, partially offset
by increased operating efficiency in the Sensors segment.

Gross profit
as a percentage of revenue for the Test segment was 37.3% for fiscal year 2008,
a decrease from 39.3% for fiscal year 2007 and 41.3% for fiscal year 2006. The
decrease in gross profit rate in fiscal year 2008 was primarily due to
unfavorable product mix and higher custom project costs, as well as a 0.7
percentage point unfavorable impact of currency translation. The decrease in
gross profit rate in fiscal year 2007 was primarily due to higher custom
project costs and unfavorable product mix, as well as a 0.5 percentage point
unfavorable impact of currency translation.

Gross profit as
a percentage of revenue for the Sensors segment was 56.6% for fiscal year 2008,
an increase from 55.6% and 53.6% for fiscal years 2007 and 2006, respectively.
The gross profit rate increase in fiscal year 2008 was primarily due to
increased volume. The gross profit rate increase in fiscal year 2007 was
primarily due to increased volume and improved operational efficiency. There
was no significant impact on gross profit rate due to currency translation in
fiscal years 2008, 2007 or 2006.

Selling, Marketing, General and Administrative Expense

|                          |  |                          |         |      |   |         |   |   |        |  
|------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------ | -
|                          |  | 2008                     |         | 2007 |   | 2006    |  
|                          |  |                          |         |      |   |         |  
|                          |  | (expressed in thousands) |        
|Selling & Marketing       |  | $                        | 76,867  |      | $ | 68,907  |   | $ | 63,901 |  
|General &
 Administrative |  |                          | 35,393  |      |   | 32,216  |   |   | 32,851 |  
|                          |  |                          |         |      |   |         |   |   |        |  
|Total                     |  | $                        | 112,260 |      | $ | 101,123 |   | $ | 96,752 |  
|                          |  |                          |         |      |   |         |   |   |        |  
|% of Revenue              |  |                          | 24.4    | %    |   | 24.7    | % |   | 24.9   | %
|                          |  |                          |         |      |   |         |   |   |        |  

Selling and
marketing expense increased $8.0 million for fiscal year 2008, primarily due to
$3.1 million increased compensation, benefits and commissions in the Test
segment, driven by normal annual merit increases as well as increased order
volume, $2.4 million planned investment in strategic sales and marketing
initiatives in the Sensors segment, and an estimated $2.9 million unfavorable
impact of currency translation, partially offset by a $0.4 million reduction in
bad debt expense. Selling expense increased $5.0 million for fiscal year 2007,
primarily due to $3.1 million increased compensation, benefits and commissions
in the Test segment, driven by 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.

General and
administrative expense increased $3.2 million for fiscal year 2008, primarily
due to $1.5 million of integration costs related to the acquisition of SANS
Group (SANS), $0.7 million increase in compensation and benefits, $0.5
million increased legal fees, and an estimated $1.0 million unfavorable impact
of currency translation, partially offset by $0.5 million reduction in various
other expenses. The increase in legal expense primarily resulted from a $0.8
million settlement with the U.S. Department of Commerce and the U.S. Department
of Justice, related to noncompliance with U.S. export control regulations.
General and administrative expense decreased $0.6 million for fiscal year 2007,
primarily due to $3.2 million decrease in consulting and professional fees,
partially offset by a $2.0 million increase in compensation and benefits and an
estimated $0.6 million unfavorable impact of currency translation.

Selling,
marketing, general and administrative (SG&A) expense for the Test segment
increased to $83.5 million in fiscal year 2008 from $77.3 million and $77.2
million in fiscal years 2007 and 2006, respectively. The increase in SG&A
in fiscal year 2008 was primarily due to a $3.2 million increase in
compensation, benefits and commissions, $1.5 million of integration costs
related to the acquisition of SANS, $0.5M increased legal fees, as well as an
estimated $2.3 million unfavorable impact of currency translation in fiscal
year 2008. These factors were partially offset by $0.4 million decreased bad
debt expense, and a $0.9 million decrease in various other expenses. The
increase in fiscal year 2007 was

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primarily due
to 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, 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.

SG&A
expense for the Sensors segment increased to $28.8 million for fiscal year 2008
from $23.8 million and $19.6 million for fiscal years 2007 and 2006,
respectively. The increase in SG&A expense for fiscal year 2008 was
primarily due to $3.3 million increased compensation, benefits and other costs
to support strategic initiatives, and an estimated $1.6 million unfavorable
impact of currency translation. 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 strategic initiatives, and an estimated $0.7 million
unfavorable impact of currency translation.

Research and Development Expense

|                       |  |                          |        |      |   |        |   |   |        |  
|---------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                       |  | 2008                     |        | 2007 |   | 2006   |  
|                       |  |                          |        |      |   |        |  
|                       |  | (expressed in thousands) |       
|Research & Development |  | $                        | 16,232 |      | $ | 19,285 |   | $ | 17,969 |  
|                       |  |                          |        |      |   |        |   |   |        |  
|% of Revenue           |  |                          | 3.5    | %    |   | 4.7    | % |   | 4.6    | %
|                       |  |                          |        |      |   |        |   |   |        |  

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 decreased to 3.5% in fiscal year 2008, as the Company
allocated certain of its resources towards capitalized software development
activities in the Test segment. Total software development costs capitalized
during the fiscal year ended September 27, 2008 were $4.2 million. 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.

During fiscal
year 2008, approximately 68.1% of the Companys total R&D spending was in
the Test Segment, compared to 78.0% and 79.5% in fiscal years 2007 and 2006, respectively.

Gain on Sale of Assets


Gain 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

|                 |  |                          |        |      |   |        |   |   |        |  
|---------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                 |  | 2008                     |        | 2007 |   | 2006   |  
|                 |  |                          |        |      |   |        |  
|                 |  | (expressed in thousands) |       
|Interest Expense |  | $                        | (1,083 | )    | $ | (1,309 | ) | $ | (1,716 | )
|Interest Income  |  | $                        | 4,033  |      | $ | 3,899  |   | $ | 3,595  |  
|                 |  |                          |        |      |   |        |   |   |        |  

Interest
expense of $1.1 million for fiscal year 2008 decreased from $1.3 million and
$1.7 million for fiscal years 2007 and 2006, respectively, due to reductions in
outstanding long-term debt. Interest income of $4.0 million in fiscal year 2008
increased from $3.9 million and $3.6 million for fiscal years 2007 and 2006,
respectively, as higher global interest rates more than offset declines in the
Companys average balances of cash, cash equivalents, and short-term
investments compared to previous fiscal years.

Other Income, net
Other income for fiscal year 2008 was $0.7 million, compared to other income of
less than $0.1 million and other income of $1.0 million for fiscal years 2007
and 2006, respectively. Other income for fiscal 2008 included a net gain of
$0.4 million related to currency transactions. Other income for fiscal 2007
included a $0.3 million favorable legal settlement involving intellectual
property, as well as $0.4 million of other miscellaneous income, which was
mainly offset by a net loss of $0.6 million related to currency

20

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transactions.
Other income for fiscal year 2006 primarily reflected a net gain of $0.8
million related to currency transactions.

Operating Results

|                                                        |  |                          |        |      |   |        |   |   |        |  
|------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                                                        |  | 2008                     |        | 2007 |   | 2006   |  
|                                                        |  |                          |        |      |   |        |  
|                                                        |  | (expressed in thousands) |       
|Income from Operations                                  |  | $                        | 61,761 |      | $ | 53,972 |   | $ | 54,386 |  
|Income Before Income Taxes and Discontinued Operations  |  |                          | 65,460 |      |   | 56,590 |   |   | 57,306 |  
|% of Revenue                                            |  |                          | 14.2   | %    |   | 13.8   | % |   | 14.8   | %
|                                                        |  |                          |        |      |   |        |   |   |        |  
|Effective Income Tax Rate                               |  |                          | 28.0   | %    |   | 27.5   | % |   | 33.7   | %
|                                                        |  |                          |        |      |   |        |   |   |        |  
|Income Before Discontinued Operations                   |  | $                        | 47,110 |      | $ | 41,041 |   | $ | 37,969 |  
|                                                        |  |                          |        |      |   |        |   |   |        |  
|Income Before Discontinued Operations per Diluted Share |  | $                        | 2.68   |      | $ | 2.24   |   | $ | 1.97   |  
|                                                        |  |                          |        |      |   |        |   |   |        |  

Income from
operations for fiscal year 2008 increased 14.4%, to $61.8 million, compared to
$54.0 million for fiscal year 2007. Income from operations for fiscal year 2006
totaled $54.4 million. The increase in fiscal year 2008 from fiscal year 2007
was primarily due to higher gross profit and lower research and development
expense, and an estimated $3.1 million favorable impact of currency
translation, partially offset by planned increases in operating expenditures to
support strategic initiatives. The decrease in fiscal year 2007 compared to
fiscal year 2006 was primarily due to planned increases in sales, marketing,
and research and development spending to support strategic initiatives,
partially offset by higher gross profit and an estimated $1.0 million favorable
impact of currency translation.

Income from
operations for the Test segment was $41.1 million for fiscal year 2008, an
increase of $1.9 million, or 4.8%, compared to $39.2 million for fiscal year
2007. Income from operations for fiscal year 2006 was $43.3 million. Income
from operations for fiscal year 2008 increased from fiscal year 2007 primarily
due to increased gross profit, $4.0 million lower research and development
expense, as the Company allocated certain of its resources towards capitalized
software development activities aggregating $4.2 million, and an estimated $0.8
million favorable impact of currency translation. These factors were partially
offset by $6.1 million planned increases in operating expenses in fiscal year 2008, and a $0.7
million gain on the sale of the noise and vibration business in fiscal year
2007. Income from operations for fiscal year 2007 decreased from fiscal year
2006 due to decreased gross profit and $2.7 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 the Sensors segment was $20.7 million for fiscal year 2008, an
increase of $5.9 million, or 39.9%, compared to $14.8 million for fiscal year
2007. Income from operations for the Sensors segment totaled $11.1 million for
fiscal year 2006. The increase in income from operations for fiscal year 2008
compared to fiscal year 2007 is primarily due to increased gross profit and an
estimated $2.3 million favorable impact of currency translation, partially
offset by $5.9 million planned increases in operating expenses to support
strategic initiatives. 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.

Income before income taxes and discontinued operations totaled $65.5
million for fiscal year 2008, compared to $56.6 million for fiscal year 2007.
Income before income taxes and discontinued operations for fiscal year 2006 was
$57.3 million. The fiscal year 2008 increase compared to fiscal year 2007 was
primarily due to higher operating income, $1.0 million favorable impact of
foreign currency transaction gains, and an estimated $3.4 million favorable
impact of currency translation. The fiscal year 2007 decrease compared to fiscal
year 2006 was primarily due to lower operating income, as well as $1.4 million
unfavorable impact of foreign currency transaction losses, partially offset by
$0.7 million favorable net interest, and an estimated $1.2 million favorable
impact of currency translation.

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A historical level of inflation ranging from 2% to 4% has impacted the Companys operating costs.
However, 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
with price increases.

The effective
tax rate for each of the years presented is impacted by the Companys
geographic mix of income, with foreign income now generally taxed at lower
rates than domestic income. In addition, the effective tax rate is favorably
impacted by the Companys R&D credits and qualified domestic production
activities. The effective tax rate is unfavorably impacted by certain non-deductible
business expenses. The Companys effective income tax rate from continuing
operations for fiscal year 2008 increased 0.5 percentage points to 28.0%
compared to the effective income tax rate for fiscal year 2007 of 27.5%. During
fiscal year 2008, the Company recognized $3.5 million of tax benefits
associated with the repatriation of historic earnings from its Japanese
subsidiaries. These tax benefits reflect the Companys foreign tax credit
position, which allows the Company to credit taxes paid offshore against taxes
assessed in the United States. Also during fiscal year 2008, the Company was
only allowed to recognize R&D credits on applicable spending during the
first quarter, as the provision in the United States tax law allowing for these
credits expired on December 31, 2007. During fiscal year 2007, the Company
recognized $2.4 million and $1.2 million of tax benefits as a result of
favorable tax law changes in Germany and the United States, respectively. The
tax legislation in Germany decreased the German tax rate and entitled the
Companys primary German subsidiary to a corporate income tax refund. The tax
legislation in the United States retroactively extended the R&D tax credit
to January 1, 2006. This legislation allowed the Company to recognize tax credits
for applicable R&D spending, incurred during the last three fiscal quarters
of fiscal year 2006, during fiscal year 2007. During fiscal year 2006, the
Company recognized $1.8 million of tax benefits primarily as a result of the
closing of tax audits and the release of contingencies associated with tax
matters accrued for in prior fiscal years.

Fiscal year
2008 income before discontinued operations of $47.1 million, or $2.68 per
diluted share, increased from $41.0 million, or $2.24 per diluted share, and
$38.0 million, or $1.97 per diluted share, for fiscal years 2007 and 2006,
respectively.

Discontinued Operations
On June 27, 2008, the Company sold substantially all of the net assets of its
Nano Instruments product line, which was based in Oak Ridge, Tennessee. As a
result of this sale, the Company recorded a gain of $2.4 million, net of tax of
$3.6 million, in fiscal year 2008. The Nano Instruments product line was
historically included in the Companys Test segment for financial reporting.
The results of operations of the Nano Instruments product line, including the
gain on the sale, have been excluded from the results of operations of the Test
segment and are reported as discontinued operations for the fiscal years ended
September 27, 2008, September 29, 2007 and September 30, 2006.

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 that business. The engine
test business was historically included in the Companys Test segment for
financial reporting. The results of operations of the engine test business are
excluded from the results of operations of the Test segment and are reported as
discontinued operations for the fiscal year ended September 30, 2006.

Also in fiscal
year 2005, the Company closed its AeroMet subsidiary, a laser deposition
technology business. The AeroMet subsidiary
was historically included in the Companys Industrial segment (now the
Sensors segment) for financial reporting. The results of operations of
the AeroMet business are excluded from the results of operations of the Sensors
segment and are reported as discontinued operations for the fiscal year ended
September 30, 2006.

The Company does not allocate
interest income or interest expense to discontinued operations. Operating
results of the discontinued operations for the fiscal years ended September 27,
2008, September 29, 2007, and September 30, 2006 were as follows:

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|                                                                        |  |                          |       |      |   |        |  |   |       | 
|----------------------------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ------ |  | - | ----- | 
|                                                                        |  | 2008                     |       | 2007 |   | 2006   | 
|                                                                        |  |                          |       |      |   |        | 
|                                                                        |  | (expressed in thousands) |      
|Revenue                                                                 |  | $                        | 6,106 |      | $ | 10,413 |  | $ | 8,861 | 
|(Loss) income on discontinued operations
 before taxes and gain on sale |  |                          | (628  | )    |   | 1,576  |  |   | 2,082 | 
|(Benefit) provision for income taxes                                    |  |                          | (260  | )    |   | 621    |  |   | 728   | 
|                                                                        |  |                          |       |      |   |        |  |   |       | 
|(Loss) income from discontinued operations,
 net of tax                 |  | $                        | (368  | )    | $ | 955    |  | $ | 1,354 | 
|                                                                        |  |                          |       |      |   |        |  |   |       | 

The
assets and liabilities of discontinued operations at September 27, 2008 and
September 29, 2007 were as follows:

|                                                              |  |                          |     |      |   |        |  
|------------------------------------------------------------- |  | ------------------------ | --- | ---- | - | ------ | -
|                                                              |  | 2008                     |     | 2007 |  
|                                                              |  |                          |     |      |  
|                                                              |  | (expressed in thousands) |    
|Accounts
 receivable, net of allowances for doubtful accounts |  | $                        | 149 |      | $ | 2,354  |  
|Unbilled
 accounts receivable                                 |  |                          | 88  |      |   |       |  
|Inventories                                                   |  |                          |    |      |   | 1,099  |  
|Prepaid
 expenses & other current assets                      |  |                          |    |      |   | 69     |  
|Current
 deferred tax assets                                  |  |                          | 143 |      |   | 473    |  
|                                                              |  |                          |     |      |   |        |  
|Current assets of discontinued
operations                     |  |                          | 380 |      |   | 3,995  |  
|                                                              |  |                          |     |      |   |        |  
|Machinery
 and equipment                                      |  |                          |    |      |   | 2,478  |  
|Accumulated
 depreciation                                     |  |                          |    |      |   | (1,325 | )
|Goodwill                                                      |  |                          |    |      |   | 2,929  |  
|                                                              |  |                          |     |      |   |        |  
|Long-lived assets of discontinued
 operations                 |  |                          |    |      |   | 4,082  |  
|                                                              |  |                          |     |      |   |        |  
|                                                             
|Total
 assets of discontinued operations                      |  | $                        | 380 |      | $ | 8,077  |  
|                                                              |  |                          |     |      |   |        |  
|                                                              |  |                          |     |      |   |        |  
|                                                              |  |                          |     |      |   |        |  
|Accounts
 payable                                             |  | $                        |    |      | $ | 472    |  
|Accrued
 payroll-related costs                                |  |                          |    |      |   | 399    |  
|Advance
 payments from customers                              |  |                          |    |      |   | 391    |  
|Accrued
 warranty costs                                       |  |                          |    |      |   | 60     |  
|Accrued
 income taxes                                         |  |                          | 177 |      |   | 612    |  
|Other
 accrued liabilities                                    |  |                          |    |      |   | 10     |  
|                                                              |  |                          |     |      |   |        |  
|Total
 liabilities of discontinued operations                 |  | $                        | 177 |      | $ | 1,944  |  
|                                                              |  |                          |     |      |   |        |  

Cash Flow
Total cash and cash equivalents
increased $9.8 million during fiscal year 2008, primarily due to strong
earnings, proceeds received from borrowings on the credit facility, net
proceeds from the conversion of short-term investments to cash and cash
equivalents, net proceeds from the sale of the Nano Instruments product line,
and proceeds from the exercise of stock options. These factors were partially
offset by purchases of the Companys common stock, initial investments in SANS,
funding contributions to a defined benefit pension plan, increased working
capital requirements, and dividend payments. Total 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, dividend
payments, and repayment of long-term debt. 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, and dividend payments.

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Cash flow from operating activities provided cash of $30.2 million
during fiscal year 2008, compared to cash provided of $44.9 million and $38.2
million in fiscal years 2007 and 2006, respectively. Fiscal year 2008 cash flow
from operating activities was primarily due to strong earnings, partially offset
by $13.2 million contributions to a defined benefit pension plan, $11.1 million
increased working capital requirements due to strong fourth quarter revenue, and
$4.6 million net cash usage for the discontinued Nano Instruments product line.
The defined benefit pension plan was funded during fiscal year 2008 in order to
better utilize excess cash reserves and increase the Companys return on
investment. Fiscal year 2007 cash flow from operating activities was primarily
due to strong earnings and a $7.6 million increase in income taxes payable due
to timing of tax payments, partially offset by $9.2 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 $2.2 million, partially offset by $11.1
million increased working capital requirements.

Cash flow from investing
activities provided cash of $3.6 million during fiscal year 2008, compared to $5.2
million used during fiscal year 2007, and $47.5 million provided during fiscal
year 2006. During fiscal year 2008, the Company received net proceeds of $17.1
million and $10.3 million for the maturity of short term investments and the
sale of the Nano Instruments product line, respectively, and invested $13.7
million and $9.8 million in SANS and property and equipment, respectively.
During fiscal year 2007, the Company invested $12.0 million in property and
equipment, 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 $7.2 million in property and equipment.

Cash flow from financing
activities required a use of cash of $26.5 million during fiscal year 2008,
compared to $41.5 million and $73.6 million used in fiscal years 2007 and 2006,
respectively. During fiscal year 2008, the Companys cash usage primarily
resulted from purchases of the Companys common stock of $42.0 million, including
purchases of stock related to stock option exercises of $3.2 million, payment
of cash dividends of $10.5 million, and net repayment of interest-bearing debt
of $6.7 million, partially offset by $23.9 million net proceeds received from
short-term borrowings, and $7.9 million received from stock option
exercises and stock purchases under the Companys employee stock purchase plan.
During fiscal year 2007, the Companys cash usage primarily resulted from
purchases of the Companys common stock of $38.2 million, including purchases
of stock related to stock option exercises of $0.3 million, payment of cash
dividends of $8.0 million, and net repayment of interest-bearing debt of $6.7
million, partially offset by $9.3 million received from stock option exercises
and stock purchases under the Companys employee stock purchase plan. The cash
usage in fiscal year 2006 primarily resulted from purchases of the Companys
common stock of $64.5 million, including purchases of stock related to stock
option exercises of $0.3 million, net repayment of interest-bearing debt of
$8.0 million, and payment of cash dividends of $7.6 million, partially offset
by $5.2 million received from stock option exercises and stock purchases under
the Companys employee stock purchase plan.

During
fiscal year 2008, 2007, and 2006 the Company purchased approximately 1.0
million, 1.0 million, and 1.8 million shares of its common stock, respectively,
for $38.8 million, $37.9 million, and $64.2 million, respectively.

Liquidity and Capital Resources
The Company had cash and cash equivalents of $114.1 million at September 27, 2008.
Of this amount, approximately $13.0 million was located in North America, $75.1
million in Europe, and $26.0 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 27, 2008, the Companys capital structure was comprised of $24.3
million in short-term debt, $2.3 million in long-term debt, and $204.9 million
in Shareholders Investment. Total interest-

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bearing
debt at September 27, 2008 was $26.3 million, an increase of $17.3 million from
$9.0 million at September 29, 2007, due to $24.0 million of borrowings on the
credit facility, partially offset by scheduled long term debt payments.
Shareholders Investment increased by $15.2 million during fiscal year 2008,
primarily due to strong operating results, $7.9 million received from stock
option exercises and stock purchases under the Companys employee stock
purchase plan, $4.2 million in stock-based compensation, $3.9 million of
foreign currency translation gains, and $1.3 million excess tax benefits from
stock-based compensation, partially offset by $42.0 million in purchases of the
Companys common stock, and $10.3 million in dividends declared.

The
Company believes its liquidity, represented by funds available from cash, cash
equivalents, credit facility, anticipated cash from operations, and capital
structure are adequate to fund ongoing operations, capital expenditures and
Company share purchases, as well as to fund internal growth opportunities and
strategic acquisitions.

At
September 27, 2008, 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 |  
|                                        |  |       |        |                   |                                                  |             |  |             |       |                    |  
|Short-Term Borrowings                   |  | $     | 24,338 |                   | $                                                | 24,338      |  | $           |      |                    | $ |      |  | $ |      | 
|Long-Term Debt Obligations              |  |       | 2,308  |                   |                                                  | 2,308       |  |             |      |                    |   |      |  |   |      | 
|Capital Lease Obligations               |  |       | 41     |                   |                                                  | 19          |  |             | 22    |                    |   |      |  |   |      | 
|Operating Lease Obligations             |  |       | 16,264 |                   |                                                  | 4,790       |  |             | 6,535 |                    |   | 2,272 |  |   | 2,667 | 
|Interest Payable                        |  |       | 149    |                   |                                                  | 149         |  |             |      |                    |   |      |  |   |      | 
|Pension and Other Long-Term Obligations |  |       | 3,086  |                   |                                                  | 457         |  |             | 183   |                    |   |      |  |   | 2,446 | 
|                                        |  |       |        |                   |                                                  |             |  |             |       |                    |   |       |  |   |       | 
|Total                                   |  | $     | 46,186 |                   | $                                                | 32,061      |  | $           | 6,740 |                    | $ | 2,272 |  | $ | 5,113 | 
|                                        |  |       |        |                   |                                                  |             |  |             |       |                    |   |       |  |   |       | 

Notes
payable outstanding on September 27, 2008 consisted of $24.0 million in
interest-bearing short-term notes payable placed with the Companys credit
facility, as well as $0.3 million of non-interest bearing notes payable to
vendors by the Companys Japanese Sensors subsidiary. Notes payable outstanding
on September 29, 2007 consisted of non-interest bearing notes payable to
vendors by the Companys Japanese Sensors subsidiary. Under the terms of both the credit facility
and its long-term debt agreements, the Company has agreed to certain financial
covenants, including, among other covenants, minimum net worth, the ratio of
consolidated total indebtedness to consolidated earnings before interest,
taxes, depreciation, and amortization (EBITDA), as well as the ratio of
consolidated EBITDA to consolidated interest expense. These covenants restrict the Companys
ability to pay dividends and purchase outstanding shares of common stock. At September 27, 2008, the Company was
in
compliance with these financial covenants.

At
September 27, 2008, the Company had letters of credit and guarantees
outstanding totaling $41.4 million and $3.0 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 Arrangements
At the end of fiscal year 2008, 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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Critical Accounting Policies
The Consolidated Financial Statements are prepared in accordance with U.S.
generally accepted accounting principles (GAAP), 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, included in 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.

Software
Development Costs: The Company incurs costs associated with the development of
software to be sold, leased, or otherwise marketed. Software development costs
are expensed as incurred until technological feasibility has been established,
at which time future costs incurred are capitalized until the product is
available for general release to the public. A certain amount of judgment and
estimation is required to assess when technological feasibility is established,
as well as the ongoing assessment of the recoverability of capitalized costs.
In evaluating the recoverability of capitalized software costs, the Company
compares expected product performance, utilizing forecasted revenue amounts, to
the total costs incurred to date and estimates of additional costs to be
incurred. If revised forecasted product revenue is less than, and/or revised
forecasted costs are greater than, the previously forecasted amounts, the net
realizable value may be lower than previously estimated, which could result in
the recognition of an impairment charge in the period in which such a
determination is made.

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.

Stock-Based
Compensation: For purposes of determining estimated fair value of stock-based
payment awards on the date of grant in accordance with Statement of Financial
Accounting Standard (SFAS) No. 123R, Share-Based Payment, the Company
utilizes a Black-Scholes option pricing model for estimating the fair value of
stock option grants, which requires the input of certain assumptions requiring
management judgment. Because the Companys employee stock option 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. 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 the application of SFAS No.
123R in future periods, the compensation expense recorded under SFAS No. 123R
may differ significantly from the stock-based compensation expense recorded in
the current period.

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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 Pronouncements
In September 2006, the Financial Accounting Standards Board (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 does not expect the
adoption of SFAS No. 157 to have a material impact 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 does
not expect the adoption of SFAS No. 159 to have a material impact on its
consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations. SFAS No. 141R expands the definition of a business combination
and requires the fair value of the purchase price of an acquisition, including
the issuance of equity securities, to be determined on the acquisition date.
SFAS No. 141R also requires that all assets, liabilities, contingent
considerations, and contingencies of an acquired business be recorded at fair
value at the acquisition date. In addition, SFAS No. 141R requires that
acquisition costs generally be expensed as incurred, restructuring costs
generally be expensed in periods subsequent to the acquisition date and changes
in accounting for deferred tax asset valuation allowances and acquired income
tax uncertainties after the measurement period impact income tax expense. SFAS
No. 141R is effective for the Companys fiscal years beginning on or after
December 15, 2008, with early adoption prohibited. The Company is evaluating
the effect the adoption of SFAS No. 141R will have on its consolidated
financial statements.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51. SFAS No. 160
requires minority interests to be recharacterized as noncontrolling interests
and reported as a component of equity. In addition, SFAS No. 160 requires that
purchases or sales of equity interests that do not result in a change in
control be accounted for as equity transactions and, upon a loss of control,
requires the interests sold, as well as any interests retained, to be recorded
at fair value with any gain or loss recognized in earnings. SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008, with early
adoption prohibited. The Company does not expect the adoption of SFAS No. 160
to have a material impact on its consolidated financial statements.

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In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment to SFAS No. 133. SFAS No. 161
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. SFAS No. 161 is effective for
fiscal years beginning after November 15, 2008. The Company does not expect the
adoption of SFAS No. 161 to have a material impact on its consolidated
financial statements.

In
April 2008, the FASB issued Staff Position (FSP) FAS 142-3 Determination of
the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of intangible assets under SFAS No. 142 Goodwill and
Other Intangible Assets. FSP FAS 142-3 is intended to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142 and
the period of the expected cash flows used to measure the fair value of the
asset under SFAS No. 141R and other GAAP. FSP No. FAS 142-3 is effective for
fiscal years beginning after December 15, 2008, with early adoption prohibited.
The Company does not expect the adoption of FSP No. FAS 142-3 to have a
material impact on its consolidated financial statements.

In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
accordance with GAAP. SFAS No. 162 will be effective 60 days after the SEC
approves the Public Company Accounting Oversight Boards amendments to AU
Section 411, The Meaning of Present Fairly in Accordance With Generally
Accepted Accounting Principles. The Company does not expect the adoption of
SFAS No. 162 to have a material impact on its consolidated financial
statements.

In
June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1
Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities FSP EITF No. 03-6-1 clarifies that all
outstanding unvested share-based payment awards that contain rights to
non-forfeitable dividends participate in undistributed earnings with common
shareholders. Awards of this nature are considered participating securities and
the two-class method of computing basic and diluted earnings per share must be
applied. FSP EITF No. 03-6-1 is effective for fiscal years beginning after
December 15, 2008. The Company does not expect the adoption of FSP EITF No.
03-6-1 to have a material impact on its consolidated financial statements.

In
June 2008, the FASB issued EITF No. 07-5, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entitys Own Stock. EITF No. 07-5
provides that an entity should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instruments contingent exercise and settlement
provisions. It also clarifies the impact of foreign currency denominated strike
prices and market-based employee stock option valuation instruments on the
evaluation. EITF No. 07-5 is effective for fiscal years beginning after
December 15, 2008. The Company does not expect the adoption of EITF No. 07-5 to
have a material impact on its consolidated financial statements.

Quarterly Financial Information
Revenue and operating results reported on a quarterly basis do not necessarily reflect
trends in demand for the Companys products or its operating efficiency. Revenue
and operating results in any quarter may be significantly affected by customer
shipments, installation timing, or the timing of the completion of one or more
contracts where revenue is recognized upon shipment or customer acceptance
rather than on the percentage-of-completion 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 included in Item 8 of this Annual Report on Form 10-K 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

28

---

Table of Contents

expense. See Notes 1 and 6 to the Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K 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 27, 2008
and September 29, 2007 was as follows:

|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|------------------------------------------------------ |  | ----------------------------------------------- | ------- | --------------- | - | -------------- |  | --------------- | ------- | ----------- | - | ------- | - | - | ------- | 
|                                                       |  | First
 Quarter                                  |         | Second
 Quarter |   | Third
 Quarter |  | Fourth
 Quarter |         | Total
 Year |  
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |  
|                                                       |  | (expressed in thousands, except per share data) |        
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|2008                                                   |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Revenue                                                |  | $                                               | 107,392 |                 | $ | 112,168        |  | $               | 116,886 |             | $ | 124,069 |   | $ | 460,515 | 
|Gross profit                                           |  |                                                 | 43,222  |                 |   | 46,074         |  |                 | 47,246  |             |   | 53,711  |   |   | 190,253 | 
|Income before income taxes and discontinued operations |  |                                                 | 12,604  |                 |   | 15,381         |  |                 | 15,327  |             |   | 22,148  |   |   | 65,460  | 
|Income before discontinued operations                  |  |                                                 | 8,181   |                 |   | 13,445         |  |                 | 10,985  |             |   | 14,499  |   |   | 47,110  | 
|Discontinued operations, net of tax                    |  |                                                 | 175     |                 |   | 94             |  |                 | 1,765   |             |   | 47      |   |   | 2,081   | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Net income                                             |  | $                                               | 8,356   |                 | $ | 13,539         |  | $               | 12,750  |             | $ | 14,546  |   | $ | 49,191  | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Earnings per share:                                    |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Basic                                                  |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Income before discontinued operations                  |  | $                                               | 0.46    |                 | $ | 0.76           |  | $               | 0.64    |             | $ | 0.86    |   | $ | 2.72    | 
|Discontinued operations, net of tax                    |  |                                                 | 0.01    |                 |   | 0.01           |  |                 | 0.10    |             |   |        |   |   | 0.12    | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Earnings per share                                     |  | $                                               | 0.47    |                 | $ | 0.77           |  | $               | 0.74    |             | $ | 0.86    |   | $ | 2.84    | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Diluted                                                |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Income before discontinued operations                  |  | $                                               | 0.45    |                 | $ | 0.75           |  | $               | 0.63    |             | $ | 0.85    |   | $ | 2.68    | 
|Discontinued operations, net of tax                    |  |                                                 | 0.01    |                 |   | 0.01           |  |                 | 0.10    |             |   |        |   |   | 0.12    | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Earnings per share                                     |  | $                                               | 0.46    |                 | $ | 0.76           |  | $               | 0.73    |             | $ | 0.85    |   | $ | 2.80    | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|2007                                                   |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Revenue                                                |  | $                                               | 96,734  |                 | $ | 99,476         |  | $               | 105,180 |             | $ | 108,701 |   | $ | 410,091 | 
|Gross profit                                           |  |                                                 | 40,877  |                 |   | 45,028         |  |                 | 41,119  |             |   | 46,614  |   |   | 173,638 | 
|Income before income taxes and discontinued operations |  |                                                 | 12,791  |                 |   | 16,340         |  |                 | 11,747  |             |   | 15,712  |   |   | 56,590  | 
|Income before discontinued operations                  |  |                                                 | 9,803   |                 |   | 10,280         |  |                 | 9,396   |             |   | 11,562  |   |   | 41,041  | 
|Discontinued operations, net of tax                    |  |                                                 | 314     |                 |   | 51             |  |                 | 609     |             |   | (19     | ) |   | 955     | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Net income                                             |  | $                                               | 10,117  |                 | $ | 10,331         |  | $               | 10,005  |             | $ | 11,543  |   | $ | 41,996  | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Earnings per share:                                    |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Basic                                                  |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Income before discontinued operations                  |  | $                                               | 0.54    |                 | $ | 0.57           |  | $               | 0.53    |             | $ | 0.65    |   | $ | 2.29    | 
|Discontinued operations, net of tax                    |  |                                                 | 0.02    |                 |   |               |  |                 | 0.03    |             |   |        |   |   | 0.05    | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Earnings per share                                     |  | $                                               | 0.56    |                 | $ | 0.57           |  | $               | 0.56    |             | $ | 0.65    |   | $ | 2.34    | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Diluted                                                |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Income before discontinued operations                  |  | $                                               | 0.52    |                 | $ | 0.56           |  | $               | 0.52    |             | $ | 0.64    |   | $ | 2.24    | 
|Discontinued operations, net of tax                    |  |                                                 | 0.02    |                 |   |               |  |                 | 0.03    |             |   |        |   |   | 0.05    | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Earnings per share                                     |  | $                                               | 0.54    |                 | $ | 0.56           |  | $               | 0.55    |             | $ | 0.64    |   | $ | 2.29    | 
|                                                       |  |                                                 |         |                 |   |                |  |                 |         |             |   |         |   |   |         | 

29

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

Foreign Currency Exchange Risk
Approximately 65-70% of the Companys revenue is derived from shipments to customers outside
of the United States and about 65% of this revenue (approximately 44% 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, occasionally,
transact business in currencies other than their functional currencies. These
non-functional currency transactions expose the Company to market risk on
assets, liabilities and cash flows recognized on these transactions.

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

|                                                   |  |                          |        |      |   |        |  |   |        |  
|-------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------ | -
|                                                   |  | 2008                     |        | 2007 |   | 2006   | 
|                                                   |  |                          |        |      |   |        | 
|                                                   |  | (expressed in thousands) |       
|Increase (decrease) from
 currency translation on: |  |                          |        |      |   |        |  |   |        |  
|Orders                                             |  | $                        | 21,090 |      | $ | 9,107  |  | $ | (6,901 | )
|Revenue                                            |  |                          | 22,128 |      |   | 11,593 |  |   | (9,590 | )
|Net Income                                         |  | $                        | 2,243  |      | $ | 868    |  | $ | (895   | )
|                                                   |  |                          |        |      |   |        |  |   |        |  

The net effect
of currency translation on orders, revenue, and net income was favorable in
fiscal year 2008, as the value of the U.S. dollar, on average, decreased by
approximately 5% against the Euro and by approximately 6% against the Japanese
Yen.

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 2008 revenue of approximately $20.9 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 both Revenue and Other
Income (Expense), net in the accompanying Consolidated Statements of Income,
was a net gain of $0.6 million in fiscal year 2008, a net loss of $0.6 million
in fiscal year 2007, and a net gain of $0.8 million in fiscal year 2006.
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 the same line item in the Consolidated
Statements of Income that the underlying hedged transaction is reported.

Interest Rates
The 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.

30

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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
27, 2008, the Company had cash and cash equivalents of $114.1 million. Most of
this balance was invested in interest-bearing bank deposits or money market
funds, with interest rates reset every 1-89 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 on an annualized basis.

The Companys
short-term borrowings outstanding at the end of fiscal year 2008 consisted of
$24.0 million utilization of the revolving credit facility and $0.3 million in
non-interest bearing notes payable to vendors. This utilization of the credit
facility involves interest payments calculated at a floating rate. In order to
mitigate the Companys exposure to interest rate increases, the Company entered
into a four-year floating to fixed interest rate swap agreement on July 25,
2008. The notes payable to vendors are non-interest bearing and, therefore, are
not impacted by the effect of increases or decreases in market interest rates.
The Companys long-term debt has a fixed rate of interest and, therefore, is
not impacted by changes in market interest rates.

A discount
rate of 6.4% and an expected rate increase in future compensation levels of
3.2% was used in the calculation of the pension liability related to the
non-contributory, defined benefit pension plan of one of the Companys
international subsidiaries. In addition, a 5.9% expected rate of return was
used in the calculation of the plan assets associated with this defined benefit
pension plan.

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

The Companys
audited financial statements and notes thereto described in Item 15(1) of this
Annual Report on Form 10-K, and appearing on pages F-1 through F-31 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 27,
2008. Based on that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in the reports it files or submits under the 1934 Act is
recorded, processed, summarized, and reported within the time periods specified
in the SECs rules and forms.

There have
been no changes in internal control over financial reporting during the fiscal
quarter ended September 27, 2008 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

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

31

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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 27, 2008. 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 27, 2008.

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

None.

PART III

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

The required
information with respect to the directors of the 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 Shareholders scheduled to
be held on February 4, 2009. 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 Shareholders scheduled to be held on February 4, 2009.

|         |                                                                                                 
|-------- | ------------------------------------------------------------------------------------------------
|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 27, 2008:

32

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|                                                            |  |                                                                                                                 |  |                                                                        |   |                                                                                                                                                                  |  |       |  | 
|----------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | 
|Plan Category                                               |  | Number of Securities tobe Issued Upon Exercise of
 Outstanding Options, Warrants
 and Rights
 (in thousands)(a) |  | Weighted-AverageExercisePrice of
 Outstanding
 Warrants and
 Rights(b) |   | Number of SecuritiesRemaining Available forFuture Issuance UnderEquity Compensation Plans
 (Excluding Securities Reflected
 in Column (a))(1)
 (in thousands)(c) | 
|                                                            |  |                                                                                                                 |  |                                                                        |   |                                                                                                                                                                  | 
|Equity compensation plans approved by
 security holders     |  | 1,592                                                                                                           |  |                                                                        | $ | 37.12                                                                                                                                                            |  | 1,767 |  | 
|                                                            |  |                                                                                                                 |  |                                                                        |   |                                                                                                                                                                  |  |       |  | 
|Equity compensation plans not approved by
 security holders |  |                                                                                                                |  |                                                                        | $ |                                                                                                                                                                 |  |      |  | 
|                                                            |  |                                                                                                                 |  |                                                                        |   |                                                                                                                                                                  |  |       |  | 
|                                                            |  |                                                                                                                 |  |                                                                        |   |                                                                                                                                                                  |  |       |  | 
|Total                                                       |  | 1,592                                                                                                           |  |                                                                        | $ | 37.12                                                                                                                                                            |  | 1,767 |  | 
|                                                            |  |                                                                                                                 |  |                                                                        |   |                                                                                                                                                                  |  |       |  | 

(1)
Includes 514 shares available for issuance under the 2002 Employee Stock
Purchase Plan as of September 27, 2008.

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 Shareholders and Management in the Companys Proxy
Statement for the Annual Meeting of Shareholders scheduled to be held on
February 4, 2009.

|         |                                                                            
|-------- | ---------------------------------------------------------------------------
|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 Shareholders scheduled to be held on February 4, 2009.

|         |                                       
|-------- | --------------------------------------
|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 Shareholders scheduled to be held on February 4,
2009.

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 27, 2008 and September 29, 2007                                                               
| |                                                            |                                               |                                                                                                                                        
| |                                                            |                                               | Consolidated
 Statements of Income for the Years Ended September 27, 2008, September 29,
 2007 and September 30, 2006                  
| |                                                            |                                               |                                                                                                                                        
| |                                                            |                                               | Consolidated
 Statements of Shareholders Investment for the Years Ended September 27,
 2008, September 29, 2007 and September 30, 2006
| |                                                            |                                               |                                                                                                                                        
| |                                                            |                                               | Consolidated
 Statements of Cash Flows for the Years Ended September 27, 2008, September
 29, 2007 and September 30, 2006              

33

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| |  |                                           |                                                             
| |  | ----------------------------------------- | ------------------------------------------------------------
| |  |                                           | Notes
 to Consolidated Financial Statements                 
| |  |                                          
| |  | (2)       Financial
 Statement Schedules:
| |  |                                          
| |  |                                           | See
 accompanying Index to Financial Statements on page F-1.
| |  |                                          
| |  | (3)       Exhibits:                      

| |                 |  |                                                                                                                                                                                                                                                                              
| | --------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                 |  |                                                                                                                                                                                                                                                                              
| | Exhibit
 Number |  | Description                                                                                                                                                                                                                                                                  
| |                 |  |                                                                                                                                                                                                                                                                              
| | 3.a             |  | Restated
 and Amended Articles of Incorporation, incorporated herein by reference from
 Exhibit 3.a of the Companys Form 10-K for the fiscal year ended September
 30, 1996.                                                                                                
| |                 |  |                                                                                                                                                                                                                                                                              
| | 3.b             |  | Amended
 and Restated Bylaws, incorporated herein by reference to Exhibit 3.b of the
 Companys Form 10-K filed for the fiscal year ended September 29, 2007.                                                                                                                
| |                 |  |                                                                                                                                                                                                                                                                              
| | 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.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            |  | 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.

34

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| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.m |  | Employment
 Contract dated January 1, 1991 between MTS Sensor Technologie GmbH and Co. KG
 and Joachim Hellwig, incorporated by reference to Exhibit 10.q of the
 Companys Form 10-K filed for fiscal year ended October 2, 2004.                                                                                                                                                                                                
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.n |  | 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.o |  | 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.                                                                                                                                                                                                  
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.p |  | First
 Amendment to the Companys 2006 Stock Incentive Plan, First Amendment to the
 Companys Executive Variable Compensation Plan, amendments to the Companys
 Executive Deferred Compensation Plan (2005), and amendments to the Companys
 form of change in control agreements, incorporated herein by reference to
 Exhibits 10.1, 10.2, 10.3 and 10.4 of the Companys Form 8-K Current Report
 filed on October 27, 2008.
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.q |  | Master
 Asset Purchase Agreement dated April 28, 2008, between the Company and the
 SANS Group, incorporated herein by reference to Exhibit 2.1 of the Companys
 Form 8-K Current Report filed October 2, 2008.                                                                                                                                                                                                                  
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.r |  | Letter
 Agreement Regarding Accelerated Share Purchase Program by and between the
 Company and J.P. Morgan Securities Inc., as agent for JPMorgan Chase Bank,
 National Association, London Branch dated May 5, 2008, incorporated herein by
 reference to Exhibit 10.1 of the Companys Form 8-K Current Report filed May
 8, 2008.                                                                                              
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.s |  | Credit
 Agreement dated December 18, 2007, among the Company, Wells Fargo Bank,
 National Association, Fifth Third Bank, The Bank of Tokyo Mitsubishi UFJ,
 Ltd., U.S. Bank National Association, JPMorgan Chase Bank, N.A. and J.P.
 Morgan Securities Inc., incorporated herein by reference to Exhibit 10.1 of
 the Companys Form 8-K Current Report filed December 21, 2007.                                                 
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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).                                                                                                                                                                                                                                                                                                        

35

---

Table of Contents

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/
 LAURA B. HAMILTON                        | 
|                        |                          |                                               | 
|                        |                          | Laura
 B. Hamilton                           
|                        |                          | Chair,
 President and Chief Executive Officer
|                        |                          |                                              
|Date: November 25, 2008 |                          |                                              

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/
 LAURA B. HAMILTON  |  | Chair,
 President and    |  | November
 25 2008 
|                        |  |                          |  |                   
|Laura
 B. Hamilton      |  | Chief
 Executive Officer |  |                   
|                        |  |                          |  |                   
|/s/
 SUSAN E. KNIGHT    |  | Chief
 Financial Officer |  | November
 25, 2008
|                        |  |                          |  |                   
|Susan
 E. Knight        |  | and
 Vice President      |  |                   
|                        |  |                          |  |                   
|/s/
 JEAN-LOU CHAMEAU   |  | Director                 |  | November
 25, 2008
|                        |  |                          |  |                   
|Jean-Lou
 Chameau       |  |                          |  |                   
|                        |  |                          |  |                   
|/s/
 MERLIN E. DEWING   |  | Director                 |  | November
 25, 2008
|                        |  |                          |  |                   
|Merlin
 E. Dewing       |  |                          |  |                   
|                        |  |                          |  |                   
|/s/
 BRENDAN C. HEGARTY |  | Director                 |  | November
 25, 2008
|                        |  |                          |  |                   
|Brendan
 C. Hegarty     |  |                          |  |                   
|                        |  |                          |  |                   
|/s/
 LOIS M. MARTIN     |  | Director                 |  | November
 25, 2008
|                        |  |                          |  |                   
|Lois
 M. Martin         |  |                          |  |                   
|                        |  |                          |  |                   
|/s/
 JOSEPH M. ODONNEL |  | Director                 |  | November
 25, 2008
|                        |  |                          |  |                   
|Joseph
 M. ODonnell    |  |                          |  |                   
|                        |  |                          |  |                   
|/s/
 BARB J. SAMARDZICH |  | Director                 |  | November
 25, 2008
|                        |  |                          |  |                   
|Barb
 J. Samardzich     |  |                          |  |                   

36

---

Table of Contents

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 27, 2008 and September 29,
 2007                                                                                                | F-4                                                                               
|                                                                                                                                                                        |                                                                                    |  |     
|Consolidated Statements of Income for the Years Ended
 September 27, 2008, September 29, 2007 and September 30, 2006                                                    | F-5                                                                               
|                                                                                                                                                                        |                                                                                    |  |     
|Consolidated Statements of Shareholders Investment
 and Comprehensive Income (Loss) for the Years Ended
 September 27, 2008, September 29, 2007 and September 30, 2006 | F-6                                                                               
|                                                                                                                                                                        |                                                                                    |  |     
|Consolidated Statements of Cash Flows for the Years Ended
 September 27, 2008, September 29, 2007 and September 30, 2006                                                | F-7                                                                               
|                                                                                                                                                                        |                                                                                    |  |     
|Notes to Consolidated Financial Statements                                                                                                                              | F-8 through
 F-31                                                                 
|                                                                                                                                                                        |                                                                                    |  |     
|Financial Statement Schedule                                                                                                                                            |                                                                                   
|                                                                                                                                                                        |                                                                                   
|Schedule                                                                                                                                                                | Description                                                                        |  |     
|                                                                                                                                                                        |                                                                                    |  |     
|                                                                                                                                                                        |                                                                                    |  |     
|II                                                                                                                                                                      | Summary of
 Consolidated AllowancesFor Doubtful Accounts and RestructuringReserves |  | F-32

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 27, 2008 and September 29,
2007, and the related consolidated statements of income, shareholders
investment and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended September 27, 2008. In connection with our
audits of the consolidated financial statements, we also have audited financial
statement schedule II. These consolidated financial statements and financial
statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTS Systems
Corporation and subsidiaries as of September 27, 2008 and September 29, 2007,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 27, 2008, 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), MTS Systems Corporation and
subsidiaries internal control over financial reporting as of September 27,
2008, based on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated November
25, 2008 expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.

In fiscal
2008, as disclosed in Note 6 to the consolidated financial statements, the
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an Interpretation of FASB Statement No. 109 on September 30,
2007.

| |             
| | ------------
| | /s/ KPMG LLP

Minneapolis,
Minnesota
November 25, 2008

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 27, 2008, based on criteria
established inInternal 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 27, 2008, based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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 27, 2008 and
September 29, 2007, and the related consolidated statements of income, shareholders
investment and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended September 27, 2008, and our report dated
November 25, 2008 expressed an unqualified opinion on those consolidated
financial statements

| |             
| | ------------
| | /s/ KPMG LLP

Minneapolis,
Minnesota
November 25, 2008

F-3

---

Table of Contents

Consolidated Balance Sheets(September 27
and September 29, respectively)

|                                                                                                        |  |                          |         |      |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | -
|Assets                                                                                                  |  | 2008                     |         | 2007 |  
|                                                                                                        |  |                          |         |      |  
|                                                                                                        |  | (expressed in thousands) |        
|Current Assets:                                                                                         |  |                          |         |      |   |         |  
|Cash and cash equivalents                                                                               |  | $                        | 114,099 |      | $ | 104,345 |  
|Short-term investments                                                                                  |  |                          |        |      |   | 17,050  |  
|Accounts receivable, net of allowance for doubtful accounts of $1,008
 and $1,518 respectively          |  |                          | 101,331 |      |   | 73,474  |  
|Unbilled accounts receivable                                                                            |  |                          | 43,022  |      |   | 41,026  |  
|Inventories                                                                                             |  |                          | 46,135  |      |   | 42,384  |  
|Prepaid expenses and other current assets                                                               |  |                          | 6,205   |      |   | 3,801   |  
|Current deferred tax assets                                                                             |  |                          | 11,825  |      |   | 6,451   |  
|Assets of discontinued operations                                                                       |  |                          | 380     |      |   | 8,077   |  
|                                                                                                        |  |                          |         |      |   |         |  
|Total current assets                                                                                    |  |                          | 322,997 |      |   | 296,608 |  
|                                                                                                        |  |                          |         |      |   |         |  
|                                                                                                        |  |                          |         |      |   |         |  
|Property and Equipment:                                                                                 |  |                          |         |      |   |         |  
|Land                                                                                                    |  |                          | 1,668   |      |   | 1,668   |  
|Buildings and improvements                                                                              |  |                          | 45,700  |      |   | 45,525  |  
|Machinery and equipment                                                                                 |  |                          | 91,851  |      |   | 88,108  |  
|Accumulated depreciation                                                                                |  |                          | (88,685 | )    |   | (85,554 | )
|                                                                                                        |  |                          |         |      |   |         |  
|Total property and equipment, net                                                                       |  |                          | 50,534  |      |   | 49,747  |  
|                                                                                                        |  |                          |         |      |   |         |  
|Goodwill                                                                                                |  |                          | 1,668   |      |   | 1,642   |  
|Software development costs                                                                              |  |                          | 4,155   |      |   |        |  
|Other assets                                                                                            |  |                          | 17,491  |      |   | 3,664   |  
|Non-current deferred tax assets                                                                         |  |                          | 2,312   |      |   | 1,320   |  
|                                                                                                        |  |                          |         |      |   |         |  
|Total assets                                                                                            |  | $                        | 399,157 |      | $ | 352,981 |  
|                                                                                                        |  |                          |         |      |   |         |  
|                                                                                                        |  |                          |         |      |   |         |  
|Liabilities and Shareholders Investment                                                                |  |                          |         |      |   |         |  
|                                                                                                        |  |                          |         |      |   |         |  
|                                                                                                        |  |                          |         |      |   |         |  
|Current Liabilities:                                                                                    |  |                          |         |      |   |         |  
|Short-term borrowings                                                                                   |  | $                        | 24,338  |      | $ | 265     |  
|Current maturities of long-term debt                                                                    |  |                          | 2,308   |      |   | 6,683   |  
|Accounts payable                                                                                        |  |                          | 28,567  |      |   | 22,341  |  
|Accrued payroll and related costs                                                                       |  |                          | 33,819  |      |   | 29,236  |  
|Advance payments from customers                                                                         |  |                          | 64,979  |      |   | 51,536  |  
|Accrued warranty costs                                                                                  |  |                          | 6,107   |      |   | 6,205   |  
|Accrued income taxes                                                                                    |  |                          | 4,510   |      |   | 7,572   |  
|Current deferred income taxes                                                                           |  |                          | 3,723   |      |   | 3,564   |  
|Other accrued liabilities                                                                               |  |                          | 17,042  |      |   | 15,437  |  
|Liabilities of discontinued operations                                                                  |  |                          | 177     |      |   | 1,944   |  
|                                                                                                        |  |                          |         |      |   |         |  
|Total current liabilities                                                                               |  |                          | 185,570 |      |   | 144,783 |  
|                                                                                                        |  |                          |         |      |   |         |  
|Deferred income taxes                                                                                   |  |                          | 1,354   |      |   | 846     |  
|Non-current accrued income taxes                                                                        |  |                          | 4,009   |      |   |        |  
|Long-term debt, less current maturities                                                                 |  |                          |        |      |   | 2,308   |  
|Pension benefit plan                                                                                    |  |                          | 245     |      |   | 12,777  |  
|Other long-term liabilities                                                                             |  |                          | 3,037   |      |   | 2,566   |  
|                                                                                                        |  |                          |         |      |   |         |  
|Total liabilities                                                                                       |  |                          | 194,215 |      |   | 163,280 |  
|                                                                                                        |  |                          |         |      |   |         |  
|                                                                                                        |  |                          |         |      |   |         |  
|Shareholders Investment:                                                                               |  |                          |         |      |   |         |  
|Common stock, 25¢ par value; 64,000 shares authorized: 16,976 and
 17,704 shares issued and outstanding |  |                          | 4,244   |      |   | 4,426   |  
|Retained earnings                                                                                       |  |                          | 175,216 |      |   | 164,862 |  
|Accumulated other comprehensive income                                                                  |  |                          | 25,482  |      |   | 20,413  |  
|                                                                                                        |  |                          |         |      |   |         |  
|Total shareholders investment                                                                          |  |                          | 204,942 |      |   | 189,701 |  
|                                                                                                        |  |                          |         |      |   |         |  
|Total liabilities and shareholders investment                                                          |  | $                        | 399,157 |      | $ | 352,981 |  
|                                                                                                        |  |                          |         |      |   |         |  

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
27, September 29 and September 30, respectively)

|                                                            |  |      |         |      |   |         |   |   |         |  
|----------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                            |  | 2008 |         | 2007 |   | 2006    |  
|                                                            |  |      |         |      |   |         |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Revenue:                                                    |  |      |         |      |   |         |   |   |         |  
|Product                                                     |  | $    | 395,173 |      | $ | 350,156 |   | $ | 335,006 |  
|Service                                                     |  |      | 65,342  |      |   | 59,935  |   |   | 52,918  |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Total Revenue                                               |  |      | 460,515 |      |   | 410,091 |   |   | 387,924 |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Cost of Sales:                                              |  |      |         |      |   |         |   |   |         |  
|Product                                                     |  |      | 235,861 |      |   | 206,067 |   |   | 193,243 |  
|Service                                                     |  |      | 34,401  |      |   | 30,386  |   |   | 26,446  |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Total Cost of Sales                                         |  |      | 270,262 |      |   | 236,453 |   |   | 219,689 |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Gross Profit                                                |  |      | 190,253 |      |   | 173,638 |   |   | 168,235 |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Operating Expenses:                                         |  |      |         |      |   |         |   |   |         |  
|Selling and marketing                                       |  |      | 76,867  |      |   | 68,907  |   |   | 63,901  |  
|General and administrative                                  |  |      | 35,393  |      |   | 32,216  |   |   | 32,851  |  
|Research and development                                    |  |      | 16,232  |      |   | 19,285  |   |   | 17,969  |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Total Operating Expenses                                    |  |      | 128,492 |      |   | 120,408 |   |   | 114,721 |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Gain on sale of assets                                      |  |      |        |      |   | 742     |   |   | 872     |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Income From Operations                                      |  |      | 61,761  |      |   | 53,972  |   |   | 54,386  |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Interest expense                                            |  |      | (1,083  | )    |   | (1,309  | ) |   | (1,716  | )
|Interest income                                             |  |      | 4,033   |      |   | 3,899   |   |   | 3,595   |  
|Other income, net                                           |  |      | 749     |      |   | 28      |   |   | 1,041   |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Income Before Income Taxes and Discontinued
 Operations     |  |      | 65,460  |      |   | 56,590  |   |   | 57,306  |  
|Provision for Income Taxes                                  |  |      | 18,350  |      |   | 15,549  |   |   | 19,337  |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Income Before Discontinued Operations                       |  |      | 47,110  |      |   | 41,041  |   |   | 37,969  |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Discontinued Operations:                                    |  |      |         |      |   |         |   |   |         |  
|(Loss) income from discontinued operations, net of tax      |  |      | (368    | )    |   | 955     |   |   | 1,354   |  
|Net gain on disposal of discontinued businesses, net of tax |  |      | 2,449   |      |   |        |   |   |        |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Income from Discontinued Operations, net of tax             |  |      | 2,081   |      |   | 955     |   |   | 1,354   |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Net Income                                                  |  |      | 49,191  |      |   | 41,996  |   |   | 39,323  |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Earnings Per Share                                          |  |      |         |      |   |         |   |   |         |  
|Basic:                                                      |  |      |         |      |   |         |   |   |         |  
|Income Before Discontinued Operations                       |  | $    | 2.72    |      | $ | 2.29    |   | $ | 2.03    |  
|Discontinued Operations:                                    |  |      |         |      |   |         |   |   |         |  
|(Loss) income from discontinued operations, net of
tax      |  |      | (0.02   | )    |   | 0.05    |   |   | 0.07    |  
|Net gain on disposal of discontinued businesses, net
of tax |  |      | 0.14    |      |   |        |   |   |        |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Income from Discontinued Operations, net of tax             |  |      | 0.12    |      |   | 0.05    |   |   | 0.07    |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Earnings Per Share - Basic                                  |  | $    | 2.84    |      | $ | 2.34    |   | $ | 2.10    |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Diluted:                                                    |  |      |         |      |   |         |   |   |         |  
|Income Before Discontinued Operations                       |  | $    | 2.68    |      | $ | 2.24    |   | $ | 1.97    |  
|Discontinued Operations:                                    |  |      |         |      |   |         |   |   |         |  
|(Loss) income from discontinued operations, net of
tax      |  |      | (0.02   | )    |   | 0.05    |   |   | 0.07    |  
|Net gain on disposal of discontinued businesses, net
of tax |  |      | 0.14    |      |   |        |   |   |        |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Income from Discontinued Operations, net of tax             |  |      | 0.12    |      |   | 0.05    |   |   | 0.07    |  
|                                                            |  |      |         |      |   |         |   |   |         |  
|Earnings Per Share - Diluted                                |  | $    | 2.80    |      | $ | 2.29    |   | $ | 2.04    |  
|                                                            |  |      |         |      |   |         |   |   |         |  

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

F-5

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Table of Contents

Consolidated Statements of Shareholders
Investment and Comprehensive Income (Loss)(For the Fiscal Years Ended
September 27, September 29 and September 30, respectively, expressed in
thousands)

|                                                     |  |                |        |                              |   |                    |   |                                                  |         |                                  |   |         |   |   |        |   |   |         |  
|---------------------------------------------------- |  | -------------- | ------ | ---------------------------- | - | ------------------ | - | ------------------------------------------------ | ------- | -------------------------------- | - | ------- | - | - | ------ | - | - | ------- | -
|                                                     |  | Common Stock   |        | Additional
 Paid-In
 Capital |   | Retained
 Earnings |   | Accumulated
 Other
 Comprehensive
 Income (Loss) |         | Total
 Shareholders
 Investment |  
|                                                     |  |                |        |                              |   |                    |  
|                                                     |  | Shares
 Issued |        | Amount                       |   |                    |   |                                                  |        
|                                                     |  |                |        |                              |   |                    |   |                                                  |         |                                  |   |         |  
|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 |  
|                                                     |  |                |        |                              |   |                    |   |                                                  |         |                                  |   |         |   |   |        |   |   |         |  
|Net income                                           |  |                |       |                              |   |                   |   |                                                  |        |                                  |   | 49,191  |   |   |       |   |   | 49,191  |  
|Foreign currency translation                         |  |                |       |                              |   |                   |   |                                                  |        |                                  |   |        |   |   | 3,859  |   |   | 3,859   |  
|Pension benefit plan adjustments                     |  |                |       |                              |   |                   |   |                                                  |        |                                  |   |        |   |   | 890    |   |   | 890     |  
|Derivative instruments                               |  |                |       |                              |   |                   |   |                                                  |        |                                  |   |        |   |   | 320    |   |   | 320     |  
|                                                     |  |                |        |                              |   |                    |   |                                                  |         |                                  |   |         |   |   |        |   |   |         |  
|Total comprehensive income                           |  |                |       |                              |   |                   |   |                                                  |        |                                  |   | 49,191  |   |   | 5,069  |   |   | 54,260  |  
|Exercise of stock options                            |  |                | 332    |                              |   | 83                 |   |                                                  | 7,096   |                                  |   |        |   |   |       |   |   | 7,179   |  
|Stock-based compensation                             |  |                | 11     |                              |   | 3                  |   |                                                  | 4,190   |                                  |   |        |   |   |       |   |   | 4,193   |  
|Tax benefit from equity compensation                 |  |                |       |                              |   |                   |   |                                                  | 1,302   |                                  |   |        |   |   |       |   |   | 1,302   |  
|Issuance for employee stock purchase plan            |  |                | 21     |                              |   | 5                  |   |                                                  | 682     |                                  |   |        |   |   |       |   |   | 687     |  
|Common stock purchased and retired                   |  |                | (1,092 | )                            |   | (273               | ) |                                                  | (13,270 | )                                |   | (28,499 | ) |   |       |   |   | (42,042 | )
|Dividends, $0.60 per share                           |  |                |       |                              |   |                   |   |                                                  |        |                                  |   | (10,338 | ) |   |       |   |   | (10,338 | )
|                                                     |  |                |        |                              |   |                    |   |                                                  |         |                                  |   |         |   |   |        |   |   |         |  
|Balance, September 27, 2008                          |  |                | 16,976 |                              | $ | 4,244              |   | $                                                |        |                                  | $ | 175,216 |   | $ | 25,482 |   | $ | 204,942 |  
|                                                     |  |                |        |                              |   |                    |   |                                                  |         |                                  |   |         |   |   |        |   |   |         |  

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 27, September 29 and September 30, respectively)

|                                                                                   |  |                           |         |      |   |         |   |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                   |  | 2008                      |         | 2007 |   | 2006    |  
|                                                                                   |  |                           |         |      |   |         |  
|                                                                                   |  | (expressed
 in thousands) |        
|Cash Flows from Operating Activities:                                              |  |                           |         |      |   |         |   |   |         |  
|Net income                                                                         |  | $                         | 49,191  |      | $ | 41,996  |   | $ | 39,323  |  
|Adjustments to reconcile net income to net cash provided by operating
 activities: |  |                           |         |      |   |         |   |   |         |  
|Loss (income) from discontinued operations                                         |  |                           | 368     |      |   | (955    | ) |   | (1,354  | )
|Net gain on disposal of discontinued operations                                    |  |                           | (2,449  | )    |   |        |   |   |        |  
|Gain on sale of assets                                                             |  |                           |        |      |   | (742    | ) |   | (872    | )
|Stock-based compensation                                                           |  |                           | 4,199   |      |   | 5,023   |   |   | 4,377   |  
|Excess tax benefits from stock-based compensation                                  |  |                           | (925    | )    |   | (2,123  | ) |   | (1,249  | )
|Net periodic pension benefit cost                                                  |  |                           | 1,282   |      |   | 1,208   |   |   | 1,079   |  
|Depreciation and amortization                                                      |  |                           | 9,207   |      |   | 7,985   |   |   | 7,302   |  
|Deferred income taxes                                                              |  |                           | (5,726  | )    |   | (4,599  | ) |   | 2,222   |  
|Bad debt provision                                                                 |  |                           | (111    | )    |   | 320     |   |   | 354     |  
|Changes in operating assets and liabilities:                                       |  |                           |         |      |   |         |   |   |         |  
|Accounts and unbilled contracts receivable                                         |  |                           | (27,462 | )    |   | (11,414 | ) |   | (11,829 | )
|Inventories                                                                        |  |                           | (3,191  | )    |   | (1,733  | ) |   | (1,346  | )
|Prepaid expenses                                                                   |  |                           | 119     |      |   | 387     |   |   | (466    | )
|Other assets                                                                       |  |                           | (6,030  | )    |   | (3,876  | ) |   | 1,033   |  
|Accounts payable                                                                   |  |                           | 6,138   |      |   | 4,994   |   |   | 1,028   |  
|Accrued payroll and related costs                                                  |  |                           | 4,441   |      |   | (654    | ) |   | (1,989  | )
|Advance payments from customers                                                    |  |                           | 13,398  |      |   | (1,054  | ) |   | 1,082   |  
|Accrued warranty costs                                                             |  |                           | (138    | )    |   | 138     |   |   | 669     |  
|Other liabilities                                                                  |  |                           | 5,613   |      |   | 8,581   |   |   | (3,187  | )
|Contributions to pension benefit plan                                              |  |                           | (13,198 | )    |   | (257    | ) |   | (212    | )
|Operating activities of discontinued operations                                    |  |                           | (4,552  | )    |   | 1,690   |   |   | 2,264   |  
|                                                                                   |  |                           |         |      |   |         |   |   |         |  
|Net Cash Provided by Operating Activities                                          |  |                           | 30,174  |      |   | 44,915  |   |   | 38,229  |  
|                                                                                   |  |                           |         |      |   |         |   |   |         |  
|Cash Flows from Investing Activities:                                              |  |                           |         |      |   |         |   |   |         |  
|Additions to property and equipment                                                |  |                           | (9,752  | )    |   | (12,040 | ) |   | (7,187  | )
|Proceeds from maturity of short-term investments                                   |  |                           | 19,050  |      |   | 71,260  |   |   | 130,857 |  
|Purchases of short-term investments                                                |  |                           | (2,000  | )    |   | (64,735 | ) |   | (77,782 | )
|Investment in business                                                             |  |                           | (13,737 | )    |   |        |   |   |        |  
|Net proceeds from sale of businesses                                               |  |                           | 10,293  |      |   | 1,000   |   |   | 1,882   |  
|Investing activities of discontinued operations                                    |  |                           | (287    | )    |   | (695    | ) |   | (318    | )
|                                                                                   |  |                           |         |      |   |         |   |   |         |  
|Net Cash Provided by (Used in) Investing Activities                                |  |                           | 3,567   |      |   | (5,210  | ) |   | 47,452  |  
|                                                                                   |  |                           |         |      |   |         |   |   |         |  
|Cash Flows from Financing Activities:                                              |  |                           |         |      |   |         |   |   |         |  
|Net receipts under short-term borrowings                                           |  |                           | 23,866  |      |   | 36      |   |   | 161     |  
|Payments of notes payable                                                          |  |                           |        |      |   |        |   |   | (1,477  | )
|Repayments of long-term debt                                                       |  |                           | (6,683  | )    |   | (6,683  | ) |   | (6,708  | )
|Excess tax benefits from stock-based compensation                                  |  |                           | 925     |      |   | 2,123   |   |   | 1,249   |  
|Cash dividends                                                                     |  |                           | (10,478 | )    |   | (7,988  | ) |   | (7,576  | )
|Proceeds from exercise of stock options and employee stock                         |  |                           |         |      |   |         |   |   |         |  
|purchase plan                                                                      |  |                           | 7,866   |      |   | 9,256   |   |   | 5,249   |  
|Payments to purchase and retire common stock                                       |  |                           | (42,042 | )    |   | (38,236 | ) |   | (64,541 | )
|                                                                                   |  |                           |         |      |   |         |   |   |         |  
|Net Cash Used in Financing Activities                                              |  |                           | (26,546 | )    |   | (41,492 | ) |   | (73,643 | )
|                                                                                   |  |                           |         |      |   |         |   |   |         |  
|Effect of Exchange Rate Changes on Cash and Cash
 Equivalents                      |  |                           | 2,559   |      |   | 8,170   |   |   | 2,781   |  
|                                                                                   |  |                           |         |      |   |         |   |   |         |  
|Cash and Cash Equivalents:                                                         |  |                           |         |      |   |         |   |   |         |  
|Increase during the year                                                           |  |                           | 9,754   |      |   | 6,383   |   |   | 14,819  |  
|Balance, beginning of year                                                         |  |                           | 104,345 |      |   | 97,962  |   |   | 83,143  |  
|                                                                                   |  |                           |         |      |   |         |   |   |         |  
|Balance, end of year                                                               |  | $                         | 114,099 |      | $ | 104,345 |   | $ | 97,962  |  
|                                                                                  
|Supplemental Disclosures of Cash Flows:                                            |  |                           |         |      |   |         |   |   |         |  
|Cash paid during the year for:                                                     |  |                           |         |      |   |         |   |   |         |  
|Interest                                                                           |  | $                         | 726     |      | $ | 1,052   |   | $ | 1,591   |  
|Income taxes                                                                       |  |                           | 22,157  |      |   | 11,172  |   |   | 17,315  |  
|                                                                                  

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

F-7

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Table of Contents

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies:

Nature of Operations
MTS 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 Year
The Companys fiscal year
ends on the Saturday closest to September 30. The Companys fiscal years ended
September 27, 2008, September 29, 2007 and September 30, 2006 each consisted of
52 weeks.

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

Revenue Recognition
Orders that are manufactured
and delivered in less than six months with routine installations and no special
acceptance protocol may 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 Statement of Position (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 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 stand-alone 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.

F-8

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Table of Contents

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

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

Foreign Currency
The financial position and
results of operations of the Companys foreign subsidiaries are measured using
local currency as the functional currency. Assets and liabilities are
translated using 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 on foreign currency translation in
Comprehensive Income of $3.9 million, $9.3 million, and $2.9 million for fiscal
years 2008, 2007, and 2006 respectively. Gains and losses from foreign currency
transactions are recognized in the Consolidated Statements of Income. The Company
recorded net foreign currency transaction gains/(losses) of $0.6 million,
($0.6) million, and $0.8 million in fiscal years 2008, 2007, and 2006,
respectively.

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

Short-Term Investments
The Company held no
short-term investments as of September 27, 2008. As of September 29, 2007, the
Companys short-term investments consisted of U.S. municipal bonds. The Company
classified these investments as available-for-sale, and liquidated them in
fiscal year 2008 to fund current operations, as well as to return capital to
shareholders. All investments in available-for-sale securities at September 29,
2007 were carried at fair value, and unrealized gains and losses were reported
as a component of Accumulated Other Comprehensive Income within Shareholders
Investment on the Consolidated Balance Sheets. At September 29, 2007, 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
approximated amortized cost.

Accounts Receivable and Long-Term Contracts
The 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.

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

F-9

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the accompanying
Consolidated Balance Sheets. Amounts unbilled at September 27, 2008 are
expected to be invoiced during fiscal year 2009.

Inventories
Inventories consist of
material, labor, and overhead costs and are stated at the lower of cost or
market value, determined under the first-in, first-out accounting method.
Inventories at September 27, 2008 and September 29, 2007 were as follows:

|                                                   |  |                          |        |      |   |        | 
|-------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | 
|                                                   |  | 2008                     |        | 2007 |  
|                                                   |  |                          |        |      |  
|                                                   |  | (expressed in thousands) |       
|Customer projects in
 various stages of completion |  | $                        | 14,257 |      | $ | 14,534 | 
|Components, assemblies and
 parts                  |  |                          | 31,878 |      |   | 27,850 | 
|                                                   |  |                          |        |      |   |        | 
|Total                                              |  | $                        | 46,135 |      | $ | 42,384 | 
|                                                  

Software Development Costs.
The Company capitalizes
certain software development costs related to software to be sold, leased, or
otherwise marketed in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed. Capitalized software development costs include
purchased materials and services, salary and benefits of the Companys
development and technical support staff, and other costs associated with the
development of new products and services. Software development costs are
expensed as incurred until technological feasibility has been established, at
which time future costs incurred are capitalized until the product is available
for general release to the public. Based on the Companys product development
process, technological feasibility is generally established once product and
detailed program designs have been completed, uncertainties related to high-risk
development issues have been resolved through coding and testing, and the
Company has established that the necessary skills, hardware, and software
technology are available for production of the product. Once a software product
is available for general release to the public, capitalized development costs
associated with that product will begin to be amortized to cost of sales over
the products estimated economic life, using a method that results in cost
recognition in future periods that is consistent with the anticipated timing of
product revenue recognition.

The Companys capitalized
software development costs are subject to an ongoing assessment of
recoverability, which is impacted by estimates and assumptions of future
revenues and expenses for these software products, as well as other factors
such as changes in product technologies. The portion of unamortized capitalized
software development costs that are determined to be in excess of net
realizable value will be expensed in the period such a determination is made.
The Company reached technological feasibility for certain software products and
began capitalizing software development costs during the fiscal year ended
September 27, 2008. At September 27, 2008, capitalized software development costs,
including capitalized interest, were approximately $4.2 million. No
amortization expense was recognized during the year ended September 27, 2008.

The anticipated amortization
expense related to capitalized software development costs for the next five
fiscal years is as follows:

|                                            |  |                          |     |      |   |      |  |      |     |      |   |     |  |   |     | 
|------------------------------------------- |  | ------------------------ | --- | ---- | - | ---- |  | ---- | --- | ---- | - | --- |  | - | --- | 
|                                            |  | 2009                     |     | 2010 |   | 2011 |  | 2012 |     | 2013 |  
|                                            |  |                          |     |      |   |      |  |      |     |      |  
|                                            |  | (expressed in thousands) |    
|Amortization of Software
 Development Costs |  | $                        | 693 |      | $ | 831  |  | $    | 831 |      | $ | 831 |  | $ | 831 | 

Capitalized Interest
The Company capitalizes
interest on outstanding borrowings during the active construction period of
certain assets that require a period of time to develop before being available
for general release to customers. Capitalized interest is added to the cost of
the underlying assets and is amortized over the useful life of the

F-10

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Table of Contents

assets. During the fiscal
year ended September 27, 2008, interest costs of $0.1 million were capitalized
and included in capitalized software development costs. No interest costs were
capitalized during the fiscal years ended September 29, 2007 and September 30,
2006.

Impairment of Long-lived Assets
In accordance with SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived Assets, the Company
reviews the carrying value of long-lived assets or asset groups, 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 may
not be recoverable. When this review indicates the carrying value of an asset
or asset group exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual sale of the asset or asset group, 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 Equipment
Property and equipment is
stated at cost. Additions, replacements, and improvements are capitalized at
cost, while maintenance and repairs are charged to operations as incurred.
Depreciation is recorded over the following estimated useful lives of the
property:

Buildings
and improvements: 10 to 40 years. 
          Machinery and
equipment: 3 to 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.

Goodwill
Goodwill 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 27,
2008 or September 29, 2007. At both September 27, 2008 and September 29, 2007,
goodwill was associated with the Sensors segment. There was no change in these
Goodwill balances over the three-year period ending September 27, 2008, other
than changes associated with the effect of currency translation.

Other Assets
Other assets at September
27, 2008 and September 29, 2007 include security deposits paid on leased
property, cash redemption values on group insurance policies, and intangible
assets such as patents and other intellectual property. Other assets at
September 27, 2008 also include a $13.7 million investment in the SANS Group
(SANS). See Note 10 to the Consolidated Financial Statements for additional
information regarding the acquisition of the SANS business. 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 27, 2008 and
September 29, 2007, the carrying value of intangible assets, net of accumulated
amortization, was $0.2 million and $0.3 million respectively. Annual
amortization of other intangible assets was less than $0.1 million in both
fiscal years 2008 and 2007, and $0.3 million in fiscal year 2006.

The anticipated amortization
expense related to other intangible assets for the next five fiscal years is as
follows:

|                                   |  |                          |    |      |   |      |  |      |    |      |   |    |  |   |    | 
|---------------------------------- |  | ------------------------ | -- | ---- | - | ---- |  | ---- | -- | ---- | - | -- |  | - | -- | 
|                                   |  | 2009                     |    | 2010 |   | 2011 |  | 2012 |    | 2013 |  
|                                   |  |                          |    |      |   |      |  |      |    |      |  
|                                   |  | (expressed in thousands) |   
|Amortization of intangible
 assets |  | $                        | 18 |      | $ | 15   |  | $    | 14 |      | $ | 14 |  | $ | 13 | 

F-11

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Table of Contents

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 27, 2008 and September 29, 2007, were as follows:

|                       |  |                          |        |      |   |        |  
|---------------------- |  | ------------------------ | ------ | ---- | - | ------ | -
|                       |  | 2008                     |        | 2007 |  
|                       |  |                          |        |      |  
|                       |  | (expressed in thousands) |       
|Beginning balance      |  | $                        | 6,205  |      | $ | 5,848  |  
|Warranty provisions    |  |                          | 7,585  |      |   | 7,146  |  
|Warranty claims        |  |                          | (7,643 | )    |   | (7,141 | )
|Translation adjustment |  |                          | (40    | )    |   | 352    |  
|                       |  |                          |        |      |   |        |  
|Ending balance         |  | $                        | 6,107  |      | $ | 6,205  |  
|                       |  |                          |        |      |   |        |  

Derivative Financial InstrumentsThe Company uses interest rate swaps, currency swaps,
forward and option currency exchange contracts to manage risks associated with
foreign exchange and interest rate fluctuations. Because the market value of
these contracts is derived from current market rates, they are classified as
derivative financial instruments. The Company does not use derivatives for
speculative or trading purposes. Derivative contracts contain credit risk to
the extent that the Companys bank counterparties may be unable to meet the
terms of the agreements. Such risk is minimized by limiting those
counterparties to major financial institutions of high credit quality.

Foreign Currency Cash Flow HedgingCurrency exchange contracts utilized to maintain the
functional currency value of expected financial transactions denominated in
foreign currencies are designated as cash flow hedges. Qualifying 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 revenue at the time a
gain or loss is recognized on the underlying expected transaction. The Company
periodically assesses whether the contracts are effective in offsetting the
changes in the functional currency 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 revenue on the Consolidated Statement of Income for
the current period.

At September
27, 2008 and September 29, 2007, the Company had outstanding cash flow hedge
currency exchange contracts with gross notional U.S. dollar equivalent amounts
of $59.1 million and $64.2 million, respectively. Upon netting offsetting
contracts to sell foreign currencies against contracts to purchase foreign
currencies, irrespective of contract maturity dates, the net notional U.S.
dollar equivalent amount of contracts outstanding were $39.8 million and $37.3
million at September 27, 2008 and September 29, 2007, respectively. At
September 27, 2008 the net market value of the foreign currency exchange
contracts was an asset of $0.6 million consisting of $1.1 million in assets and
$0.5 million in liabilities. At September 29, 2007, the net market value of
foreign currency exchange contracts was a net liability of $0.7 million
consisting of $0.5 million in assets and $1.2 million in liabilities. The
amount recognized in earnings as a result of the ineffectiveness of cash flow
hedges was less than $0.1 million in each of the fiscal years ended September
27, 2008 and September 29, 2007. At September 27, 2008 and September 29, 2007,
the amount projected to be reclassified from Accumulated Other Comprehensive
Income into earnings in the next 12 months was a net gain of $0.4 million and a
net loss of $0.4 million, respectively. The maximum

F-12

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Table of Contents

remaining
maturity of any forward or optional contract at September 27, 2008 and September
29, 2007 was 1.3 years and 1.6 years, respectively.

Foreign Currency Balance Sheet HedgingThe Company also uses currency exchange contracts to
hedge the functional currency value of monetary assets and liabilities
denominated in non-functional foreign currencies. The gains and losses related
to the changes in the market value of these contracts are included in Other
income, net on the Consolidated Statement of Income in the current period.

At September
27, 2008 and September 29, 2007, the Company had outstanding balance sheet
hedge currency exchange contracts with gross notional U.S. dollar equivalent
amounts of $17.3 million and $56.9 million, respectively. Upon netting
offsetting contracts by counterparty bank to sell foreign currencies against contracts
to purchase foreign currencies, irrespective of contract maturity dates, the
net notional U.S. dollar equivalent amount of contracts outstanding was $0.5
million at September 27, 2008 and $3.8 million at September 29, 2007. At
September 27, 2008, the net market value of the balance sheet foreign currency
exchange contracts was less than $0.1 million. On September 29, 2007, the net
market value of the balance sheet forward exchange contracts was a liability of
$2.3 million, consisting of $2.3 million in liabilities with a less than $0.1
million in offsetting assets.

Interest Rate SwapOn July 25, 2008, the Company entered into a four-year
floating to fixed interest rate swap agreement to mitigate its exposure to an
increase in interest rates related to a portion of its floating rate
indebtedness. The total notional amount of the interest rate swap is $13.0
million. As a result of this agreement, every month, the Company pays fixed
interest at 4.24% in exchange for interest received at 1 month U.S. LIBOR. The
market value of the interest rate swap at September 27, 2008 was a liability of
$0.2 million. As of the effective date, the Company designated the interest
rate swap as a cash flow hedge. As a result, changes in the fair value of the
interest rate swap are recorded in Accumulated Other Comprehensive Income
within Shareholders Investment on the Consolidated Balance Sheets.

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. See Note 6 to the
Consolidated Financial Statements for additional information on income taxes.

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 include the
potentially dilutive effect of common shares issued in connection with
outstanding stock-based compensation options and grants, using the treasury
stock method. Under the treasury stock method, shares associated with certain
stock options have been excluded from the diluted weighted average shares
outstanding calculation because the exercise of those options would lead to a
net reduction in common shares outstanding. As a result, stock options to
acquire 0.9 million, 0.5 million, and 0.6 million weighted common shares have
been excluded from the diluted weighted shares outstanding calculation for the
fiscal year ended September 27, 2008, September 29, 2007, and September 30,
2006, respectively. 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:

F-13

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Table of Contents

|                                                |  |                                                 |        |      |   |        |  |   |        | 
|----------------------------------------------- |  | ----------------------------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                                |  | 2008                                            |        | 2007 |   | 2006   | 
|                                                |  |                                                 |        |      |   |        | 
|                                                |  | (expressed in thousands, except per share data) |       
|                                                |  |                                                 |       
|Income before discontinued operations           |  | $                                               | 47,110 |      | $ | 41,041 |  | $ | 37,969 | 
|Income from discontinued operations, net of tax |  |                                                 | 2,081  |      |   | 955    |  |   | 1,354  | 
|                                                |  |                                                 |        |      |   |        |  |   |        | 
|Net income                                      |  | $                                               | 49,191 |      | $ | 41,996 |  | $ | 39,323 | 
|                                                |  |                                                 |        |      |   |        |  |   |        | 
|Weighted average common shares outstanding      |  |                                                 | 17,351 |      |   | 17,980 |  |   | 18,749 | 
|Dilutive potential common shares                |  |                                                 | 193    |      |   | 350    |  |   | 480    | 
|                                                |  |                                                 |        |      |   |        |  |   |        | 
|Total dilutive common shares                    |  |                                                 | 17,544 |      |   | 18,330 |  |   | 19,229 | 
|                                                |  |                                                 |        |      |   |        |  |   |        | 
|                                                |  |                                                 |        |      |   |        |  |   |        | 
|Earnings per share:                             |  |                                                 |        |      |   |        |  |   |        | 
|Basic:                                          |  |                                                 |        |      |   |        |  |   |        | 
|Income before discontinued operations           |  | $                                               | 2.72   |      | $ | 2.29   |  | $ | 2.03   | 
|Income from discontinued operations, net of
tax |  |                                                 | 0.12   |      |   | 0.05   |  |   | 0.07   | 
|                                                |  |                                                 |        |      |   |        |  |   |        | 
|Earnings per share                              |  | $                                               | 2.84   |      | $ | 2.34   |  | $ | 2.10   | 
|                                                |  |                                                 |        |      |   |        |  |   |        | 
|Diluted:                                        |  |                                                 |        |      |   |        |  |   |        | 
|Income before discontinued operations           |  | $                                               | 2.68   |      | $ | 2.24   |  | $ | 1.97   | 
|Income from discontinued operations, net of
tax |  |                                                 | 0.12   |      |   | 0.05   |  |   | 0.07   | 
|                                                |  |                                                 |        |      |   |        |  |   |        | 
|Earnings per share                              |  | $                                               | 2.80   |      | $ | 2.29   |  | $ | 2.04   | 
|                                                |  |                                                 |        |      |   |        |  |   |        | 

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.

For purposes
of determining estimated fair value of stock-based payment awards, the Company
utilizes a Black-Scholes option pricing model, which requires the input of
certain assumptions requiring management judgment. Because the Companys
employee stock option 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. 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 of future grants of stock-based payment awards. If factors
change and the Company employs different assumptions in the application of SFAS
No. 123R in future periods, the compensation expense recorded under SFAS No.
123R may differ significantly from the stock-based compensation expense
recorded in the current period. 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, for the fiscal years ended September 27, 2008,
September 29, 2007 and September 30, 2006 consists of net income, pension
benefit plan adjustments, derivative instrument gains or losses and foreign
currency translation adjustments.

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-14

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Table of Contents

DerivativeFinancialInstrumentUnrealizedGain (Loss)

        

        MinimumPensionLiabilityandFASBStatementNo. 158Adjustments

        

        ForeignCurrencyTranslationAdjustment

        

        TotalAccumulatedOtherComprehensiveIncome (Loss)(expressed in thousands)Balances at October 1, 2005

        

        $

        1,304

        

        $

        (865

        )

        $

        9,590

        

        $

        10,029Foreign exchange translation adjustments

        

        

        

        

        

        

        

        

        2,927

        

        

        2,927Minimum pension liability adjustment, net of tax of $72

        

        

        

        

        

        115

        

        

        

        

        

        115Change in unrealized gain, net of tax of $371

        

        

        621

        

        

        

        

        

        

        

        

        621Realized gain, net of tax of ($945)

        

        

        (1,582

        )

        

        

        

        

        

        

        

        (1,582

        )Balances at September 30, 2006

        

        $

        343

        

        $

        (750

        )

        $

        12,517

        

        $

        12,110Foreign exchange translation adjustments

        

        

        

        

        

        (91

        )

        

        9,389

        

        

        9,298Minimum pension liability adjustment, net of tax of $490

        

        

        

        

        

        738

        

        

        

        

        

        738Change in unrealized loss, net of tax of ($366)

        

        

        (612

        )

        

        

        

        

        

        

        

        (612

        )Realized gain, 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

        

        $

        20,413Foreign exchange translation adjustments

        

        

        

        

        

        (29

        )

        

        3,888

        

        

        3,859Pension benefit plan adjustments, net of tax of $374

        

        

        

        

        

        866

        

        

        

        

        

        866Change in unrealized loss, net of tax of ($523)

        

        

        (973

        )

        

        

        

        

        

        

        

        (973

        )Realized loss, net of tax of $892

        

        

        1,293

        

        

        24

        

        

        

        

        

        1,317Balances at September 27, 2008

        

        $

        (72

        )

        $

        (240

        )

        $

        25,794

        

        $

        25,482


Use of EstimatesThe 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 PronouncementsIn 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 does not expect the adoption of SFAS No.
157 to have a material impact on its consolidated financial statements.

F-15

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Table of Contents

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 does not expect the adoption of
SFAS No. 157 to have a material impact on its consolidated financial
statements.

In December
2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations.
SFAS No. 141R expands the definition of a business combination and requires the
fair value of the purchase price of an acquisition, including the issuance of
equity securities, to be determined on the acquisition date. SFAS No. 141R also
requires that all assets, liabilities, contingent considerations, and
contingencies of an acquired business be recorded at fair value at the
acquisition date. In addition, SFAS No. 141R requires that acquisition costs
generally be expensed as incurred, restructuring costs generally be expensed in
periods subsequent to the acquisition date and changes in accounting for
deferred tax asset valuation allowances and acquired income tax uncertainties
after the measurement period impact income tax expense. SFAS No. 141R is
effective for the Companys fiscal years beginning on or after December 15,
2008, with early adoption prohibited. The Company is evaluating the effect the
adoption of SFAS No. 141R will have on its consolidated financial statements.

In December
2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51. SFAS No. 160 requires
minority interests to be recharacterized as noncontrolling interests and
reported as a component of equity. In addition, SFAS No. 160 requires that
purchases or sales of equity interests that do not result in a change in
control be accounted for as equity transactions and, upon a loss of control,
requires the interests sold, as well as any interests retained, to be recorded
at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective
for fiscal years beginning on or after December 15, 2008, with early adoption
prohibited. The Company does not expect the adoption of SFAS No. 157 to have a
material impact on its consolidated financial statements.

In March 2008,
the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an Amendment to SFAS No. 133. SFAS No. 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. SFAS No. 161 is effective for fiscal years
beginning after November 15, 2008. The Company does not expect the adoption of
SFAS No. 157 to have a material impact on its consolidated financial
statements.

In April 2008,
the FASB issued Staff Position (FSP) FAS 142-3 Determination of the Useful
Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful
life of intangible assets under SFAS No. 142 Goodwill and Other Intangible
Assets. FSP FAS 142-3 is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the period
of the expected cash flows used to measure the fair value of the asset under
SFAS No. 141R and other GAAP. FSP No. FAS 142-3 is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited. The Company
does not expect the adoption of FSP No. FAS 142-3 to have a material impact on
its consolidated financial statements.

In May 2008,
the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
accordance with GAAP. SFAS No. 162 will be effective 60 days after the SEC
approves the Public Company Accounting Oversight Boards amendments to AU
Section 411, The Meaning of Present Fairly in Accordance With Generally
Accepted Accounting Principles. The Company does not expect the adoption of
SFAS No. 162 to have a material impact on its consolidated financial
statements.

F-16

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Table of Contents

In June 2008,
the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1 Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities FSP EITF No. 03-6-1 clarifies that all outstanding unvested share-based
payment awards that contain rights to non-forfeitable dividends participate in
undistributed earnings with common shareholders. Awards of this nature are
considered participating securities and the two-class method of computing basic
and diluted earnings per share must be applied. FSP EITF No. 03-6-1 is
effective for fiscal years beginning after December 15, 2008. The Company does
not expect the adoption of FSP EITF No. 03-6-1 to have a material impact on its
consolidated financial statements.

In June 2008,
the FASB issued EITF No. 07-5, Determining Whether an Instrument (or an
Embedded Feature) Is Indexed to an Entitys Own Stock. EITF No. 07-5 provides
that an entity should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instruments contingent exercise and settlement
provisions. It also clarifies the impact of foreign currency denominated strike
prices and market-based employee stock option valuation instruments on the
evaluation. EITF No. 07-5 is effective for fiscal years beginning after
December 15, 2008. The Company does not expect the adoption of EITF No. 07-5 to
have a material impact 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 27, 2008, September 29, 2007, and
September 30, 2006, the Company awarded stock options, employee stock purchase
plan shares, and restricted stock under these plans. At September 27, 2008, a
total of 1,767,209 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 27, 2008, September 29, 2007, and September 30, 2006 was as follows
(in thousands, except per share data):

|                                                                              |  |      |        |      |   |        |   |   |        |  
|----------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                              |  | 2008 |        | 2007 |   | 2006   |  
|                                                                              |  |      |        |      |   |        |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|Stock-based compensation expense by type of award:                            |  |      |        |      |   |        |   |   |        |  
|Employee stock options                                                        |  | $    | 3,591  |      | $ | 4,388  |   | $ | 4,056  |  
|Employee stock purchase plan (ESPP)                                           |  |      | 191    |      |   | 189    |   |   | 157    |  
|Restricted stock units                                                        |  |      | 441    |      |   | 441    |   |   | 429    |  
|Amounts capitalized as inventory                                              |  |      | (938   | )    |   | (1,080 | ) |   | (977   | )
|Amounts recognized in income for amounts previously capitalized as
 inventory |  |      | 914    |      |   | 1,085  |   |   | 712    |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|Total stock-based compensation included in income from
operations             |  |      | 4,199  |      |   | 5,023  |   |   | 4,377  |  
|Income tax benefit on stock-based compensation                                |  |      | (1,421 | )    |   | (1,669 | ) |   | (1,165 | )
|                                                                              |  |      |        |      |   |        |   |   |        |  
|Net compensation expense included in net income                               |  | $    | 2,778  |      | $ | 3,354  |   | $ | 3,212  |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|Earnings per share:                                                           |  |      |        |      |   |        |   |   |        |  
|Basic                                                                         |  | $    | 0.16   |      | $ | 0.19   |   | $ | 0.17   |  
|Diluted                                                                       |  | $    | 0.16   |      | $ | 0.18   |   | $ | 0.17   |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|Tax effect on:                                                                |  |      |        |      |   |        |   |   |        |  
|Cash flows from operating activities                                          |  | $    | (925   | )    | $ | (2,123 | ) | $ | (1,249 | )
|Cash flows from financing activities                                          |  | $    | 925    |      | $ | 2,123  |   | $ | 1,249  |  

At September
27, 2008, there was $3.8 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

F-17

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Table of Contents

years. At
September 27, 2008, there was $0.3 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.

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
risk-free 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 27, 2008, September 29, 2007 and September 30, 2006 was $7.53, $10.51
and $11.85, respectively. The weighted average assumptions used to determine
fair value of stock options granted during those fiscal years were as follows:

|                         |  |      |      |      |  |      |   |  |      |  
|------------------------ |  | ---- | ---- | ---- |  | ---- | - |  | ---- | -
|                         |  | 2008 |      | 2007 |  | 2006 |  
|                         |  |      |      |      |  |      |  
|Expected life (in years) |  |      | 2.6  |      |  | 2.6  |   |  | 3.5  |  
|Risk-free interest rate  |  |      | 2.8  | %    |  | 4.9  | % |  | 5.1  | %
|Expected volatility      |  |      | 33.3 | %    |  | 31.1 | % |  | 35.6 | %
|Dividend yield           |  |      | 1.7  | %    |  | 1.0  | % |  | 1.0  | %
|                         |  |      |      |      |  |      |   |  |      |  

The expected
life represents the period that the stock option awards are expected to be
outstanding. In fiscal year 2008 and 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. 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.

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 27, 2008, September 29, 2007, and
September 30, 2006 was as follows (in thousands, except per share amounts):

F-18

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Table of Contents

|                                           |  |        |   |       |       |        |       |       |   |        |  |       |   |   |       | 
|------------------------------------------ |  | ------ | - | ----- | ----- | ------ | ----- | ----- | - | ------ |  | ----- | - | - | ----- | 
|                                           |  | 2008   |   | 2007  |       | 2006   |      
|                                           |  |        |   |       |       |        |      
|                                           |  | Shares |   | WAEP* |       | Shares |       | WAEP* |   | Shares |  | WAEP* |  
|                                           |  |        |   |       |       |        |       |       |   |        |  |       |  
|Options outstanding at
 beginning of year  |  | 1,588  |   | $     | 34.60 |        | 1,667 |       | $ | 28.06  |  | 1,686 |   | $ | 22.63 | 
|Granted                                    |  | 377    |   | $     | 35.87 |        | 416   |       | $ | 45.49  |  | 436   |   | $ | 39.08 | 
|Exercised                                  |  | (332   | ) | $     | 21.62 |        | (426  | )     | $ | 20.08  |  | (288  | ) | $ | 16.19 | 
|Forfeited or expired                       |  | (61    | ) | $     | 35.87 |        | (69   | )     | $ | 31.92  |  | (167  | ) | $ | 22.89 | 
|                                           |  |        |   |       |       |        |       |       |   |        |  |       |   |   |       | 
|Options outstanding at end
 of year        |  | 1,572  |   | $     | 37.59 |        | 1,588 |       | $ | 34.60  |  | 1,667 |   | $ | 28.06 | 
|                                           |  |        |   |       |       |        |       |       |   |        |  |       |   |   |       | 
|Options eligible for
 exercise at year-end |  | 821    |   | $     | 35.68 |        | 763   |       | $ | 27.05  |  | 780   |   | $ | 20.13 | 
|                                           |  |        |   |       |       |        |       |       |   |        |  |       |   |   |       | 
|*Weighted
 Average Exercise Price         

Options
outstanding at September 27, 2008 had a weighted average remaining contractual
term of 2.9 years, and an aggregate intrinsic value of $9.0 million. Options
eligible for exercise at September 27, 2008 had a weighted average remaining
contractual term of 2.0 years, and an aggregate intrinsic value of $6.0
million.

The total
intrinsic value of stock options exercised during the fiscal years ended
September 27, 2008, September 29, 2007, and September 30, 2006 were $5.8
million, $9.6 million and $6.7 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 27, 2008, September 29,
2007, and September 30, 2006 was as follows (in thousands, except per share
amounts):

|                                         |  |        |   |         |       |        |     |         |   |        |  |         |   |   |       | 
|---------------------------------------- |  | ------ | - | ------- | ----- | ------ | --- | ------- | - | ------ |  | ------- | - | - | ----- | 
|                                         |  | 2008   |   | 2007    |       | 2006   |    
|                                         |  |        |   |         |       |        |    
|                                         |  | Shares |   | WAGDFV* |       | Shares |     | WAGDFV* |   | Shares |  | WAGDFV* |  
|                                         |  |        |   |         |       |        |     |         |   |        |  |         |  
|Unvested shares at
 beginning of year    |  | 22     |   | $       | 38.64 |        | 22  |         | $ | 34.06  |  | 19      |   | $ | 25.97 | 
|Granted                                  |  | 12     |   | $       | 38.30 |        | 11  |         | $ | 42.49  |  | 13      |   | $ | 36.65 | 
|Vested                                   |  | (11    | ) | $       | 36.62 |        | (11 | )       | $ | 33.57  |  | (9      | ) | $ | 21.55 | 
|Forfeited                                |  | (3     | ) | $       | 39.87 |        |    |         | $ |       |  | (1      | ) | $ | 29.95 | 
|                                         |  |        |   |         |       |        |     |         |   |        |  |         |   |   |       | 
|Unvested shares at end of
 year          |  | 20     |   | $       | 39.29 |        | 22  |         | $ | 38.64  |  | 22      |   | $ | 34.06 | 
|                                         |  |        |   |         |       |        |     |         |   |        |  |         |   |   |       | 
|*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 2008 with the combined issuance of 20,733 shares at a weighted
average price of $33.15. In fiscal years 2007 and 2006, purchases were 21,351
and 19,772 shares, respectively, with weighted average share prices of $32.83
and $29.19, respectively. At September 27, 2008, the number of shares remaining
for issuance under the ESPP was 514,469.

3. Discontinued Operations:

On June 27, 2008, the Company sold substantially all of the net assets of its
Nano Instruments product line, which was based in Oak Ridge, Tennessee. As a
result of this sale, the Company recorded a gain of $2.4 million, net of tax of
$3.6 million, in fiscal year 2008. The Nano Instruments product line was
historically included in the Companys Test segment for financial reporting. The
results of operations of the Nano Instruments product line, including the gain
on the sale, have been excluded from the results of operations of the Test
segment and are reported as discontinued operations for the fiscal years ended
September 27, 2008, September 29, 2007 and September 30, 2006.

F-19

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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 that business. The engine
test business was historically included in the Companys Test segment for
financial reporting. The results of operations of the engine test business are
excluded from the results of operations of the Test segment and are reported as
discontinued operations for the fiscal year ended September 30, 2006.

Also in fiscal
year 2005, the Company closed its AeroMet subsidiary, a laser deposition
technology business. The AeroMet subsidiary
was historically included in the Companys Industrial segment (now the
Sensors segment) for financial reporting. The results of operations of
the AeroMet business are excluded from the results of operations of the Sensors
segment and are reported as discontinued operations for the fiscal year ended
September 30, 2006.

The Company
does not allocate interest income or interest expense to discontinued
operations. Operating results of the discontinued operations included in the
Companys results for the fiscal years ended September 27, 2008, September 29,
2007, and September 30, 2006 were as follows:

|                                                                       |  |                          |       |      |   |        |  |   |       | 
|---------------------------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ------ |  | - | ----- | 
|                                                                       |  | 2008                     |       | 2007 |   | 2006   | 
|                                                                       |  |                          |       |      |   |        | 
|                                                                       |  | (expressed in thousands) |      
|Revenue                                                                |  | $                        | 6,106 |      | $ | 10,413 |  | $ | 8,861 | 
|(Loss) income on discontinued operations before taxes and gain on
sale |  |                          | (628  | )    |   | 1,576  |  |   | 2,082 | 
|(Benefit) provision for income taxes                                   |  |                          | (260  | )    |   | 621    |  |   | 728   | 
|                                                                       |  |                          |       |      |   |        |  |   |       | 
|(Loss) income from discontinued operations, net of tax                 |  | $                        | (368  | )    | $ | 955    |  | $ | 1,354 | 
|                                                                       |  |                          |       |      |   |        |  |   |       | 

The assets and liabilities of discontinued operations at September 27,
2008 and September 29, 2007 were as follows:

|                                                              |  |                          |     |      |   |        |  
|------------------------------------------------------------- |  | ------------------------ | --- | ---- | - | ------ | -
|                                                              |  | 2008                     |     | 2007 |  
|                                                              |  |                          |     |      |  
|                                                              |  | (expressed in thousands) |    
|Accounts receivable, net of
 allowances for doubtful accounts |  | $                        | 149 |      | $ | 2,354  |  
|Unbilled accounts
 receivable                                 |  |                          | 88  |      |   |       |  
|Inventories                                                   |  |                          |    |      |   | 1,099  |  
|Prepaid expenses &
 other current assets                      |  |                          |    |      |   | 69     |  
|Current deferred tax assets                                   |  |                          | 143 |      |   | 473    |  
|                                                              |  |                          |     |      |   |        |  
|Current assets of discontinued operations                     |  |                          | 380 |      |   | 3,995  |  
|                                                              |  |                          |     |      |   |        |  
|Machinery and equipment                                       |  |                          |    |      |   | 2,478  |  
|Accumulated depreciation                                      |  |                          |    |      |   | (1,325 | )
|Goodwill                                                      |  |                          |    |      |   | 2,929  |  
|                                                              |  |                          |     |      |   |        |  
|Long-lived assets of discontinued operations                  |  |                          |    |      |   | 4,082  |  
|                                                              |  |                          |     |      |   |        |  
|                                                              |  |                          |     |      |   |        |  
|Total assets of
 discontinued operations                      |  | $                        | 380 |      | $ | 8,077  |  
|                                                              |  |                          |     |      |   |        |  
|                                                              |  |                          |     |      |   |        |  
|Accounts payable                                              |  | $                        |    |      | $ | 472    |  
|Accrued payroll-related
 costs                                |  |                          |    |      |   | 399    |  
|Advance payments from
 customers                              |  |                          |    |      |   | 391    |  
|Accrued warranty costs                                        |  |                          |    |      |   | 60     |  
|Accrued income taxes                                          |  |                          | 177 |      |   | 612    |  
|Other accrued liabilities                                     |  |                          |    |      |   | 10     |  
|                                                              |  |                          |     |      |   |        |  
|Total liabilities of
 discontinued operations                 |  | $                        | 177 |      | $ | 1,944  |  
|                                                              |  |                          |     |      |   |        |  

F-20

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Table of Contents

4. Business Segment Information:

The Companys
Chief Executive Officer and management regularly review financial information
for the Companys two 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 categorized for financial
statement purposes into two reportable segments, Test and Sensors. 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 27,
2008, September 29, 2007, and September 30, 2006, were as follows:

|                               |  |                          |         |      |   |         |  |   |         | 
|------------------------------ |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|                               |  | 2008                     |         | 2007 |   | 2006    | 
|                               |  |                          |         |      |   |         | 
|                               |  | (expressed in thousands) |        
|Revenue                        |  |                          |         |      |   |         |  |   |         | 
|Test                           |  | $                        | 364,068 |      | $ | 333,185 |  | $ | 323,700 | 
|Sensors                        |  |                          | 96,447  |      |   | 76,906  |  |   | 64,224  | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Total Revenue                  |  | $                        | 460,515 |      | $ | 410,091 |  | $ | 387,924 | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Income
 from Operations        |  |                          |         |      |   |         |  |   |         | 
|Test                           |  | $                        | 41,108  |      | $ | 39,215  |  | $ | 43,278  | 
|Sensors                        |  |                          | 20,653  |      |   | 14,757  |  |   | 11,108  | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Total Income from
 Operations  |  | $                        | 61,761  |      | $ | 53,972  |  | $ | 54,386  | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Identifiable
 Assets           |  |                          |         |      |   |         |  |   |         | 
|Test                           |  | $                        | 301,346 |      | $ | 261,040 |  | $ | 249,153 | 
|Sensors                        |  |                          | 97,431  |      |   | 83,864  |  |   | 67,278  | 
|Discontinued Operations        |  |                          | 380     |      |   | 8,077   |  |   | 7,692   | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Total Assets                   |  | $                        | 399,157 |      | $ | 352,981 |  | $ | 324,123 | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Other
 Segment Data            |  |                          |         |      |   |         |  |   |         | 
|Test:                          |  |                          |         |      |   |         |  |   |         | 
|Capital expenditures           |  | $                        | 7,643   |      | $ | 8,908   |  | $ | 5,349   | 
|Depreciation and
 amortization |  | $                        | 7,317   |      | $ | 6,290   |  | $ | 5,728   | 
|                               |  |                          |         |      |   |         |  |   |         | 
|Sensors:                       |  |                          |         |      |   |         |  |   |         | 
|Goodwill                       |  | $                        | 1,668   |      | $ | 1,642   |  | $ | 1,537   | 
|Capital expenditures           |  | $                        | 2,109   |      | $ | 3,132   |  | $ | 1,838   | 
|Depreciation and
 amortization |  | $                        | 1,890   |      | $ | 1,695   |  | $ | 1,574   | 
|                               |  |                          |         |      |   |         |  |   |         | 

F-21

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Table of Contents

|                                        |  |                          |         |      |   |         |  |   |         | 
|--------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|Geographic
 information was as follows:
|                                        |  |                          |         |      |   |         |  |   |         | 
|                                        |  | 2008                     |         | 2007 |   | 2006    | 
|                                        |  |                          |        
|                                        |  | (expressed in thousands) |        
|Revenue                                 |  |                          |         |      |   |         |  |   |         | 
|United
 States                          |  | $                        | 147,766 |      | $ | 134,889 |  | $ | 116,344 | 
|Germany                                 |  |                          | 58,962  |      |   | 49,597  |  |   | 54,161  | 
|Europe,
 excluding Germany              |  |                          | 92,995  |      |   | 97,867  |  |   | 85,772  | 
|Japan                                   |  |                          | 48,802  |      |   | 42,600  |  |   | 61,283  | 
|Asia,
 excluding Japan                  |  |                          | 90,721  |      |   | 70,751  |  |   | 53,872  | 
|Other                                   |  |                          | 21,269  |      |   | 14,387  |  |   | 16,492  | 
|                                        |  |                          |         |      |   |         |  |   |         | 
|Total
 Revenue                          |  | $                        | 460,515 |      | $ | 410,091 |  | $ | 387,924 | 
|                                        |  |                          |         |      |   |         |  |   |         | 
|Property and Equipment, Net             |  |                          |         |      |   |         |  |   |         | 
|United
 States                          |  | $                        | 38,915  |      | $ | 35,312  |  | $ | 31,373  | 
|Europe                                  |  |                          | 10,085  |      |   | 12,403  |  |   | 10,570  | 
|Asia                                    |  |                          | 1,534   |      |   | 2,032   |  |   | 1,029   | 
|                                        |  |                          |         |      |   |         |  |   |         | 
|Total
 Property and Equipment, Net      |  | $                        | 50,534  |      | $ | 49,747  |  | $ | 42,972  | 
|                                        |  |                          |         |      |   |         |  |   |         | 

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:

Short-term borrowings at
 September 27, 2008 and September 29, 2007 consist of the following:

2008

        

        

        2007(expressed in thousands)Bank line of credit, monthly U.S. LIBOR plus 45 basis points (2.95% rate in effect at September 27, 2008), maturing 
October 2008, with optional month-to-month term renewal and loan repricing until December 2012

        

        $

        11,000

        

        

        

        $

        Bank line of credit, monthly U.S. LIBOR plus 45 basis points (3.70% rate in effect at September 27, 2008), maturing 
October 2008, with optional month-to-month term renewal and loan repricing until December 2012

        

        

        13,000

        

        

        

        

        Notes payable, non-interest bearing

        

        

        338

        

        

        

        

        265Total Short-Term Borrowings

        

        $

        24,338

        

        

        

        $

        265


On December 18, 2007, the
Company entered into a five-year unsecured credit agreement (Credit
Facility). The Credit Facility provides for up to $75.0 million for working
capital financing, acquisitions, share purchases, or other general corporate
purposes until December 2012. At September 27, 2008, outstanding borrowings
under the Credit Facility aggregated $24.0 million. Commitment fees are payable
on the unused portion of the Credit Facility at rates between 0.09% and 0.18%,
based on the Companys leverage ratio. During the fiscal
year ended September 27, 2008, commitment fees incurred on the Credit Facility
were less than $0.1 million.

At the Companys election,
future borrowings under the Credit Facility can be structured to bear interest
at either an alternate base rate (ABR) or an adjusted LIBOR plus an
applicable margin. The ABR is the greater of the Prime Rate or the Federal
Funds Effective Rate plus 0.5%. At September 27, 2008, the prime rate of 5.0%
was the applicable ABR. The adjusted LIBOR is generally determined based on the
multiple of

F-22

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the applicable LIBOR and a
statutory reserve factor, considering the projected period of use of the loan
proceeds. The applicable margin applied to adjusted LIBOR on borrowings varies
based on the Companys leverage ratio. At September
27, 2008, the spread of the adjusted LIBOR plus the applicable margin ranged
from 4.15% to 4.33%.

The weighted average
interest rate on outstanding borrowings under the Credit Facility during the
fiscal year ended September 27, 2008 was 2.95%. In July 2008, in order to
mitigate its exposure to interest rate increases on $13 million of its floating
rate indebtedness, the Company entered into a four-year floating to fixed
interest rate swap. See Note 1 to the Consolidated Financial Statements for
additional information on the interest rate swap.

Notes payable at September
27, 2008 and September 29, 2007 consisted of non-interest bearing notes payable
to vendors by the Companys Japanese Sensors subsidiary.

Long-term debt at September
27, 2008 and September 29, 2007 was as follows:

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

The 7.5% note contains
pre-payment penalties that make early repayment economically disadvantageous to
the Company based on current market interest rates. The Company estimates the
difference between the fair market value and the carrying value of its
long-term debt portfolio is less than $0.1 million at September 27, 2008.

The Company is subject to
financial covenants, among other restrictions, under both the Credit Facility
and the 7.5% note agreement, including, among other covenants, minimum net
worth, the ratio of consolidated total indebtedness to consolidated EBITDA, as
well as the ratio of consolidated EBITDA to consolidated interest expense.
These covenants restrict the Companys ability to pay dividends and purchase
outstanding shares of common stock. At September 27, 2008 and September 29,
2007, the Company was in compliance with these financial covenants.

At September 27, 2008, the
Company had outstanding letters of credit and guarantees totaling $41.4 million
and $3.0 million, respectively, primarily to bond advance payments and
performance related to customer contracts in the Test segment.

F-23

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Table of Contents

6. Income Taxes:

The components
of income before income taxes and discontinued operations for the fiscal years
ended September 27, 2008, September 29, 2007, and September 30, 2006 were as
follows:

|                                                         |  |                          |        |      |   |        |  |   |        | 
|-------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------ | 
|                                                         |  | 2008                     |        | 2007 |   | 2006   | 
|                                                         |  |                          |        |      |   |        | 
|                                                         |  | (expressed in thousands) |       
|Income before
 income taxes and discontinued operations: |  |                          |        |      |   |        |  |   |        | 
|Domestic                                                 |  | $                        | 29,745 |      | $ | 31,211 |  | $ | 37,264 | 
|Foreign                                                  |  |                          | 35,715 |      |   | 25,379 |  |   | 20,042 | 
|                                                         |  |                          |        |      |   |        |  |   |        | 
|Total                                                    |  | $                        | 65,460 |      | $ | 56,590 |  | $ | 57,306 | 
|                                                         |  |                          |        |      |   |        |  |   |        | 

The provision
for income taxes from continuing operations for the fiscal years ended
September 27, 2008, September 29, 2007, and September 30, 2006 was as follows:

|                              |  |                          |        |      |   |        |   |   |        | 
|----------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | 
|                              |  | 2008                     |        | 2007 |   | 2006   |  
|                              |  |                          |       
|                              |  | (expressed in thousands) |       
|Current
 provision (benefit): |  |                          |        |      |   |        |   |   |        | 
|Federal                       |  | $                        | 9,016  |      | $ | 7,791  |   | $ | 8,301  | 
|State                         |  |                          | 1,080  |      |   | 1,530  |   |   | 1,330  | 
|Foreign                       |  |                          | 11,943 |      |   | 10,425 |   |   | 6,946  | 
|Deferred                      |  |                          | (3,689 | )    |   | (4,197 | ) |   | 2,760  | 
|                              |  |                          |        |      |   |        |   |   |        | 
|Total
 provision              |  | $                        | 18,350 |      | $ | 15,549 |   | $ | 19,337 | 
|                              |  |                          |        |      |   |        |   |   |        | 

A
reconciliation from the federal statutory income tax rate to the Companys
effective income tax rate for the fiscal years ended September 27, 2008,
September 29, 2007, and September 30, 2006 is as follows:

|                                                                   |  |      |    |      |  |      |   |  |    |  
|------------------------------------------------------------------ |  | ---- | -- | ---- |  | ---- | - |  | -- | -
|                                                                   |  | 2008 |    | 2007 |  | 2006 |  
|                                                                   |  |      |    |      |  |      |   |  |    |  
|                                                                   |  |      |    |      |  |      |   |  |    |  
|United
 States federal statutory income tax rate                   |  |      | 35 | %    |  | 35   | % |  | 35 | %
|Tax benefit
 of export sales                                       |  |      |   |      |  | (1   | ) |  | (2 | )
|Foreign
 provision (less than) greater than of U.S. tax rate       |  |      | (1 | )    |  | (2   | ) |  | 2  |  
|Settlement
 of audits, favorable resolution of accrued tax matters |  |      | (2 | )    |  |     |   |  | (3 | )
|State income
 taxes, net of federal benefit                        |  |      | 1  |      |  | 1    |   |  | 2  |  
|Research and
 development tax credits                              |  |      |   |      |  | (5   | ) |  |   |  
|Domestic
 production activities deduction                          |  |      | (1 | )    |  | (1   | ) |  | (1 | )
|Foreign tax
 credits                                               |  |      | (5 | )    |  |     |   |  |   |  
|Tax exempt
 income                                                 |  |      |   |      |  | (1   | ) |  | (1 | )
|Nondeductible
 stock option expense and other permanent items      |  |      | 1  |      |  | 2    |   |  | 2  |  
|                                                                   |  |      |    |      |  |      |   |  |    |  
|Effective
 income tax rate                                         |  |      | 28 | %    |  | 28   | % |  | 34 | %
|                                                                   |  |      |    |      |  |      |   |  |    |  

F-24

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Table of Contents

A summary of
the deferred tax assets and liabilities for the fiscal years ended September
27, 2008, September 29, 2007, and September 30, 2006 is as follows:

|                                                     |  |                          |        |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                                                     |  | 2008                     |        | 2007 |   | 2006   |  
|                                                     |  |                          |        |      |   |        |  
|                                                     |  | (expressed in thousands) |       
|Deferred Tax
 Asset:                                 |  |                          |        |      |   |        |   |   |        |  
|Accrued compensation and benefits                    |  | $                        | 7,887  |      | $ | 6,907  |   | $ | 5,382  |  
|Inventory reserves                                   |  |                          | 1,679  |      |   | 2,466  |   |   | 2,567  |  
|Intangible assets                                    |  |                          |       |      |   | (61    | ) |   | 63     |  
|Allowance for doubtful accounts                      |  |                          | 163    |      |   | 215    |   |   | 175    |  
|Other assets                                         |  |                          | 3,323  |      |   | 655    |   |   | 425    |  
|Net operating loss carryovers                        |  |                          | 2,555  |      |   | 1,483  |   |   | 1,720  |  
|Unrealized derivative instrument losses              |  |                          | 82     |      |   | 119    |   |   |       |  
|Capital loss carryovers                              |  |                          |       |      |   | 34     |   |   |       |  
|Research and development and foreign tax
 credits    |  |                          | 2,713  |      |   | 305    |   |   |       |  
|                                                     |  |                          |        |      |   |        |   |   |        |  
|Total deferred tax asset before valuation
 allowance |  |                          | 18,402 |      |   | 12,123 |   |   | 10,332 |  
|Less valuation allowance                             |  |                          | (809   | )    |   | (781   | ) |   | (669   | )
|                                                     |  |                          |        |      |   |        |   |   |        |  
|Total
 Deferred Tax Asset                            |  | $                        | 17,593 |      | $ | 11,342 |   | $ | 9,663  |  
|                                                     |  |                          |        |      |   |        |   |   |        |  
|                                                     |  |                          |        |      |   |        |   |   |        |  
|Deferred Tax
 Liability:                             |  |                          |        |      |   |        |   |   |        |  
|Property and equipment                               |  | $                        | 4,193  |      | $ | 3,784  |   | $ | 4,481  |  
|Intangible Assets                                    |  |                          | 40     |      |   |       |   |   |       |  
|Unrealized derivative instrument gains               |  |                          |       |      |   |       |   |   | 811    |  
|Foreign deferred revenue and other                   |  |                          | 4,300  |      |   | 4,197  |   |   | 5,236  |  
|                                                     |  |                          |        |      |   |        |   |   |        |  
|Total
 Deferred Tax Liability                        |  | $                        | 8,533  |      | $ | 7,981  |   | $ | 10,528 |  
|                                                     |  |                          |        |      |   |        |   |   |        |  
|Net Deferred
 Tax Asset (Liability)                  |  | $                        | 9,060  |      | $ | 3,361  |   | $ | (865   | )
|                                                     |  |                          |        |      |   |        |   |   |        |  

As
of September 27, 2008, the Companys French, Swedish, Chinese and one of its
German subsidiaries had net operating loss carryovers of $3.9 million, $0.9
million, $0.9 million and $2.0 million, respectively. These net operating loss
carryovers will not expire under local tax law. The Company determined that the benefit of
the German subsidiarys net operating loss carryover of $2.0 million is not likely to be realized. Accordingly, as of September 27, 2008, the
Company had a full valuation allowance against the German subsidiarys deferred
tax asset in the amount of $0.8 million.

During fiscal year 2008, the
Company repatriated $20.2 million of historic earnings from its Japanese
subsidiaries. The Company recorded $3.5 million of net tax benefit during
fiscal year 2008 related to these dividends. Also during
fiscal year 2008, the Company was only allowed to recognize research and
development credits on applicable spending during the first quarter, as the
provision in the U.S. tax law allowing for these credits expired on December
31, 2007. 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. 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. research and development tax
credit legislation was also extended during fiscal year 2007 with an effective
date retroactive to January 1, 2006. This legislation allowed the Company to
recognize $1.2 million of tax benefits in fiscal year 2007, due to tax credits
available on applicable research and development spending by the Company during
the last three fiscal quarters of fiscal year 2006. 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. 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 the U.S.
and Germany and expanded R&D tax credits.

According to Accounting
Principles Bulletin (APB) 23, Accounting for Income Taxes  Special Areas,
U.S. income taxes are not provided on undistributed earnings of international
subsidiaries that are

F-25

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permanently reinvested. At
September 27, 2008, undistributed earnings permanently reinvested in
international subsidiaries were approximately $109 million. The Company has not
provided for U.S. income taxes, or any of the related foreign tax credits, on
these earnings.

In the fiscal years ended
September 27, 2008, September 29, 2007, and September 30, 2006, the Company
recognized tax benefits of $1.3 million, $2.7 million, and $1.7 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 (Loss) within
Shareholders Investment. Under SFAS No. 87, Employers Accounting for
Pensions and 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, 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 (Loss) within Shareholders Investment.

Effective September 30,
2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entitys financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes, and
prescribes a threshold for recognizing and measuring attributes for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Additionally, FIN 48 provides guidance on
subsequent de-recognition of tax positions, financial statement classification,
recognition of interest and penalties, accounting in interim periods and
disclosure and transition requirements.

The adoption of FIN 48 had
no material impact on the Companys liability for unrecognized tax benefits or
retained earnings. Consistent with the provisions of FIN 48, the Company
reclassified the reserves for uncertain tax positions from other current
liabilities to non-current liabilities, unless the liability was expected to be
paid within one year. At September 30, 2007, the Companys liability for
unrecognized tax benefits was $5.3 million.

A summary of changes in the
Companys liability for unrecognized tax benefits from adoption through September 27, 2008 is as follows

|                                                                   |  |                          |       |  
|------------------------------------------------------------------ |  | ------------------------ | ----- | -
|                                                                   |  | 2008                     |      
|                                                                   |  |                          |      
|                                                                   |  | (expressed in thousands) |      
|Beginning balance                                                  |  | $                        | 5,252 |  
|Increase due to tax positions related to the current year          |  |                          | 162   |  
|Decrease due to settlement of tax positions related to prior
years |  |                          | (867  | )
|Decrease due to lapse of statute of limitations                    |  |                          | (575  | )
|Exchange rate change                                               |  |                          | 37    |  
|                                                                   |  |                          |       |  
|Ending balance                                                     |  | $                        | 4,009 |  
|                                                                   |  |                          |       |  

Included in the balance of
unrecognized tax benefits at September 27, 2008 are potential benefits of $1.3
million that, if recognized, would favorably impact the effective tax rate on
continuing operations.

At September 27, 2008, the
Company had accrued approximately $0.5 million of interest related to uncertain
income tax positions. No accrual for penalties related to uncertain tax
positions existed at September 27, 2008. Upon adoption of FIN 48, the Company
elected to classify interest and penalties related to uncertain tax positions
in Interest Expense and General and Administrative Expense, respectively, on
the Consolidated Statements of Income. Previously, the Company recognized
interest and penalties in Provision for Income Taxes on the Consolidated
Statements of Income.

F-26

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The Company is subject to
U.S. federal income tax as well as income tax of numerous state and foreign
jurisdictions. The Company is no longer subject to U.S. federal tax
examinations for fiscal years before 2006 and with limited exceptions, state
and foreign income tax examinations for fiscal years before 2005. The Companys
Japanese and French tax returns have been examined by the tax authorities
through fiscal year 2006. The Companys German tax returns have been examined
by the tax authorities through fiscal year 2005. As of September 27, 2008, the
Company does not expect significant changes in the amount of unrecognized tax
benefits during the next twelve months.

7. Employee Benefit Plans:

The Company offers a
retirement plan that has two components: (1) a 401(k) component with a Company
match and (2) 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 $2.2 million, $1.9 million, and $1.8 million in fiscal years
2008, 2007, and 2006, 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 are active as of the end of the fiscal year and whom 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 100% of the total Company fiscal year contributions.
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 $2.7 million, $2.7 million,
and $2.5 million in fiscal years 2008, 2007, and 2006, respectively.

One of the Companys German
subsidiaries has a non-contributory, defined benefit retirement plan for
eligible employees. This plan provides benefits based on the employees years
of service and compensation during the years immediately preceding retirement,
early retirement, termination, disability, or death, as defined in the plan.
The Company uses a September 30 measurement date for this defined benefit
retirement plan.

On September 14, 2008, the
Company made a discretionary contribution of $12.9 million to the defined
benefit retirement plan. This contribution resulted in a re-measurement of the
plan assets, benefit obligation, and projected net periodic benefit cost as of
that date.

Effective September 29,
2007, the Company adopted the recognition and disclosure provisions of SFAS No.
158. SFAS No. 158 requires employers to recognize the funded status of each
defined benefit pension and other postretirement plans 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 pretax amounts
recognized in Accumulated Other Comprehensive Income as of September 27, 2008
and September 29, 2007 consist of the following:

|                   |  |                          |     |      |   |       | 
|------------------ |  | ------------------------ | --- | ---- | - | ----- | 
|                   |  | 2008                     |     | 2007 |  
|                   |  |                          |     |      |  
|                   |  | (expressed in thousands) |    
|Actuarial net loss |  | $                        | 329 |      | $ | 1,547 | 
|Prior service cost |  |                          | 15  |      |   | 30    | 
|                   |  |                          |     |      |   |       | 
|                   |  | $                        | 344 |      | $ | 1,577 | 
|                   |  |                          |     |      |   |       | 

F-27

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The portion of
the pretax amount in Accumulated Other Comprehensive Income (Loss) at September 29,
2007 that was recognized during the fiscal year ended September 27, 2008 was
less than $0.1 million. The portion of the pretax amount in Accumulated Other
Comprehensive Income (Loss) at September 27, 2008 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 27, 2008 and September 29, 2007:

|                                                |  |                          |        |      |   |        |  
|----------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | -
|                                                |  | 2008                     |        | 2007 |  
|                                                |  |                          |       
|                                                |  | (expressed in thousands) |       
|Change in benefit obligation:                   |  |                          |        |      |   |        |  
|Projected benefit obligation, beginning of year |  | $                        | 13,117 |      | $ | 11,987 |  
|Service cost                                    |  |                          | 551    |      |   | 513    |  
|Interest cost                                   |  |                          | 740    |      |   | 562    |  
|Exchange rate change                            |  |                          | 361    |      |   | 1,428  |  
|Actuarial gain                                  |  |                          | (1,439 | )    |   | (1,116 | )
|Benefits paid                                   |  |                          | (310   | )    |   | (257   | )
|                                                |  |                          |        |      |   |        |  
|Projected benefit obligation, end of year       |  | $                        | 13,020 |      | $ | 13,117 |  
|                                                |  |                          |        |      |   |        |  
|                                                |  |                          |        |      |   |        |  
|Change in plan assets:                          |  |                          |        |      |   |        |  
|Fair value of plan assets, beginning of year    |  | $                        |       |      | $ |       |  
|Actual return on plan assets                    |  |                          | (116   | )    |   |       |  
|Exchange rate change                            |  |                          | 3      |      |   |       |  
|Employer contributions                          |  |                          | 13,198 |      |   | 257    |  
|Benefits paid                                   |  |                          | (310   | )    |   | (257   | )
|                                                |  |                          |        |      |   |        |  
|Fair value of plan assets, end of year          |  | $                        | 12,775 |      | $ |       |  
|                                                |  |                          |        |      |   |        |  

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 27, 2008 and September
29, 2007:

|                                                   |  |                          |      |      |   |         |  
|-------------------------------------------------- |  | ------------------------ | ---- | ---- | - | ------- | -
|                                                   |  | 2008                     |      | 2007 |  
|                                                   |  |                          |     
|                                                   |  | (expressed in thousands) |     
|Funded status:                                     |  |                          |      |      |   |         |  
|Funded status, end of year                         |  | $                        | (245 | )    | $ | (13,117 | )
|Accumulated other comprehensive loss               |  |                          | 344  |      |   | 1,577   |  
|                                                   |  |                          |      |      |   |         |  
|Net amount recognized                              |  | $                        | 99   |      | $ | (11,540 | )
|                                                   |  |                          |      |      |   |         |  
|                                                   |  |                          |      |      |   |         |  
|Amounts recognized in consolidated balance sheets: |  |                          |      |      |   |         |  
|Accrued payroll and related costs                  |  | $                        |     |      | $ | (340    | )
|Pension benefit plan                               |  |                          | (245 | )    |   | (12,777 | )
|                                                   |  |                          |      |      |   |         |  
|Total accrued benefit liability                    |  |                          | (245 | )    |   | (13,117 | )
|Deferred income taxes                              |  |                          | 104  |      |   | 476     |  
|Accumulated other comprehensive income, net of tax |  |                          | 240  |      |   | 1,101   |  
|                                                   |  |                          |      |      |   |         |  
|Net amount recognized                              |  | $                        | 99   |      | $ | (11,540 | )
|                                                   |  |                          |      |      |   |         |  

The weighted
average assumptions used to determine the defined benefit retirement plan
obligation at September 27, 2008 and September 29, 2007, and also the net
periodic benefit cost for the following fiscal year, were as follows:

F-28

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Table of Contents

|                                                         |  |      |   |      |  
|-------------------------------------------------------- |  | ---- | - | ---- | -
|                                                         |  | 2008 |   | 2007 |  
|                                                         |  |      |   |      |  
|Discount rate                                            |  | 6.4  | % | 5.4  | %
|Expected rate of return on
 plan assets                  |  | 5.9  | % | N/A  |  
|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.

The objective
of the Companys investment policy for the defined benefit retirement plan is
earn the highest possible total returns consistent with the preservation of
capital and anticipated liquidity requirements while minimizing the volatility
of returns. The plan fiduciaries set the long-term strategic investment
objectives for the defined benefit retirement plan assets. The objectives
include preserving the funded status of the trust and balancing risk and
return. Investment performance and plan asset mix are reviewed periodically.
Plan assets are currently allocated to fixed income, equity, cash and cash
equivalent, and other categories (see table below). Within these categories,
investments are allocated to multiple investment classes. Any decisions to
change to the asset allocation are made by the plan fiduciaries however,
investment into equity securities is limited to a maximum of 40% of total plan
assets. The expected long-term rate of return of plan assets of 5.9% for the
fiscal year ended September 27, 2008 was determined by considering historical
and expected returns for each asset class and the effect of periodic asset
rebalancing and reallocation. While historical returns are not guarantees of
future performance, current and future allocations are expected to meet the
objectives of the defined benefit retirement plan.

The actual
defined benefit retirement plan asset allocation at September 27, 2008, by
asset category, is as follows:

|                          |  |       |  
|------------------------- |  | ----- | -
|                          |  | 2008  |  
|                          |  |       |  
|Fixed income securities   |  | 76.3  | %
|Equity securities         |  | 9.6   | %
|Cash and cash equivalents |  | 8.6   | %
|Other                     |  | 5.5   | %
|                          |  |       |  
|                          |  | 100.0 | %
|                          |  |       |  

Net periodic
benefit cost for the Companys defined retirement plan for the fiscal years
ended September 27, 2008, September 29, 2007, and September 30, 2006 included
the following components:

|                                |  |                          |       |      |   |       |  |   |       | 
|------------------------------- |  | ------------------------ | ----- | ---- | - | ----- |  | - | ----- | 
|                                |  | 2008                     |       | 2007 |   | 2006  | 
|                                |  |                          |       |      |   |       | 
|                                |  | (expressed in thousands) |      
|Service cost                    |  | $                        | 551   |      | $ | 513   |  | $ | 474   | 
|Interest cost                   |  |                          | 740   |      |   | 562   |  |   | 466   | 
|Expected return on plan
 assets |  |                          | (44   | )    |   |      |  |   |      | 
|Net amortization and
 deferral  |  |                          | 35    |      |   | 133   |  |   | 139   | 
|                                |  |                          |       |      |   |       |  |   |       | 
|Net
 periodic benefit cost      |  | $                        | 1,282 |      | $ | 1,208 |  | $ | 1,079 | 
|                                |  |                          |       |      |   |       |  |   |       | 

The
accumulated benefit obligation of the Companys defined benefit retirement plan
as of September 27, 2008 and September 29, 2007 was $11.8 million and $11.7
million, respectively. 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 were 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.

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:

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Future Benefit payments:

|                   |  |                          |       | 
|------------------ |  | ------------------------ | ----- | 
|Fiscal Year        |  | Pension
 Benefits        |      
|                   |  |                          |      
|                   |  | (expressed in thousands) |      
|2009               |  | $                        | 415   | 
|2010               |  |                          | 545   | 
|2011               |  |                          | 606   | 
|2012               |  |                          | 659   | 
|2013               |  |                          | 701   | 
|2014
 through 2018 |  |                          | 4,458 | 
|                   |  |                          |       | 
|                   |  | $                        | 7,384 | 
|                   |  |                          |       | 

8. Commitments and Contingencies:

Litigation:
The Company is subject to various claims, legal actions, and complaints arising
in the ordinary course of business. The Company believes the final outcome of
these matters will not have a material adverse effect on its consolidated
financial position or results of operations. The Company expenses legal costs
as incurred.

Leases: Total
lease expense associated with continuing operations was $5.4 million, $5.4
million, and $5.1 million for fiscal years 2008, 2007, and 2006, 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) |       
|2009       |  | $                        | 4,790  | 
|2010       |  |                          | 3,626  | 
|2011       |  |                          | 2,909  | 
|2012       |  |                          | 1,649  | 
|2013       |  |                          | 623    | 
|Thereafter |  |                          | 2,667  | 
|           |  |                          |        | 
|           |  | $                        | 16,264 | 
|           |  |                          |        | 

9. Related Party Transactions:

During the
fiscal years ended September 27, 2008, September 29, 2007, and September 30,
2006, MTS Sensors purchased mechanical components and remote-mechanic workbench
services from Mark-Tronik GmbH (Mark-Tronik) aggregating approximately $1.6
million, $1.4 million and $1.2 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 27, 2008 and September 29, 2007, net outstanding payments due to Mark-Tronik
by MTS Sensors were less than $0.1 million.

10. Subsequent Events:

Business Acquisition
On September
28, 2008, the Company acquired substantially all of the assets of SANS for an
estimated purchase price of approximately $47.1 million (after post-acquisition
adjustments), plus $2.7 million of acquisition costs. SANS, headquartered in
Shenzhen, China, manufactures material testing solutions and offers a variety
of products, including electro-mechanical and static-hydraulic testing
machines. The results of operations of SANS are expected to be reported within
the Companys Test segment. During the fiscal year ended September 27, 2008,
the Company made an initial investment in SANS of $13.7 million, which is
reported in Other Assets on the Consolidated Balance Sheets. As of September
27, 2008, this investment

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did not
provide the Company with any beneficial risks and rewards of ownership, as the
Company was not entitled to participate in any profits or losses incurred by
SANS, and the Company did not have any control over the operations or any
assets of SANS after this investment. The Company anticipates funding the
remaining portion of the cost of acquisition through cash and cash equivalents
or use of its credit facility.

Income Tax Legislation

Legislation was enacted in
October of fiscal year 2009 that extended United States R&D credits, with an
effective date that is retroactive to January 1, 2008. The Company recognized
only one quarter of the R&D tax credit for fiscal year 2008 and will recognize
the other three quarters of benefit of approximately $1.2 million in the first
quarter of fiscal year 2009.

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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 27,
2008, SEPTEMBER 29, 2007,
AND SEPTEMBER 30, 2006

(expressed in thousands)

BalanceBeginningof Year

        

        Provisions/(Recoveries)

        

        AmountsWritten-Off/Payments

        

        BalanceEnd ofYearAllowance for Doubtful Accounts:2008

        

        $

        1,518

        

        $

        (111

        )

        $

        (399

        )

        $

        1,0082007

        

        

        1,350

        

        

        320

        

        

        (152

        )

        

        1,5182006

        

        

        1,208

        

        

        354

        

        

        (212

        )

        

        1,350Restructuring Reserves:2008

        

        $

        

        

        $

        

        

        $

        

        

        $

        2007

        

        

        40

        

        

        

        

        

        (40

        )

        

        2006

        

        

        1,319

        

        

        30

        

        

        (1,309

        )

        

        40


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