Table of Contents





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|UNITED
 STATES SECURITIES AND EXCHANGE COMMISSION                                            
|Washington, D.C. 20549                                                                       
|                                                                                             
|                                                                                             
|                                                                                             
|FORM 10-K                                                                                    
|                                                                                             
|                                                                                             
|                                                                                             
|(Mark One)                                                                                   
|                                                                                             
|xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
 SECURITIES EXCHANGE ACT OF 1934      
|                                                                                             
|For
 the fiscal year ended October 3, 2009OR                                                 
|                                                                                             
|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
 incorporation or organization) |  | (I.R.S.
 Employer
 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
whether the registrant has submitted electronically and posted on it corporate
Webiste, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (Section 229.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes o 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 o | Accelerated filer x | 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:
$381,398,349.

As of November 27, 2009, the
Registrant had outstanding 16,593,623 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 10, 2010 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                                                                                       |  | 13
|Item 7.  | Managements Discussion and Analysis of Financial
 Condition and Results of Operations                        |  | 14
|Item 7A. | Quantitative and Qualitative Disclosures About Market
 Risk                                                   |  | 38
|Item 8.  | Financial Statements and Supplementary Data                                                                   |  | 39
|Item 9.  | Changes in and Disagreements With Accountants on
 Accounting and Financial Disclosure                         |  | 40
|Item 9A. | Controls and Procedures                                                                                       |  | 40
|Item 9B. | Other Information                                                                                             |  | 40
|         |                                                                                                               |  |   
|PART III |                                                                                                               | 
|         |                                                                                                               |  |   
|Item 10. | Directors and Executive Officers of Registrant                                                                |  | 40
|Item 11. | Executive Compensation                                                                                        |  | 40
|Item 12. | Security Ownership of Certain Beneficial Owners and
 Management and Related Stockholder Matters               |  | 41
|Item 13. | Certain Relationships and Related Transactions                                                                |  | 41
|Item 14. | Principal Accountant Fees and Services                                                                        |  | 41
|         |                                                                                                               |  |   
|PART IV  |                                                                                                               | 
|         |                                                                                                               |  |   
|Item 15. | Exhibits
 and Financial Statement Schedules                                                                   |  | 42

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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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Table of Contents

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

MTS
Systems Corporation (the Company or MTS) is a leading global supplier of
test systems and 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. Company was
incorporated under Minnesota law in 1967.

On
September 28, 2008, Company acquired substantially all of the assets of SANS
Group (SANS). SANS manufactures material testing systems and offers a variety
of test systems. The results of operations for SANS have been included in the
Companys results of operations since the date of the acquisition, and are
reported in the Companys Test segment. The term organic as used throughout
this Annual Report on Form 10-K means without the SANS acquisition.

Products and
Markets by Business Segment

Test Segment: The Test segment
provides 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:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, drill bit testing for the petroleum industry and alternative wind
 energy. Bio-medical applications include systems to test wear and performance
 of implants, prostheses, and other medical and dental materials and devices.
 This is the largest Test segment market, representing approximately 45% of
 Test segment revenue.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Ground Vehicles: This market consists of automobile, truck,
 motorcycle, motorsports vehicles, construction equipment, agricultural
 equipment, rail, 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 global
 market represents approximately 40% of segment revenue.                                                                                                                               

2

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Table of Contents

| |   |                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
and geographical information about the Companys segments is included in Item 7
of this Annual Report on Form 10-K and Note 5 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, 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, Shenzhen and Hong Kong, China.

In
fiscal 2009, product orders in the Test segment ranged in value from a few
hundred dollars to $7 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 2009 ranged from $100 to over $600,000 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 $10,000, with an
average sales price of approximately $500 on a United States dollar-equivalent
basis. While the average sales cycle for the Sensors segment is approximately
one to four weeks for existing customers purchasing standard products, the
sales cycle for a new account can range from three months to two years.

3

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Table of Contents

Manufacturing and
Engineering

Test Segment: Test systems are
largely built to order and primarily engineered and assembled at the Companys
headquarters in Eden Prairie, Minnesota. The Company also operates
manufacturing facilities in Shenzhen and Shanghai, China, which manufactures
test systems for the recently acquired SANS business. 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.

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 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.

4

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Table of Contents

In
the Test segment, payments are often received from customers upon order or at
milestones during the fulfillment of the order, depending upon the size and
customization of the system. These are recorded as Advance Payments from Customers
on the Companys Consolidated Balance Sheets and reduced as revenue is
recognized. 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 $168 million, $235 million, and $205 million at October 3, 2009,
September 27, 2008 and September 29, 2007, respectively. The majority of this
backlog is related to the Test segment. Based on anticipated production
schedules, the Company estimates that approximately $160 million of the backlog
at October 3, 2009 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 factors that include technical performance, price and service in new
applications or in situations in which other position sensing technologies have
been used. Competitors of the Sensors segment are typically either larger
companies that carry multiple sensor product lines or smaller, privately held
companies throughout the world.

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 $16.3 million, $16.2 million and $19.3
million for the fiscal years ended October 3, 2009, September 27, 2008 and
September 29, 2007, respectively. During the fiscal years ended October 3, 2009
and September 27, 2008, the Company allocated certain of its resources towards
capitalized software development activities. Total software development costs
capitalized during the fiscal years ended October 3, 2009 and September 27,
2008 were $3.9 million and $4.2 million, respectively.

5

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Table of Contents

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 and Chief
 Executive Officer       |  | Chair
 of the Board since September 2008, and Chief Executive Officer since January
 2008. President and Chief Operating Officer from June 2007 to January 2008.
 Senior Vice President of Test from May 2003 to June 2007. |  | 48  |  | 2000          
|                                                             |  |                                                                                                                                                                                                                             |  |     |  |               
|Joachim Hellwig,
 Vice President                             |  | Vice
 President of the Sensors business since January 2003.                                                                                                                                                                 |  | 60  |  | 2003          
|                                                             |  |                                                                                                                                                                                                                             |  |     |  |               
|Susan E. Knight,
 Vice President and Chief Financial Officer |  | Vice
 President and Chief Financial Officer since October 2001.                                                                                                                                                             |  | 55  |  | 2001          
|                                                             |  |                                                                                                                                                                                                                             |  |     |  |               
|Alfred Richter,
 Senior Vice President                       |  | Senior
 Vice President of the Test business since April 2009. Prior thereto, various
 management and executive positions with Grupo Antolin from 1993 to 2009.                                                              |  | 40  |  | 2009          
|                                                             |  |                                                                                                                                                                                                                             |  |     |  |               
|Kathleen M. Staby,
 Vice President                           |  | Vice
 President of Human Resources and Strategy since January 2006. Vice President
 of Human Resources from 2000 to 2006.                                                                                                   |  | 63  |  | 2000          

Employees

The
Company had 2,015 employees as of October 3, 2009, including approximately
1,059 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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Table of Contents

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

The following
summarizes, in no particular order, certain risks which could harm the
Companys business, financial condition and operating results. No such list can
be comprehensive or predict in detail exactly which of the 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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 2009. Accordingly, the Companys business is
subject to the political, economic and other risks that are inherent in
operating in foreign countries. These risks include:

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

Volatility in the global economy could
adversely affect results.Economies in the
United States, Europe and Asia have been experiencing extreme disruption
recently, including, among other things, volatility in security prices,
diminished liquidity and credit availability, rating downgrades of certain investments
and declining valuations of others. The current tightening of credit in
financial markets adversely 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
on our business and financial condition.

The
Companys business is subject to strong 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.

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.

7

---

Table of Contents

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 may
experience difficulties obtaining the services of skilled employees.
The Company relies on knowledgeable, experienced and skilled technical
personnel, particularly engineers, sales management, 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 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 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.

The Company may
experience difficulty obtaining materials or components for its products.
The Company purchases significant components of its products from third party
suppliers. A small number 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.

8

---

Table of Contents

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

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.

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 may 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.

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

None.

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

The Companys primary owned and leased
facilities at October 3, 2009 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          | 
|                             |  |                                                                                               |  |                 | 
|Shenzhen,
 China             |  | Test segment
 manufacturing, research and sales and service administration                    |  | 75,000          | 
|                             |  |                                                                                               |  |                 | 
|Shanghai,
 China             |  | Test segment
 manufacturing and sales and service administration                              |  | 129,000         | 

9

---

Table of Contents

Leased Property:

|                           |  |                                                                                                      |  |                 |  |                | 
|-------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --------------- |  | -------------- | 
|Location                   |  | Use of
 Facility                                                                                     |  | Square
 Footage |  | Lease
 Expires | 
|                           |  |                                                                                                      |  |                 |  |                | 
|Chanhassen,
 Minnesota 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                                                       |  | 8,000           |  | 2013           | 
|                           |  |                                                                                                      |  |                 |  |                | 
|                           |  | Sensors segment manufacturing and Asia
 sales and service administration                             |  | 8,000           |  | 2015           | 
|                           |  |                                                                                                      |  |                 |  |                | 
|Seoul, South
 Korea        |  | Test segment
 sales, service administration and assembly                                             |  | 8,000           |  | 2011           | 
|                           |  |                                                                                                      |  |                 |  |                | 
|Shanghai,
 China           |  | Test segment
 sales, service administration and assembly                                             |  | 13,000          |  | 2010           | 
|                           |  |                                                                                                      |  |                 |  |                | 
|Berlin,
 Germany           |  | Land under
 Berlin facility                                                                          |  | 30,000          |  | 2052           | 
|                           |  |                                                                                                      |  |                 |  |                | 
|Shenzhen,
 China           |  | Land under
 Shenzhen facility                                                                        |  | 31,000          |  | 2047           | 
|                           |  |                                                                                                      |  |                 |  |                | 
|Shanghai,
 China           |  | Land under
 Shanghai facility                                                                        |  | 161,000         |  | 2056           | 

The Company also leases space in the United
States, Europe and Asia for sales and service administration for the Test
segment, including locations in Michigan, France, United Kingdom, Sweden,
Italy, Japan, China, and various other locations in the United States. Neither
the amount of leased space nor the rental obligations in these locations 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 2010.

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

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

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

No matters were submitted to a vote of
shareholders during the fourth quarter of the fiscal year ended October 3,
2009.

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 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  | 
|                    |  |     |       |      |   |       |  |        |       |  |  |            | 
|December 27,
 2008  |  | $   | 21.12 |      | $ | 42.46 |  | $      | 25.64 |  |  | 9,480,094  | 
|                    |  |     |       |      |   |       |  |        |       |  |  |            | 
|March 28,
 2009     |  | $   | 19.75 |      | $ | 28.18 |  | $      | 22.71 |  |  | 6,075,476  | 
|                    |  |     |       |      |   |       |  |        |       |  |  |            | 
|June 27,
 2009      |  | $   | 20.04 |      | $ | 23.32 |  | $      | 20.83 |  |  | 8,684,079  | 
|                    |  |     |       |      |   |       |  |        |       |  |  |            | 
|October 3,
 2009    |  | $   | 20.40 |      | $ | 30.92 |  | $      | 28.13 |  |  | 5,636,852  | 

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

At November 27, 2009, there were 1,015
holders of record of the Companys common stock. This number does not reflect
shareholders who hold their shares in the name of broker-dealers or other
nominees.

Purchases of Company
Equity Securities:

|                                                              |  |                                    |         |                                 |   |                                                                                         |  |                                                                                        |         |  |  |           | 
|------------------------------------------------------------- |  | ---------------------------------- | ------- | ------------------------------- | - | --------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------- | ------- |  |  | --------- | 
|Fiscal
 Period                                                |  | Total Number
 of Shares
 Purchased |         | Average
 Price
 Paid per
 Share |   | Total Number
 of Shares
 Purchased as
 Part of
 Publicly
 Announced
 Plans or
 Programs |  | Maximum
 Number of
 Shares
 that May Yet
 be Purchased
 Under the
 Plans or 
 Programs |        
|First Quarter
 September 28, 2008 - December 27, 2008         |  |                                    | 120,100 |                                 | $ | 30.09                                                                                   |  |                                                                                        | 120,100 |  |  | 2,390,938 | 
|Second
 Quarter
 December 28, 2008 - March 28, 2009           |  |                                    | 125,400 |                                 | $ | 24.81                                                                                   |  |                                                                                        | 125,400 |  |  | 2,265,538 | 
|Third
 Quarter
 March 29, 2009 - June 27, 2009                |  |                                    | 126,000 |                                 | $ | 21.63                                                                                   |  |                                                                                        | 126,000 |  |  | 2,139,538 | 
|                                                             
|Fourth
 Quarter
 Fiscal Month
 June 28, 2009 - August 1, 2009 |  |                                    | 48,000  |                                 | $ | 21.45                                                                                   |  |                                                                                        | 48,000  |  |  | 2,091,538 | 
|August 2,
 2009 - August 29, 2009                             |  |                                    | 40,000  |                                 | $ | 24.43                                                                                   |  |                                                                                        | 40,000  |  |  | 2,051,538 | 
|August 30,
 2009 - October 3, 2009                            |  |                                    | 48,000  |                                 | $ | 28.46                                                                                   |  |                                                                                        | 48,000  |  |  | 2,003,538 | 
|                                                             
|Fourth
 Quarter                                               |  |                                    | 136,000 |                                 | $ | 24.80                                                                                   |  |                                                                                        | 136,000 |  |  | 2,003,538 | 
|                                                             
|Fiscal Year
 2009                                             |  |                                    | 507,500 |                                 | $ | 25.27                                                                                   |  |                                                                                        | 507,500 |  |  |           | 

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

11

---

Table of Contents

During fiscal
year 2009, 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 20, 2007. Authority over pricing and timing under the
authorization has been delegated to management. The share purchase
authorization has no expiration date.

The Companys
dividend practice is to target over time a payout ratio of approximately 25% of
net earnings. During fiscal years 2009 and 2008, the Company paid quarterly cash
dividends of $0.15 per share to holders of its common stock, which resulted in
a payout ratio of approximately 58% and 21%, respectively.

The Companys
unsecured credit agreement (Credit Facility) includes certain financial
covenants, including the ratio of consolidated total indebtedness to
consolidated EBITDA, as well as the ratio of consolidated EBITDA to
consolidated interest expense. These financial covenants may restrict the
Companys ability to pay dividends and purchase outstanding shares of common stock.
At October 3, 2009 and September 27, 2008, the Company was in compliance with
these financial covenants. 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 October 2, 2004 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)

12

---

Table of Contents

|                                                                              |  |                    |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 
|----------------------------------------------------------------------------- |  | ------------------ | ------ | ------- | - | ------- |  | ------- | ------ | ------- | - | ------- |  | - | ------ |  | - | ------ | 
|                                                                              |  | FISCAL
 YEAR ENDED |       
|                                                                              |  | 10/2/04            |        | 10/1/05 |   | 9/29/06 |  | 9/29/07 |        | 9/27/08 |   | 10/3/09 | 
|MTS
 Systems Corporation                                                      |  | $                  | 100.00 |         | $ | 172.46  |  | $       | 149.39 |         | $ | 194.49  |  | $ | 201.95 |  | $ | 137.03 | 
|Russell
 2000 Index                                                           |  |                    | 100.00 |         |   | 117.95  |  |         | 129.66 |         |   | 145.65  |  |   | 129.17 |  |   | 108.18 | 
|                                                                              |  |                    |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |        | 
|*SIC Code
 3820 Peer Group (Modified to remove non-exchange traded companies) |  |                    | 100.00 |         |   | 113.04  |  |         | 124.20 |         |   | 158.76  |  |   | 129.96 |  |   | 116.47 | 

|        |                        
|------- | -----------------------
|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 October 3, 2009, September 27,
2008, and September 29, 2007 and the balance sheet data at October 3, 2009 and
September 27, 2008 are derived from the audited Consolidated Financial
Statements included elsewhere in this report. The statement of income data for
the fiscal years ended September 30, 2006 and October 1, 2005 and the balance
sheet data at September 29, 2007, September 30, 2006 and October 1, 2005 are
derived from financial statements of the Company that are not included in this
Annual Report on Form 10-K.

Five-Year Financial Summary


(October 3, 2009; September
27, 2008; September 29, 2007; September 30, 2006; and October 1, 2005)


(expressed in thousands, except per share data and
numbers of shareholders and employees)


|                                                                           |  |       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------- |  | ----- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                           |  | 20091 |         | 2008 |   | 2007    |   | 2006 |         | 2005 |  
|Operations                                                                 |  |       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Revenue                                                                    |  | $     | 408,881 |      | $ | 460,515 |   | $    | 410,091 |      | $ | 387,924 |   | $ | 367,950 |  
|Gross profit                                                               |  |       | 151,616 |      |   | 190,253 |   |      | 173,638 |      |   | 168,235 |   |   | 160,557 |  
|Gross profit as a % of revenue                                             |  |       | 37.1    | %    |   | 41.3    | % |      | 42.3    | %    |   | 43.4    | % |   | 43.6    | %
|Research and development expense                                           |  | $     | 16,322  |      | $ | 16,232  |   | $    | 19,285  |      | $ | 17,969  |   | $ | 14,199  |  
|Research and development as a % of revenue                                 |  |       | 4.0     | %    |   | 3.5     | % |      | 4.7     | %    |   | 4.6     | % |   | 3.9     | %
|Effective income tax rate                                                  |  |       | 27.2    | %    |   | 28.0    | % |      | 27.5    | %    |   | 33.7    | % |   | 29.4    | %
|Income before discontinued operations                                      |  | $     | 17,394  |      | $ | 47,110  |   | $    | 41,041  |      | $ | 37,969  |   | $ | 36,725  |  
|Net income                                                                 |  |       | 17,394  |      |   | 49,191  |   |      | 41,996  |      |   | 39,323  |   |   | 37,058  |  
|Net income as a % of revenue                                               |  |       | 4.3     | %    |   | 10.7    | % |      | 10.2    | %    |   | 10.1    | % |   | 10.1    | %
|Diluted earnings per share of common stock before discontinued
 operations |  | $     | 1.03    |      | $ | 2.68    |   | $    | 2.24    |      | $ | 1.97    |   | $ | 1.79    |  
|Diluted earnings per share of common stock                                 |  |       | 1.03    |      |   | 2.80    |   |      | 2.29    |      |   | 2.04    |   |   | 1.81    |  
|Weighted average dilutive shares outstanding during the year2              |  |       | 16,831  |      |   | 17,544  |   |      | 18,330  |      |   | 19,229  |   |   | 20,509  |  
|Net interest (expense) income                                              |  | $     | (916    | )    | $ | 2,950   |   | $    | 2,590   |      | $ | 1,879   |   | $ | 220     |  
|Depreciation and amortization                                              |  |       | 12,132  |      |   | 9,207   |   |      | 7,985   |      |   | 7,302   |   |   | 8,100   |  
|                                                                           |  |       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Financial Position                                                         |  |       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Cash, cash equivalents and short-term investments                          |  | $     | 118,885 |      | $ | 114,099 |   | $    | 121,395 |      | $ | 121,537 |   | $ | 159,793 |  
|Property and equipment, net                                                |  |       | 56,118  |      |   | 50,534  |   |      | 49,747  |      |   | 42,972  |   |   | 42,351  |  
|Total assets                                                               |  |       | 386,914 |      |   | 399,157 |   |      | 352,981 |      |   | 324,123 |   |   | 351,732 |  
|                                                                           |  |       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Interest-bearing debt3                                                     |  |       | 40,000  |      |   | 26,308  |   |      | 8,991   |      |   | 15,673  |   |   | 23,963  |  
|Total shareholders investment                                             |  |       | 203,965 |      |   | 204,942 |   |      | 189,701 |      |   | 169,321 |   |   | 188,432 |  
|Interest-bearing debt as a % of shareholders investment                   |  |       | 19.6    | %    |   | 12.8    | % |      | 4.7     | %    |   | 9.3     | % |   | 12.7    | %
|Return on equity4                                                          |  |       | 8.5     | %    |   | 24.8    | % |      | 24.2    | %    |   | 20.1    | % |   | 21.4    | %
|Return on invested capital5                                                |  |       | 7.9     | %    |   | 22.3    | % |      | 21.9    | %    |   | 19.7    | % |   | 18.5    | %
|                                                                           |  |       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Other Statistics                                                           |  |       |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Number of common shareholders of record at year-end6                       |  |       | 1,010   |      |   | 1,043   |   |      | 1,092   |      |   | 1,201   |   |   | 1,471   |  
|Number of employees at year-end                                            |  |       | 2,015   |      |   | 1,660   |   |      | 1,575   |      |   | 1,474   |   |   | 1,516   |  
|Orders                                                                     |  | $     | 340,839 |      | $ | 485,274 |   | $    | 421,437 |      | $ | 366,626 |   | $ | 397,642 |  
|Backlog of orders at year-end                                              |  |       | 167,726 |      |   | 234,710 |   |      | 204,558 |      |   | 189,000 |   |   | 217,982 |  
|Cash dividends paid per share                                              |  |       | 0.60    |      |   | 0.60    |   |      | 0.48    |      |   | 0.41    |   |   | 0.34    |  

|  |                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The fiscal
 year ended October 3, 2009 was a 53-week fiscal year, whereas all other
 fiscal years presented were 52-week periods.                                                             
|2 | Assumes the
 conversion of potential common shares using the treasury stock method.                                                                                                           
|3 | Consists of
 short-term borrowings and the current and non-current portion of long-term
 debt.                                                                                                
|4 | Calculated
 by dividing Income Before Discontinued Operations by beginning Shareholders
 Investment.                                                                                         
|5 | Calculated
 by dividing Income Before Discontinued Operations, excluding after-tax
 interest expense, by the aggregate of average interest bearing debt and
 average Shareholders Investment.
|6 | Does not
 include shareholders whose stock is held in the name of broker dealers or
 other nominees.                                                                                          

13

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

MTS Systems
Corporation is a leading global supplier of test systems and industrial
position sensors. The Companys testing hardware and software solutions help
customers accelerate and improve their design, development, and manufacturing
processes and are used for determining the mechanical behavior of materials,
products, and structures. MTS high-performance position sensors provide
controls for a variety of industrial and vehicular applications. MTS had 2,015
employees and revenue of $409 million for the fiscal year ended October 3,
2009.

Fiscal Year


The Companys
fiscal year ends on the Saturday closest to September 30. The fiscal years
ended October 3, 2009, September 27, 2008 and September 29, 2007 consisted of
53 weeks, 52 weeks, and 52 weeks, respectively.


Fiscal Year 2009 Compared to Fiscal Year 2008Summary of Financial ResultsHighlights for
Fiscal Year 2009 include:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On September
 28, 2008 the Company acquired substantially all of the assets of SANS for
 $49.4 million. SANS has manufacturing facilities in both Shenzhen and
 Shanghai, China, and is headquartered in Shenzhen. SANS manufactures material
 testing systems and offers a variety of products, including electro-mechanical
 and static-hydraulic testing machines. The results of operations for SANS
 have been included in the Companys results of operations since the date of
 the acquisition, and are reported in the Companys Test segment. Orders for
 SANS for fiscal year 2009 were $24.9 million. SANS reported a $3.0 million
 loss from operations for fiscal year 2009, on $23.6 million of revenue,
 driven by lower gross profit, which includes a $1.9 million reduction
 associated with the sale of inventory that was written up to fair value as
 part of the acquisition, as well as increased operating expenses associated
 with integration-related items. Total Company headcount in Asia increased by approximately
550 employees during fiscal year 2009 to support the SANS business.

14

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Table of Contents

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Orders
 decreased 29.8% to $340.8 million, compared to orders of $485.3 million for
 fiscal year 2008, as sharply lower demand in worldwide industrial capital
 spending in the Companys markets had a negative impact on both the Test and
 Sensors segments. Backlog of undelivered orders at October 3, 2009 was $167.7
 million, including $9.9 million from SANS, a decrease of 28.5% from backlog
 of $234.7 million at September 27, 2008.                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Revenue
 decreased 11.2% to $408.9 million, compared to revenue of $460.5 million for
 fiscal year 2008. This decrease was primarily due to a 12.4% decrease in the
 organic Test business and a 31.3% decline in the Sensors segment. SANS
 provided a 5.1% benefit for fiscal year 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | The Company
 initiated workforce reduction actions throughout fiscal year 2009, in order
 to align the Companys operating cost structure with changing market
 conditions. As a result of the workforce reduction actions, the Company
 incurred severance and benefit costs totaling $12.1 million, of which $10.9
 million and $1.2 million was reported in the Test and Sensors segments,
 respectively. Of the $12.1 million total costs, $6.8 million, $4.0 million,
 $1.2 million, and $0.1 million were reported in Cost of Sales, Selling and
 Marketing, General and Administrative, and Research and Development expense,
 respectively. These actions resulted in approximately an 18% reduction in the organic business workforce.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Income from
 operations decreased 60.2%, to $24.6 million, compared to $61.8 million for
 fiscal year 2008, primarily driven by lower volume, higher warranty expense
 and the previously mentioned severance charges. This was partially offset by
 reduced operating expenses in the organic Test business, resulting from a
 smaller workforce and lower discretionary spending, and a $6.7 million
 reduction in variable compensation expense.                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Cash and
 cash equivalents at October 3, 2009 totaled $118.9 million, compared to
 $114.1 million at the end of fiscal year 2008. Cash flows from operations
 generated $43.8 million. During fiscal year 2009, the Company borrowed $16.0
 million from its credit facility, paid an additional $25.1 million for the
 acquisition of SANS, invested $9.8 million in capital expenditures, and
 purchased 507,500 shares of common stock for $12.8 million.                                                                                                                                                                                                                                                                                   

Detailed Financial Results

|             
|-------------
|Total Company

Orders and Backlog

The following
is a comparison of fiscal year 2009 and fiscal year 2008 orders, separately
identifying the impact of the SANS acquisition as well as the impact of
currency translation:

|       |  |                         |       |                           |   |                   |   |                       |      |      |   |      |   |   |       | 
|------ |  | ----------------------- | ----- | ------------------------- | - | ----------------- | - | --------------------- | ---- | ---- | - | ---- | - | - | ----- | 
|       |  | 2009                    |       | Organic
 Business
 Change |   | SANS
 Acquisition |   | Currency
 Translation |      | 2008 |  
|       |  | (expressed in millions) |      
|Orders |  | $                       | 340.8 |                           | $ | (161.3            | ) | $                     | 24.9 |      | $ | (8.1 | ) | $ | 485.3 | 

Orders totaled
$340.8 million, a decrease of $144.5 million, or 29.8%, compared to orders of
$485.3 million for fiscal year 2008, reflecting lower order volume in both
segments across all geographies as a result of reduced capital spending and
overall severe economic conditions. Currency translation had an estimated $8.1
million unfavorable impact on fiscal year 2009 orders. These decreases were
partially offset by $24.9 million from SANS.

15

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Table of Contents

The following
is a comparison of fiscal year 2009 and fiscal year 2008 orders by geography:

|             |  |                         |       |      |   |          |  |            |        |   |  |       |  
|------------ |  | ----------------------- | ----- | ---- | - | -------- |  | ---------- | ------ | - |  | ----- | -
|Geography    |  | 2009                    |       | 2008 |   | Variance |  | % Variance |       
|             |  | (expressed in millions) |      
|Americas     |  | $                       | 108.3 |      | $ | 176.2    |  | $          | (67.9  | ) |  | -38.5 | %
|Europe       |  |                         | 108.7 |      |   | 168.4    |  |            | (59.7  | ) |  | -35.5 | %
|Asia         |  |                         | 123.8 |      |   | 140.7    |  |            | (16.9  | ) |  | -12.0 | %
|Total Orders |  | $                       | 340.8 |      | $ | 485.3    |  | $          | (144.5 | ) |  | -29.8 | %

Backlog of
undelivered orders at October 3, 2009 was $167.7 million, a decrease of
approximately $67.0 million, or 28.5%, compared to backlog of $234.7 million at
September 27, 2008. Backlog included $9.9 million from SANS. During fiscal year
2009, the Company experienced one significant cancellation in the Test segment
of approximately $3.0 million. The Company believes backlog is not an absolute
indicator of its future revenue because a portion of the orders constituting
this backlog could be cancelled at the customers discretion. The Company
seldom experiences order cancellations larger than $1.0 million. However,
current economic conditions could have an adverse impact on order cancellations
in the future.

Results of Operations

The following
is a comparison of fiscal year 2009 and fiscal year 2008 statements of
operations (in millions, except per share data):

|                                                        |  |      |       |      |   |          |   |            |       |   |  |        |  
|------------------------------------------------------- |  | ---- | ----- | ---- | - | -------- | - | ---------- | ----- | - |  | ------ | -
|                                                        |  | 2009 |       | 2008 |   | Variance |   | % Variance |      
|                                                        |  |      |       |      |   |          |   |            |       |   |  |        |  
|Revenue                                                 |  | $    | 408.9 |      | $ | 460.5    |   | $          | (51.6 | ) |  | -11.2  | %
|Cost of sales                                           |  |      | 257.3 |      |   | 270.2    |   |            | (12.9 | ) |  | -4.8   | %
|Gross profit                                            |  |      | 151.6 |      |   | 190.3    |   |            | (38.7 | ) |  | -20.3  | %
|Gross margin                                            |  |      | 37.1  | %    |   | 41.3     | % |            | -4.2  | % |  |        |  
|                                                        |  |      |       |      |   |          |   |            |       |   |  |        |  
|Operating expenses:                                     |  |      |       |      |   |          |   |            |       |   |  |        |  
|Selling and marketing                                   |  |      | 71.6  |      |   | 76.9     |   |            | (5.3  | ) |  | -6.9   | %
|General administrative                                  |  |      | 39.1  |      |   | 35.4     |   |            | 3.7   |   |  | 10.5   | %
|Research and development                                |  |      | 16.3  |      |   | 16.2     |   |            | 0.1   |   |  | 0.6    | %
|Total operating expenses                                |  |      | 127.0 |      |   | 128.5    |   |            | (1.5  | ) |  | -1.2   | %
|Income from operations                                  |  |      | 24.6  |      |   | 61.8     |   |            | (37.2 | ) |  | -60.2  | %
|Interest expense                                        |  |      | (2.0  | )    |   | (1.1     | ) |            | (0.9  | ) |  | 81.8   | %
|Interest income                                         |  |      | 1.1   |      |   | 4.0      |   |            | (2.9  | ) |  | -72.5  | %
|Other income, net                                       |  |      | 0.2   |      |   | 0.8      |   |            | (0.6  | ) |  | -75.0  | %
|Income before income taxes and discontinued
 operations |  |      | 23.9  |      |   | 65.5     |   |            | (41.6 | ) |  | -63.5  | %
|Provision for income taxes                              |  |      | 6.5   |      |   | 18.4     |   |            | (11.9 | ) |  | -64.7  | %
|Income before discontinued operations                   |  |      | 17.4  |      |   | 47.1     |   |            | (29.7 | ) |  | -63.1  | %
|Income from discontinued operations, net of tax         |  |      |      |      |   | 2.1      |   |            | (2.1  | ) |  | -100.0 | %
|Net income                                              |  | $    | 17.4  |      | $ | 49.2     |   | $          | (31.8 | ) |  | -64.6  | %
|                                                        |  |      |       |      |   |          |   |            |       |   |  |        |  
|Diluted earnings per share                              |  | $    | 1.03  |      | $ | 2.80     |   | $          | (1.77 | ) |  | -63.2  | %

16

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Table of Contents

The following
is a comparison of fiscal year 2009 and fiscal year 2008 results of operations,
separately identifying the impact of the SANS acquisition as well as the impact
of currency translation:

|                              |  |                          |       |                           |   |                   |   |                       |      |      |   |      |   |   |       |  
|----------------------------- |  | ------------------------ | ----- | ------------------------- | - | ----------------- | - | --------------------- | ---- | ---- | - | ---- | - | - | ----- | -
|                              |  | 2009                     |       | Organic
 Business
 Change |   | SANS
 Acquisition |   | Currency
 Translation |      | 2008 |  
|                              |  | (expressed
 in millions) |      
|Revenue                       |  | $                        | 408.9 |                           | $ | (65.3             | ) | $                     | 23.6 |      | $ | (9.9 | ) | $ | 460.5 |  
|Cost of sales                 |  |                          | 257.3 |                           |   | (21.0             | ) |                       | 14.6 |      |   | (6.5 | ) |   | 270.2 |  
|Gross profit                  |  |                          | 151.6 |                           |   | (44.3             | ) |                       | 9.0  |      |   | (3.4 | ) |   | 190.3 |  
|Gross margin                  |  |                          | 37.1  | %                         |   |                   |   |                       | 38.2 | %    |   |      |   |   | 41.3  | %
|                             
|Operating expenses:           |  |                          |       |                           |   |                   |   |                       |      |      |   |      |   |   |       |  
|Selling and marketing         |  |                          | 71.6  |                           |   | (7.6              | ) |                       | 4.2  |      |   | (1.9 | ) |   | 76.9  |  
|General administrative        |  |                          | 39.1  |                           |   | (3.6              | ) |                       | 7.8  |      |   | (0.5 | ) |   | 35.4  |  
|Research and development      |  |                          | 16.3  |                           |   | 0.3               |   |                       |     |      |   | (0.2 | ) |   | 16.2  |  
|Total operating expenses      |  |                          | 127.0 |                           |   | (10.9             | ) |                       | 12.0 |      |   | (2.6 | ) |   | 128.5 |  
|Income (loss) from operations |  | $                        | 24.6  |                           | $ | (33.4             | ) | $                     | (3.0 | )    | $ | (0.8 | ) | $ | 61.8  |  

RevenueRevenue was
$408.9 million, a decrease of $51.6 million, or 11.2%, compared to revenue of
$460.5 million for fiscal year 2008. This decrease reflects lower worldwide
volume in the organic Test business and Sensors segment, resulting from reduced
industrial capital spending, and an estimated $9.9 million unfavorable impact
of currency translation, partially offset by $23.6 million from SANS. Due to
the strong backlog position at the beginning of fiscal 2009, the percentage
rate decrease in organic revenue represents approximately one half of the rate
decrease in organic orders.

The following
is a comparison of fiscal year 2009 and fiscal year 2008 revenue by geography:

|               |  |                         |       |      |   |          |  |            |       |   |  |       |  
|-------------- |  | ----------------------- | ----- | ---- | - | -------- |  | ---------- | ----- | - |  | ----- | -
|Geography      |  | 2009                    |       | 2008 |   | Variance |  | % Variance |      
|               |  | (expressed in millions) |      
|Americas       |  | $                       | 141.8 |      | $ | 168.6    |  | $          | (26.8 | ) |  | -15.9 | %
|Europe         |  |                         | 128.7 |      |   | 152.0    |  |            | (23.3 | ) |  | -15.3 | %
|Asia           |  |                         | 138.4 |      |   | 139.9    |  |            | (1.5  | ) |  | -1.1  | %
|Total
 Revenue |  | $                       | 408.9 |      | $ | 460.5    |  | $          | (51.6 | ) |  | -11.2 | %

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

Gross profit Gross profit
was $151.6 million, a decrease of $38.7 million, or 20.3%, compared to gross
profit of $190.3 million for fiscal year 2008. Gross profit as a percentage of
revenue was 37.1%, a decrease of 4.2 percentage points from 41.3% for fiscal
year 2008. This decrease was driven by lower volume in the organic business,
and includes a 1.6 percentage point reduction due to $6.8 million severance and
benefit costs associated with workforce reduction actions, as well as a 1.2
percentage point reduction due to higher warranty expense in the organic Test
business. This was partially offset by a $3.1 million reduction in variable
compensation expense.

Selling and
Marketing ExpenseSelling and
marketing expense was $71.6 million, a decrease of $5.3 million, or 6.9%,
compared to $76.9 million for fiscal year 2008. This decrease was primarily due
to lower compensation and benefits resulting from a reduction in employees,
lower commissions and sales incentives, reduced discretionary spending, as well
as a $1.4 million reduction in variable compensation expense in the organic
business. These decreases were partially offset by a $4.2 million increase from
SANS, as well as $4.0 million severance and benefit costs associated with
workforce reduction actions. Selling and marketing expense as a percentage of
revenue was 17.5%, compared to 16.7% for fiscal year 2008.

17

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Table of Contents

General and
Administrative ExpenseGeneral and
administrative expense was $39.1 million, an increase of $3.7 million, or
10.5%, compared to $35.4 million for fiscal year 2008. This increase was
primarily driven by $7.8 million from SANS, $1.2 million severance and benefit
costs associated with workforce reduction actions, and increased legal expense
in the organic business. These increases were partially offset by lower
compensation and benefits resulting from a reduction in employees, reduced
discretionary spending, and a $2.2 million reduction in variable compensation
expense. General and administrative expense as a percentage of revenue was
9.6%, compared to 7.7% for fiscal year 2008.

Research and
Development ExpenseResearch and
development expense was $16.3 million, relatively flat compared to $16.2
million for fiscal year 2008, as increased spending in the organic Test
business on new product initiatives was partially offset by reduced spending in
the Sensors segment. In addition, the Company continued to allocate certain of
its resources towards capitalized software development activities during fiscal
year 2009. Total software development costs capitalized during fiscal years
2009 and 2008 were $3.9 million and $4.2 million, respectively. Research and
development expense as a percentage of revenue was 4.0%, compared to 3.5% for
fiscal year 2008.

Income from
OperationsIncome from
operations was $24.6 million, a decrease of $37.2 million, or 60.2%, compared
to income from operations of $61.8 million for fiscal year 2008. This decrease
was primarily driven by lower gross profit in the organic business, severance
and benefit costs associated with workforce reduction actions, as well as a
$3.0 million operating loss from SANS, partially offset by reduced operating
expenses in the organic business and reduced variable compensation expense.
Operating income as a percentage of revenue was 6.0%, compared to 13.4% for
fiscal year 2008.

A historical
level of inflation ranging from -1% to 4% impacted the Companys operating
costs. The Company uses a number of strategies to mitigate the effects of cost
inflation, including cost productivity initiatives such as global procurement
strategies, as well as increasing prices. 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 despite these strategies.

Interest ExpenseInterest
expense was $2.0 million, an increase of $0.9 million compared to $1.1 for
fiscal year 2008, as the interest expense incurred on the higher level of
short-term borrowings was partially offset by a reduction in fixed-rate
long-term debt.

Interest incomeInterest
income was $1.1 million, a decrease of $2.9 million compared to $4.0 million
for fiscal year 2008, due to lower interest rates, primarily in Europe.

Other Income, netOther income,
net was $0.2 million, a decrease of $0.6 million compared to $0.8 million of
net other income in fiscal year 2008. This decrease was primarily due to net
losses on foreign currency transactions compared to net gains on foreign
currency transactions in fiscal year 2008.

Provision for Income
TaxesProvision for
income taxes totaled $6.5 million, a decrease of $11.9 million, or 64.7%,
compared to $18.4 million for the fiscal year 2008. This decrease was primarily
due to decreased income before income taxes. The effective tax rate for both
fiscal years 2009 and 2008 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 effective tax rate from continuing operations was 27.2%, a
decrease of 0.8 percentage points compared to a tax rate of 28.0% for fiscal
year 2008. The effective tax rate for fiscal year 2009 was favorably impacted
by lower income before income taxes and a $1.0 million tax benefit from the
retroactive extension of U.S. R&D credits in fiscal year 2009, while the
effective tax rate for fiscal year 2008 was favorably impacted by a $3.7
million tax benefit from the repatriation of earnings from Japanese affiliates
and the successful closure of foreign tax audits.

18

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Table of Contents

Income before
Discontinued OperationsIncome before
discontinued operations was $17.4 million, or $1.03 per diluted share, a
decrease of $29.7 million, or 63.1%, compared to $47.1 million, or $2.68 per
diluted share, for fiscal year 2008. The decrease was primarily driven by lower
income from operations, which included pretax severance and benefits costs of
$12.1 million, or $0.48 per share.

Net IncomeNet income was
$17.4 million, or $1.03 per diluted share, for fiscal year 2009, a decrease of
64.6% compared to $49.2 million, or $2.80 per diluted share, for fiscal year
2008. Fiscal year 2008 net income includes a net gain from discontinued
operations of $2.1 million, or $0.12 per diluted share, resulting from the sale
of the Nano Instruments product line.

Segment Results

Test Segment

Orders and Backlog

The following
is a comparison of fiscal year 2009 and fiscal year 2008 orders for the Test
segment, separately identifying the impact of the SANS acquisition as well as
the impact of currency translation (in millions):

|       |  |                         |       |                           |   |                   |   |                       |      |      |   |      |   |   |       | 
|------ |  | ----------------------- | ----- | ------------------------- | - | ----------------- | - | --------------------- | ---- | ---- | - | ---- | - | - | ----- | 
|       |  | 2009                    |       | Organic
 Business
 Change |   | SANS
 Acquisition |   | Currency
 Translation |      | 2008 |  
|       |  | (expressed in millions) |      
|Orders |  | $                       | 275.0 |                           | $ | (133.7            | ) | $                     | 24.9 |      | $ | (6.0 | ) | $ | 389.8 | 

Orders totaled
$275.0 million, a decrease of $114.8 million, or 29.5%, compared to orders of
$389.8 million for fiscal year 2008, reflecting lower volume in the organic
business across all geographies due to sharply lower worldwide capital spending
in the segments markets, and an estimated $6.0 million unfavorable impact of
currency translation. This was partially offset by $24.9 million from SANS.
Fiscal 2009 orders included one large order totaling approximately $7 million.
Fiscal year 2008 orders included six large orders totaling approximately $52
million. The Company considers an individual order valued at an amount equal to
or greater than $5.0 million a large order. The Test segment accounted for
80.7% of total Company orders, compared to 80.3% for the fiscal 2008.

The following
is a comparison of fiscal year 2009 and fiscal year 2008 orders for the Test
segment by geography:

|             |  |                         |       |      |   |          |  |            |        |   |  |       |  
|------------ |  | ----------------------- | ----- | ---- | - | -------- |  | ---------- | ------ | - |  | ----- | -
|Geography    |  | 2009                    |       | 2008 |   | Variance |  | % Variance |       
|             |  | (expressed in millions) |      
|Americas     |  | $                       | 87.8  |      | $ | 150.6    |  | $          | (62.8  | ) |  | -41.7 | %
|Europe       |  |                         | 78.2  |      |   | 119.5    |  |            | (41.3  | ) |  | -34.6 | %
|Asia         |  |                         | 109.0 |      |   | 119.7    |  |            | (10.7  | ) |  | -8.9  | %
|Total Orders |  | $                       | 275.0 |      | $ | 389.8    |  | $          | (114.8 | ) |  | -29.5 | %

19

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Backlog of
undelivered orders at October 3, 2009 was $156.4 million, a decrease of 29.8%
from backlog of $222.8 million at September 27, 2008. Backlog included $9.9
million from SANS.

Results of Operations

The following
is a comparison of fiscal year 2009 and fiscal year 2008 results of operations
for the Test segment, separately identifying the impact of the SANS acquisition
as well as the impact of currency translation:

|                              |  |                          |       |                           |   |                   |   |                       |      |      |   |      |   |   |       |  
|----------------------------- |  | ------------------------ | ----- | ------------------------- | - | ----------------- | - | --------------------- | ---- | ---- | - | ---- | - | - | ----- | -
|                              |  | 2009                     |       | Organic
 Business
 Change |   | SANS
 Acquisition |   | Currency
 Translation |      | 2008 |  
|                              |  | (expressed
 in millions) |      
|Revenue                       |  | $                        | 342.6 |                           | $ | (37.5             | ) | $                     | 23.6 |      | $ | (7.6 | ) | $ | 364.1 |  
|Cost of sales                 |  |                          | 227.4 |                           |   | (10.0             | ) |                       | 14.6 |      |   | (5.6 | ) |   | 228.4 |  
|Gross profit                  |  |                          | 115.2 |                           |   | (27.5             | ) |                       | 9.0  |      |   | (2.0 | ) |   | 135.7 |  
|Gross margin                  |  |                          | 33.6  | %                         |   |                   |   |                       | 38.2 | %    |   |      |   |   | 37.3  | %
|                             
|Operating expenses:           |  |                          |       |                           |   |                   |   |                       |      |      |   |      |   |   |       |  
|Selling and marketing         |  |                          | 56.1  |                           |   | (5.8              | ) |                       | 4.2  |      |   | (1.5 | ) |   | 59.2  |  
|General administrative        |  |                          | 29.6  |                           |   | (2.2              | ) |                       | 7.8  |      |   | (0.3 | ) |   | 24.3  |  
|Research and development      |  |                          | 12.0  |                           |   | 0.9               |   |                       |     |      |   |     |   |   | 11.1  |  
|Total operating expenses      |  |                          | 97.7  |                           |   | (7.1              | ) |                       | 12.0 |      |   | (1.8 | ) |   | 94.6  |  
|Income (loss) from operations |  | $                        | 17.5  |                           | $ | (20.4             | ) | $                     | (3.0 | )    | $ | (0.2 | ) | $ | 41.1  |  

RevenueRevenue was
$342.6 million, a decrease of $21.5 million, or 5.9%, compared to revenue of
$364.1 million for fiscal year 2008, as the $23.6 million from SANS was
substantially offset by lower volume in the organic business across all
geographies, as well as an estimated $7.6 million unfavorable impact of
currency translation. Due to the strong backlog position at the beginning of
fiscal 2009, the percentage rate decrease in revenue in the organic business
represents approximately one half of the percentage rate decrease in orders.

The following
is a comparison of fiscal year 2009 and fiscal year 2008 revenue for the Test
segment by geography:

|               |  |                         |       |      |   |          |  |            |       |   |  |       |  
|-------------- |  | ----------------------- | ----- | ---- | - | -------- |  | ---------- | ----- | - |  | ----- | -
|Geography      |  | 2009                    |       | 2008 |   | Variance |  | % Variance |      
|               |  | (expressed in millions) |      
|Americas       |  | $                       | 122.8 |      | $ | 142.7    |  | $          | (19.9 | ) |  | -13.9 | %
|Europe         |  |                         | 96.3  |      |   | 104.1    |  |            | (7.8  | ) |  | -7.5  | %
|Asia           |  |                         | 123.5 |      |   | 117.3    |  |            | 6.2   |   |  | 5.3   | %
|Total
 Revenue |  | $                       | 342.6 |      | $ | 364.1    |  | $          | (21.5 | ) |  | -5.9  | %

Gross ProfitGross profit was $115.2
million, a decrease of $20.5 million, or 15.1%, compared to gross profit of
$135.7 million for fiscal year 2008. Gross profit as a percentage of revenue
was 33.6%, a decrease of 3.7 percentage points from 37.3% for fiscal year 2008.
This decrease was primarily due to the revenue volume decline, and includes a
1.9 percentage point reduction due to $6.5 million severance and benefit costs
associated with workforce reduction actions, as well as a 1.5 percentage point reduction
due to higher warranty expense in the organic Test business driven by a higher
rate of claims. This was partially offset by a $3.0 million reduction in
variable compensation expense.

20

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Selling and Marketing Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Selling and
 marketing expense was $56.1 million, a decrease of $3.1 million, or 5.2%,
 compared to $59.2 million for fiscal year 2008. This decrease was primarily
 due to lower compensation and benefits, resulting from a reduction in
 workforce, lower commissions and sales incentives, reduced discretionary
 spending and a $0.9 million reduction in variable compensation expense in the
 organic business. These decreases were partially offset by $4.2 million
 increase from SANS, as well as $3.2 million severance and benefit costs
 associated with workforce reduction actions. Selling and marketing expense as
 a percentage of revenue was 16.4%, compared to 16.3% for fiscal year 2008.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|General and Administrative Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|General and
 administrative expense was $29.6 million, an increase of $5.3 million, or
 21.8%, compared to $24.3 million for fiscal year 2008. This increase was
 primarily driven by $7.8 million from SANS, $1.2 million severance and
 benefit costs associated with workforce reduction actions, and increased
 legal fees in the organic business. These increases were partially offset by
 lower compensation and benefits resulting from a reduction in workforce,
 reduced discretionary spending, and a $1.6 million reduction in variable
 compensation expense. General and administrative expense as a percentage of
 revenue was 8.6%, compared to 6.7% for fiscal year 2008.                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Research and Development Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Research and
 development expense was $12.0 million, an increase of $0.9 million, or 8.1%,
 compared to $11.1 million for fiscal year 2008, driven by a planned increase
 in spending on new product initiatives. In addition, the Company continued to
 allocate certain of its resources towards capitalized software development
 activities during fiscal year 2009. Total software development costs
 capitalized during fiscal years 2009 and 2008 were $3.9 million and $4.2
 million, respectively. Research and development expense as a percentage of
 revenue was 3.5%, compared to 3.0% for fiscal year 2008.                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Income from Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Income from
 operations was $17.5 million, a decrease of $23.6 million, or 57.4%, compared
 to income from operations of $41.1 million for fiscal year 2008. This
 decrease was primarily due to lower gross profit in the organic business,
 severance and benefit costs associated with workforce reduction actions, as
 well as a $3.0 million operating loss from SANS, partially offset by reduced
 operating expenses in the organic business and reduced variable compensation
 expense. Operating income as a percentage of revenue was 5.1%, compared to
 11.3% for fiscal year 2008.                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|SANS Acquisition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Orders and
 revenue were $24.9 million and $23.6 million, respectively. Gross profit as a
 percentage of revenue was 38.2%. Gross profit includes a $1.9 million
 reduction associated with the sale of inventory that was written up to fair
 value as part of the acquisition, which negatively impacted the gross margin
 rate by 7.8 percentage points. Loss from operations was $3.0 million, driven
 by reduced gross profit and increased operating expenses associated with
 integration activities.                                                                                                                                                                                                    

Sensors Segment

Orders and Backlog

The following
is a comparison of fiscal 2009 and fiscal 2008 orders for the Sensors segment,
separately identifying the impact of currency translation:

|       |  |                         |      |                  |   |                       |   |      |      |   |   |      | 
|------ |  | ----------------------- | ---- | ---------------- | - | --------------------- | - | ---- | ---- | - | - | ---- | 
|       |  | 2009                    |      | Business
 Change |   | Currency
 Translation |   | 2008 |     
|       |  | (expressed in millions) |     
|Orders |  | $                       | 65.8 |                  | $ | (27.6                 | ) | $    | (2.1 | ) | $ | 95.5 | 

Orders totaled
$65.8 million, a decrease of $29.7 million, or 31.1%, compared to orders of
$95.5 million for fiscal year 2008, primarily due to lower volume across all
geographies resulting from sharply lower demand in worldwide industrial capital
spending and a reduction in customer inventory levels. Sensors segment
accounted for 19.3% of total Company orders, compared to 19.7% for fiscal year
2008.

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The following
is a comparison of fiscal year 2009 and fiscal year 2008 orders for the Sensors
segment by geography:

|             |  |                         |      |      |   |          |  |            |       |   |  |       |  
|------------ |  | ----------------------- | ---- | ---- | - | -------- |  | ---------- | ----- | - |  | ----- | -
|Geography    |  | 2009                    |      | 2008 |   | Variance |  | % Variance |      
|             |  | (expressed in millions) |     
|Americas     |  | $                       | 20.5 |      | $ | 25.6     |  | $          | (5.1  | ) |  | -19.9 | %
|Europe       |  |                         | 30.5 |      |   | 48.9     |  |            | (18.4 | ) |  | -37.6 | %
|Asia         |  |                         | 14.8 |      |   | 21.0     |  |            | (6.2  | ) |  | -29.5 | %
|Total Orders |  | $                       | 65.8 |      | $ | 95.5     |  | $          | (29.7 | ) |  | -31.1 | %

Backlog of
undelivered orders at October 3, 2009 was $11.3 million, a decrease of 5.0%
from backlog of $11.9 million at September 27, 2008.

Results of Operations

Fiscal Year 2009 Compared to Fiscal Year 2008

The following
is a comparison of fiscal year 2009 and fiscal year 2008 results of operations
for the Sensors segment, separately identifying the impact of currency
translation:

|                               |  |                         |      |                  |   |                       |   |      |      |   |   |      |  
|------------------------------ |  | ----------------------- | ---- | ---------------- | - | --------------------- | - | ---- | ---- | - | - | ---- | -
|                               |  | 2009                    |      | Business
 Change |   | Currency
 Translation |   | 2008 |     
|                               |  | (expressed in millions) |     
|Revenue                        |  | $                       | 66.3 |                  | $ | (27.8                 | ) | $    | (2.3 | ) | $ | 96.4 |  
|Cost of sales                  |  |                         | 29.9 |                  |   | (11.0                 | ) |      | (0.9 | ) |   | 41.8 |  
|Gross
 profit                  |  |                         | 36.4 |                  |   | (16.8                 | ) |      | (1.4 | ) |   | 54.6 |  
|Gross margin                   |  |                         | 54.9 | %                |   |                       |   |      |      |   |   | 56.6 | %
|                               |  |                         |      |                  |   |                       |   |      |      |   |   |      |  
|Operating
 expenses:           |  |                         |      |                  |   |                       |   |      |      |   |   |      |  
|Selling and marketing          |  |                         | 15.5 |                  |   | (1.8                  | ) |      | (0.4 | ) |   | 17.7 |  
|General administrative         |  |                         | 9.5  |                  |   | (1.4                  | ) |      | (0.2 | ) |   | 11.1 |  
|Research and development       |  |                         | 4.3  |                  |   | (0.6                  | ) |      | (0.2 | ) |   | 5.1  |  
|Total
 operating expenses      |  |                         | 29.3 |                  |   | (3.8                  | ) |      | (0.8 | ) |   | 33.9 |  
|Income
 (loss) from operations |  | $                       | 7.1  |                  | $ | (13.0                 | ) | $    | (0.6 | ) | $ | 20.7 |  

|                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Revenue                                                                                                                                                                                                  
|Revenue was
 $66.3 million, a decrease of $30.1 million, or 31.2%, compared to revenue of
 $96.4 million for the fiscal year 2008. This decrease was primarily driven by
 reduced worldwide order volume.

The following
is a comparison of fiscal year 2009 and fiscal year 2008 revenue for the
Sensors segment by geography:

|               |  |                         |      |      |   |          |  |            |       |   |  |       |  
|-------------- |  | ----------------------- | ---- | ---- | - | -------- |  | ---------- | ----- | - |  | ----- | -
|Geography      |  | 2009                    |      | 2008 |   | Variance |  | % Variance |      
|               |  | (expressed in millions) |     
|Americas       |  | $                       | 19.0 |      | $ | 25.9     |  | $          | (6.9  | ) |  | -26.6 | %
|Europe         |  |                         | 32.4 |      |   | 47.9     |  |            | (15.5 | ) |  | -32.4 | %
|Asia           |  |                         | 14.9 |      |   | 22.6     |  |            | (7.7  | ) |  | -34.1 | %
|Total
 Revenue |  | $                       | 66.3 |      | $ | 96.4     |  | $          | (30.1 | ) |  | -31.2 | %

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Gross Profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Gross profit
 was $36.4 million, a decrease of $18.2 million, or 33.3%, compared to gross
 profit of $54.6 million for fiscal year 2008. Gross profit as a percentage of
 revenue was 54.9%, a decrease of 1.7 percentage points from 56.6% for fiscal
 year 2008. This decrease was primarily due to reduced volume, and $0.3
 million severance and benefit costs associated with workforce reduction
 actions, partially offset by $0.2 million reduced variable compensation
 expense.                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Selling and Marketing Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Selling and
 marketing expense was $15.5 million, a decrease of $2.2 million, or 12.4%,
 compared to $17.7 million for fiscal year 2008. The decrease is primarily due
 to reduced discretionary spending, lower commission expense, and $0.4 million
 reduced variable compensation expense, partially offset by $0.8 million
 severance and benefit costs associated with workforce reduction actions.
 Selling and marketing expense as a percentage of revenue was 23.4%, compared
 to 18.4% for fiscal year 2008.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|General and Administrative Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|General and
 administrative expense was $9.5 million, a decrease of $1.6 million, or
 14.4%, compared to $11.1 million for fiscal year 2008, primarily due to
 reduced compensation and benefits expense, including a $0.6 million reduction
 in variable compensation, as well as reduced discretionary spending. General
 and administrative expense as a percentage of revenue was 14.3%, compared to
 11.5% for fiscal year 2008.                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Research and Development Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Research and
 development expense was $4.3 million, a decrease of $0.8 million, or 15.7%,
 compared to $5.1 million for fiscal year 2008. The decrease was due to
 planned reduction in spending. Research and development expense as a
 percentage of revenue was 6.5%, compared to 5.3% for fiscal year 2008.                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Income from operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Income from
 operations was $7.1 million, a decrease of $13.6 million, or 65.7%, compared
 to income from operations of $20.7 million for fiscal year 2008, primarily
 due to lower gross profit, partially offset by reduced operating expenses.
 Operating income as a percentage of revenue was 10.7%, compared to 21.5% for
 fiscal year 2008.                                                                                                                                                                    

Fiscal Year 2008 Compared to Fiscal Year 2007

Summary of Financial Results

Highlights for
Fiscal Year 2008 include:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 net of tax gain of $2.4 million,
 or $0.14 per diluted share, 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.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Orders
 increased 15.2% to $485.3 million, compared to orders of $421.4 million for
 fiscal year 2007. The increase in orders represents growth of 14.4% and 18.2%
 in the Test and Sensors segments, respectively, and includes an estimated
 $21.1 million favorable impact of currency translation. Backlog of
 undelivered orders at September 27, 2008 was $234.7 million, an increase of
 14.7% from backlog of $204.6 million at September 29, 2007.                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Revenue
 increased 12.3% to $460.5 million, compared to $410.1 million for fiscal year
 2007. This increase 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.                                                                                                                                                                                                                                                                                                                                                   

23

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income from
 operations increased 14.4% to $61.8 million, compared to $54.0 million for
 fiscal year 2007. This increase was primarily due to higher volume and lower
 research and development expense, partially offset by unfavorable product mix
 and higher custom project costs in the Test segment. This increase was
 partially offset by planned increases in operating expenditures to support
 strategic initiatives.                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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. The increase was primarily due to stronger operating
 performance in both segments, $1.1 million increased income from discontinued
 operations associated with a gain on the sale of the Nano product line during
 fiscal year 2008, 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.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Cash and
 cash equivalents at September 27, 2008 totaled $114.1 million, compared to
 $104.3 million at the end of fiscal year 2007. Cash flows from operations
 generated $30.2 million. During fiscal year 2008, the Company borrowed $24.0
 million from its credit facility, made a $13.7 million initial investment
 towards the acquisition of SANS, invested $9.8 million in capital
 expenditures, and purchased approximately 1.0 million shares of common stock
 for $42.0 million.                                                                                                                                   

Detailed Financial Results

Total Company

Orders and Backlog

The following
is a comparison of fiscal year 2008 and fiscal year 2007 orders, separately
identifying the impact of currency translation:

|       |  |                         |       |                  |   |                       |  |      |      |  |   |       | 
|------ |  | ----------------------- | ----- | ---------------- | - | --------------------- |  | ---- | ---- |  | - | ----- | 
|       |  | 2008                    |       | Business
 Change |   | Currency
 Translation |  | 2007 |     
|       |  | (expressed in millions) |      
|Orders |  | $                       | 485.3 |                  | $ | 42.8                  |  | $    | 21.1 |  | $ | 421.4 | 

Orders totaled
$485.3 million, an increase of $63.9 million, or 15.2%, compared to orders of
$421.4 million for fiscal year 2007. The increase was 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 following
is a comparison of fiscal year 2008 and fiscal year 2007 orders by geography:

|             |  |                         |       |      |   |          |  |            |      |  |  |      |  
|------------ |  | ----------------------- | ----- | ---- | - | -------- |  | ---------- | ---- |  |  | ---- | -
|Geography    |  | 2008                    |       | 2007 |   | Variance |  | % Variance |     
|             |  | (expressed in millions) |      
|Americas     |  | $                       | 176.2 |      | $ | 149.4    |  | $          | 26.8 |  |  | 17.9 | %
|Europe       |  |                         | 168.4 |      |   | 134.5    |  |            | 33.9 |  |  | 25.2 | %
|Asia         |  |                         | 140.7 |      |   | 137.5    |  |            | 3.2  |  |  | 2.3  | %
|Total Orders |  | $                       | 485.3 |      | $ | 421.4    |  | $          | 63.9 |  |  | 15.2 | %

Backlog of
undelivered orders at September 27, 2008 was $234.7 million, an increase of
14.7% from backlog of $204.6 million at September 29, 2007.

24

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Table of Contents

Results of Operations

The following
is a comparison of fiscal year 2008 and fiscal year 2007 statements of
operations (in millions, except per share data):

|                                                        |  |      |       |      |   |          |   |            |      |   |  |        |  
|------------------------------------------------------- |  | ---- | ----- | ---- | - | -------- | - | ---------- | ---- | - |  | ------ | -
|                                                        |  | 2008 |       | 2007 |   | Variance |   | % Variance |     
|Revenue                                                 |  | $    | 460.5 |      | $ | 410.1    |   | $          | 50.4 |   |  | 12.3   | %
|Cost of sales                                           |  |      | 270.2 |      |   | 236.5    |   |            | 33.7 |   |  | 14.2   | %
|Gross profit                                            |  |      | 190.3 |      |   | 173.6    |   |            | 16.7 |   |  | 9.6    | %
|Gross margin                                            |  |      | 41.3  | %    |   | 42.3     | % |            | -1.0 | % |  |        |  
|                                                        |  |      |       |      |   |          |   |            |      |   |  |        |  
|Operating expenses:                                     |  |      |       |      |   |          |   |            |      |   |  |        |  
|Selling and marketing                                   |  |      | 76.9  |      |   | 68.9     |   |            | 8.0  |   |  | 11.6   | %
|General administrative                                  |  |      | 35.4  |      |   | 32.2     |   |            | 3.2  |   |  | 9.9    | %
|Research and development                                |  |      | 16.2  |      |   | 19.3     |   |            | (3.1 | ) |  | -16.1  | %
|Total operating expenses                                |  |      | 128.5 |      |   | 120.4    |   |            | 8.1  |   |  | 6.7    | %
|Gain on sale of assets                                  |  |      |      |      |   | 0.7      |   |            | (0.7 | ) |  | -100.0 | %
|Income from operations                                  |  |      | 61.8  |      |   | 53.9     |   |            | 7.9  |   |  | 14.7   | %
|Interest expense                                        |  |      | (1.1  | )    |   | (1.3     | ) |            | 0.2  |   |  | -15.4  | %
|Interest income                                         |  |      | 4.0   |      |   | 3.9      |   |            | 0.1  |   |  | 2.6    | %
|Other income, net                                       |  |      | 0.8   |      |   |         |   |            | 0.8  |   |  | 100.0  | %
|Income before income taxes and discontinued
 operations |  |      | 65.5  |      |   | 56.5     |   |            | 9.0  |   |  | 15.9   | %
|Provision for income taxes                              |  |      | 18.4  |      |   | 15.5     |   |            | 2.9  |   |  | 18.7   | %
|Income before discontinued operations                   |  |      | 47.1  |      |   | 41.0     |   |            | 6.1  |   |  | 14.9   | %
|Income from discontinued operations, net of tax         |  |      | 2.1   |      |   | 1.0      |   |            | 1.1  |   |  | 110.0  | %
|Net income                                              |  | $    | 49.2  |      | $ | 42.0     |   | $          | 7.2  |   |  | 17.1   | %
|                                                        |  |      |       |      |   |          |   |            |      |   |  |        |  
|Diluted earnings per share                              |  | $    | 2.80  |      | $ | 2.29     |   | $          | 0.51 |   |  | 22.3   | %

The following
is a comparison of fiscal year 2008 and fiscal year 2007 results of operations,
separately identifying the impact of currency translation:

|                          |  |                         |       |                  |   |                       |   |      |      |  |   |       |  
|------------------------- |  | ----------------------- | ----- | ---------------- | - | --------------------- | - | ---- | ---- |  | - | ----- | -
|                          |  | 2008                    |       | Business
 Change |   | Currency
 Translation |   | 2007 |     
|                          |  | (expressed in millions) |      
|Revenue                   |  | $                       | 460.5 |                  | $ | 28.3                  |   | $    | 22.1 |  | $ | 410.1 |  
|Cost of
 sales            |  |                         | 270.2 |                  |   | 18.8                  |   |      | 14.9 |  |   | 236.5 |  
|Gross
 profit             |  |                         | 190.3 |                  |   | 9.5                   |   |      | 7.2  |  |   | 173.6 |  
|Gross margin              |  |                         | 41.3  | %                |   |                       |   |      |      |  |   | 42.3  | %
|                          |  |                         |       |                  |   |                       |   |      |      |  |   |       |  
|Operating
 expenses:      |  |                         |       |                  |   |                       |   |      |      |  |   |       |  
|Selling and marketing     |  |                         | 76.9  |                  |   | 5.1                   |   |      | 2.9  |  |   | 68.9  |  
|General administrative    |  |                         | 35.4  |                  |   | 2.2                   |   |      | 1.0  |  |   | 32.2  |  
|Research and development  |  |                         | 16.2  |                  |   | (3.3                  | ) |      | 0.2  |  |   | 19.3  |  
|Total
 operating expenses |  |                         | 128.5 |                  |   | 4.0                   |   |      | 4.1  |  |   | 120.4 |  
|Gain on sale of assets    |  |                         |      |                  |   | (0.7                  | ) |      |     |  |   | 0.7   |  
|Income
 from operations   |  | $                       | 61.8  |                  | $ | 4.8                   |   | $    | 3.1  |  | $ | 53.9  |  

|                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Revenue                                                                                                                                                                                                                                                                                                                                     
|Revenue was
 $460.5 million, an increase of $50.4 million, or 12.3%, compared to revenue
 of $410.1 million for fiscal year 2007. The increase 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.

25

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The following
is a comparison of fiscal year 2008 and fiscal year 2007 revenue by geography:

|               |  |                         |       |      |   |          |  |            |      |  |  |      |  
|-------------- |  | ----------------------- | ----- | ---- | - | -------- |  | ---------- | ---- |  |  | ---- | -
|Geography      |  | 2008                    |       | 2007 |   | Variance |  | % Variance |     
|               |  | (expressed in millions) |      
|Americas       |  | $                       | 168.6 |      | $ | 148.8    |  | $          | 19.8 |  |  | 13.3 | %
|Europe         |  |                         | 152.0 |      |   | 147.5    |  |            | 4.5  |  |  | 3.1  | %
|Asia           |  |                         | 139.9 |      |   | 113.8    |  |            | 26.1 |  |  | 22.9 | %
|Total
 Revenue |  | $                       | 460.5 |      | $ | 410.1    |  | $          | 50.4 |  |  | 12.3 | %

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

Gross ProfitGross profit was $190.3 million, an increase of
$16.7 million, or 9.6%, compared to gross profit of $173.6 million for fiscal
year 2007. Gross profit as a percentage of revenue was 41.3%, a decrease of 1.0
percentage points from 42.3% for fiscal year 2007. The decrease was primarily
due to unfavorable product mix and higher custom project costs in the Test
segment, partially offset by increased volume.

Selling and
Marketing ExpenseSelling and marketing expense was $76.9 million,
an increase of $8.0 million, or 11.6%, compared to $68.9 million for fiscal
year 2007. This increase was primarily due to increased compensation, benefits
and commissions in the Test segment, and planned investment in strategic sales
and marketing initiatives in the Sensors segment. These increases were
partially offset by a reduction in bad debt expense. Selling and marketing
expense as a percentage of revenue was 16.7%, compared to 16.8% for fiscal year
2007.

General and
Administrative ExpenseGeneral and administrative expense was $35.4
million, an increase of $3.2 million, or 9.9%, compared to $32.2 million for
fiscal year 2007. This increase was primarily due to $1.5 million of
integration costs related to the acquisition of SANS, and increased compensation
and benefits and legal fees, partially offset by a reduction in various other
discretionary expenses. General and administrative expense as a percentage of
revenue was 7.7%, compared to 7.9% for fiscal year 2007.

Research and
Development expenseResearch and development expense was $16.2
million, a decrease of $3.1 million, or 16.1%, compared to $19.3 million for
fiscal year 2007. Research and development expense includes expenses for both
equipment and software development in the Test and Sensors segments. During
fiscal year 2008, 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 2008 were $4.2 million. Research
and development expense as a percentage of revenue was 3.5%, compared to 4.7%
for fiscal year 2007.

Gain on sale of
AssetsGain on sale of assets of $0.7 million for fiscal
year 2007 resulted from the sale of assets associated with the Companys linear
friction welding technology.

Income from
OperationsIncome from operations was $61.8 million, an increase of $7.9 million, or
14.7%, compared to $53.9 million for fiscal year 2007. This increase 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. Operating income as a percentage of revenue was
13.4% compared to 13.2% for fiscal year 2007.

Interest ExpenseInterest expense was $1.1 million, a decrease of
$0.2 million, or 15.4%, compared to $1.3 million for fiscal year 2007. This
decrease was primarily due to reductions in outstanding long-term debt.

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Interest IncomeInterest income was $4.0 million, an increase of
$0.1 million, or 2.6%, compared to $3.9 million for fiscal year 2007. This
increase was due to higher global interest rates that 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, netOther income, net was $0.8 million, an increase of
$0.8 million compared to less than $0.1 million of net other income for fiscal
year 2007. 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
other miscellaneous income, which was mainly offset by a net loss of $0.6
million related to currency transactions.

Provision for Income
TaxesProvision for income taxes totaled $18.4 million,
an increase of $2.9 million, or 18.7%, compared to $15.5 million for fiscal
year 2007. 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. 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.

Income before
Discontinued OperationsIncome before discontinued operations was $47.1
million, or $2.68 per diluted share, an increase of $6.1 million, or 14.9%,
compared to $41.0 million, or $2.24 per diluted share, for fiscal year 2008.
The increase was primarily driven by higher income from operations and a $1.0
million favorable impact of foreign currency transaction gains.

Net IncomeNet income was $49.2 million, or $2.80 per diluted
share, an increase of $7.2 million, or 17.1%, compared to $42.0 million, or
$2.29 per diluted share for fiscal year 2007. Fiscal year 2008 net income
included a net gain from discontinued operations of $2.1 million, compared to
net income from discontinued operations of $1.0 million for fiscal year 2007.

Discontinued
OperationsOn 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.

The Company
does not allocate interest income or interest expense to discontinued
operations. There were no significant operating results of discontinued
operations during the fiscal year ended October 3, 2009. Operating results of
discontinued operations included in the Companys results for the fiscal years
ended September 27, 2008, and September 29, 2007 were as follows:

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

There were no
significant assets or liabilities of discontinued operations at October 3,
2009. The assets and liabilities of discontinued operations at September 27,
2008 were as follows:

|                                                              |  |                         |     | 
|------------------------------------------------------------- |  | ----------------------- | --- | 
|                                                              |  | 2008                    |    
|                                                              |  | (expressed inthousands) |    
|Accounts receivable, net of
 allowances for doubtful accounts |  | $                       | 149 | 
|Unbilled accounts
 receivable                                 |  |                         | 88  | 
|Current deferred tax assets                                   |  |                         | 143 | 
|Total assets of
 discontinued operations                      |  | $                       | 380 | 
|                                                              |  |                         |     | 
|Accrued income taxes                                          |  | $                       | 177 | 
|Total liabilities of
 discontinued operations                 |  | $                       | 177 | 

Segment Results

Test Segment

Orders and Backlog

The following
is a comparison of fiscal year 2008 and fiscal year 2007 orders for the Test
segment, separately identifying the impact of the SANS acquisition as well as
the impact of currency translation:

|       |  |                         |       |                  |   |                       |  |      |      |  |   |       | 
|------ |  | ----------------------- | ----- | ---------------- | - | --------------------- |  | ---- | ---- |  | - | ----- | 
|       |  | 2008                    |       | Business
 Change |   | Currency
 Translation |  | 2007 |     
|       |  | (expressed in millions) |      
|Orders |  | $                       | 389.8 |                  | $ | 35.1                  |  | $    | 14.1 |  | $ | 340.6 | 

Orders totaled
$389.8 million, an increase of $49.2 million, or 14.4%, compared to orders of
$340.6 million for fiscal year 2007. The increase 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 Test segment accounted for 80.3% of total Company orders, compared
to 80.8% for fiscal year 2007.

The following
is a comparison of fiscal year 2008 and fiscal year 2007 orders for the Test
segment by geography:

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|             |  |                         |       |      |   |          |  |            |      |   |  |      |  
|------------ |  | ----------------------- | ----- | ---- | - | -------- |  | ---------- | ---- | - |  | ---- | -
|Geography    |  | 2008                    |       | 2007 |   | Variance |  | % Variance |     
|             |  | (expressed in millions) |      
|Americas     |  | $                       | 150.6 |      | $ | 125.5    |  | $          | 25.1 |   |  | 20.0 | %
|Europe       |  |                         | 119.5 |      |   | 94.6     |  |            | 24.9 |   |  | 26.3 | %
|Asia         |  |                         | 119.7 |      |   | 120.5    |  |            | (0.8 | ) |  | -0.7 | %
|Total Orders |  | $                       | 389.8 |      | $ | 340.6    |  | $          | 49.2 |   |  | 14.4 | %

Backlog of
undelivered orders at September 27, 2008 was $222.8 million, an increase of
15.7% from backlog of $192.6 million at September 29, 2007.

Results of Operations

The following
is a comparison of fiscal year 2008 and fiscal year 2007 results of operations
for the Test segment, separately identifying the impact of currency translation
(in millions):

|                          |  |                         |       |                  |   |                       |   |      |      |  |   |       |  
|------------------------- |  | ----------------------- | ----- | ---------------- | - | --------------------- | - | ---- | ---- |  | - | ----- | -
|                          |  | 2008                    |       | Business
 Change |   | Currency
 Translation |   | 2007 |     
|                          |  | (expressed in millions) |      
|Revenue                   |  | $                       | 364.1 |                  | $ | 16.2                  |   | $    | 14.7 |  | $ | 333.2 |  
|Cost of
 sales            |  |                         | 228.4 |                  |   | 14.4                  |   |      | 11.6 |  |   | 202.4 |  
|Gross
 profit             |  |                         | 135.7 |                  |   | 1.8                   |   |      | 3.1  |  |   | 130.8 |  
|Gross margin              |  |                         | 37.3  | %                |   |                       |   |      |      |  |   | 39.3  | %
|                          |  |                         |       |                  |   |                       |   |      |      |  |   |       |  
|Operating
 expenses:      |  |                         |       |                  |   |                       |   |      |      |  |   |       |  
|Selling and marketing     |  |                         | 59.2  |                  |   | 2.7                   |   |      | 1.8  |  |   | 54.7  |  
|General administrative    |  |                         | 24.3  |                  |   | 1.2                   |   |      | 0.5  |  |   | 22.6  |  
|Research and development  |  |                         | 11.1  |                  |   | (4.0                  | ) |      |     |  |   | 15.1  |  
|Total
 operating expenses |  |                         | 94.6  |                  |   | (0.1                  | ) |      | 2.3  |  |   | 92.4  |  
|Gain on sale of assets    |  |                         |      |                  |   | (0.7                  | ) |      |     |  |   | 0.7   |  
|Income
 from operations   |  | $                       | 41.1  |                  | $ | 1.2                   |   | $    | 0.8  |  | $ | 39.1  |  

RevenueRevenue was $364.1 million, an increase of $30.9
million, or 9.3%, compared to revenue of $333.2 million for fiscal year 2007.
The increase was primarily due to an increase in custom business and an
estimated $14.7 million favorable impact of currency translation.

The following
is a comparison of fiscal year 2008 and fiscal year 2007 revenue for the Test
segment by geography:

|               |  |                         |       |      |   |          |  |            |      |   |  |      |  
|-------------- |  | ----------------------- | ----- | ---- | - | -------- |  | ---------- | ---- | - |  | ---- | -
|Geography      |  | 2008                    |       | 2007 |   | Variance |  | % Variance |     
|               |  | (expressed in millions) |      
|Americas       |  | $                       | 142.7 |      | $ | 125.6    |  | $          | 17.1 |   |  | 13.6 | %
|Europe         |  |                         | 104.1 |      |   | 108.5    |  |            | (4.4 | ) |  | -4.1 | %
|Asia           |  |                         | 117.3 |      |   | 99.1     |  |            | 18.2 |   |  | 18.4 | %
|Total
 Revenue |  | $                       | 364.1 |      | $ | 333.2    |  | $          | 30.9 |   |  | 9.3  | %

Gross ProfitGross profit was $135.7 million, an increase of
$4.9 million, or 3.7%, compared to gross profit of $130.8 million for fiscal
year 2007. Gross profit as a percentage of revenue was 37.3%, a decrease of 2.0
percentage points from 39.3% for fiscal year 2007. The decrease in gross profit
rate 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.

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Selling and
Marketing ExpenseSelling and marketing expense was $59.2 million,
an increase of $4.5 million, or 8.2%, compared to $54.7 million for fiscal year
2007. This increase was primarily due to increased compensation, benefits and
commissions, partially offset by a $0.4 million reduction in bad debt expense.
Selling and marketing expense as a percentage of revenue was 16.3%, compared to
16.4% for fiscal year 2007.

General and
Administrative ExpenseGeneral and administrative expense was $24.3 million,
an increase of $1.7 million, or 7.5%, compared to $22.6 million for fiscal year
2007. This increase was primarily due to $1.5 million of costs to support the
acquisition of SANS, and increased compensation and benefits and legal fees,
partially offset by a reduction in various other discretionary expenses.
General and administrative expense as a percentage of revenue was 6.7%,
compared to 6.8% for fiscal year 2007.

Research and
Development ExpenseResearch and development expense was $11.1
million, a decrease of $4.0 million, or 26.5%, compared to $15.1 million for
fiscal year 2007, as the Company allocated certain of its own 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. Research and development expense as a percentage of revenue
was 3.0%, compared to 4.5% for fiscal year 2007.

Income from
OperationsIncome from operations was $41.1 million, an
increase of $1.9 million, or 4.8%, compared to income from operations of $39.2
million for fiscal year 2007. This increase was primarily due to increased
gross profit and lower research and development expense, partially offset by
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.
Operating income as a percentage of revenue was 11.3%, compared to 11.8% for
fiscal year 2007.

Sensors Segment

Orders and Backlog

The following
is a comparison of fiscal year 2008 and fiscal year 2007 orders for the Sensors
segment, separately identifying the impact of currency translation:

|       |  |                         |      |                  |   |                       |  |      |     |  |   |      | 
|------ |  | ----------------------- | ---- | ---------------- | - | --------------------- |  | ---- | --- |  | - | ---- | 
|       |  | 2008                    |      | Business
 Change |   | Currency
 Translation |  | 2007 |    
|       |  | (expressed in millions) |     
|Orders |  | $                       | 95.5 |                  | $ | 7.7                   |  | $    | 7.0 |  | $ | 80.8 | 

Orders totaled
$95.5 million, an increase of $14.7 million, or 18.2%, compared to orders of
$80.8 million for fiscal year 2007, primarily due to continued worldwide growth
and an estimated $7.0 million favorable impact of currency translation. Sensors
segment accounted for 19.7% of total Company orders, compared to 19.2% for
fiscal year 2007.

The following
is a comparison of fiscal year 2008 and fiscal year 2007 orders for the Sensors
segment by geography:

|             |  |                         |      |      |   |          |  |            |      |  |  |      |  
|------------ |  | ----------------------- | ---- | ---- | - | -------- |  | ---------- | ---- |  |  | ---- | -
|Geography    |  | 2008                    |      | 2007 |   | Variance |  | % Variance |     
|             |  | (expressed in millions) |     
|Americas     |  | $                       | 25.6 |      | $ | 23.9     |  | $          | 1.7  |  |  | 7.1  | %
|Europe       |  |                         | 48.9 |      |   | 39.9     |  |            | 9.0  |  |  | 22.6 | %
|Asia         |  |                         | 21.0 |      |   | 17.0     |  |            | 4.0  |  |  | 23.5 | %
|Total Orders |  | $                       | 95.5 |      | $ | 80.8     |  | $          | 14.7 |  |  | 18.2 | %

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Backlog of undelivered
orders at September 27, 2008 was $11.9 million, relatively flat compared to
backlog of $12.0 million at September 29, 2007.

Results of Operations

The following
is a comparison of fiscal year 2008 and fiscal year 2007 results of operations
for the Sensors segment, separately identifying the impact of currency
translation (in millions):

|                          |  |                          |      |                  |   |                       |  |      |     |  |   |      |  
|------------------------- |  | ------------------------ | ---- | ---------------- | - | --------------------- |  | ---- | --- |  | - | ---- | -
|                          |  | 2008                     |      | Business
 Change |   | Currency
 Translation |  | 2007 |    
|                          |  | (expressed
 in millions) |     
|Revenue                   |  | $                        | 96.4 |                  | $ | 12.1                  |  | $    | 7.4 |  | $ | 76.9 |  
|Cost of
 sales            |  |                          | 41.8 |                  |   | 4.4                   |  |      | 3.3 |  |   | 34.1 |  
|Gross profit              |  |                          | 54.6 |                  |   | 7.7                   |  |      | 4.1 |  |   | 42.8 |  
|Gross margin              |  |                          | 56.6 | %                |   |                       |  |      |     |  |   | 55.6 | %
|                         
|Operating
 expenses:      |  |                          |      |                  |   |                       |  |      |     |  |   |      |  
|Selling and marketing     |  |                          | 17.7 |                  |   | 2.4                   |  |      | 1.1 |  |   | 14.2 |  
|General administrative    |  |                          | 11.1 |                  |   | 1.0                   |  |      | 0.5 |  |   | 9.6  |  
|Research and development  |  |                          | 5.1  |                  |   | 0.7                   |  |      | 0.2 |  |   | 4.2  |  
|Total
 operating expenses |  |                          | 33.9 |                  |   | 4.1                   |  |      | 1.8 |  |   | 28.0 |  
|Income
 from operations   |  | $                        | 20.7 |                  | $ | 3.6                   |  | $    | 2.3 |  | $ | 14.8 |  

RevenueRevenue was $96.4 million, an increase of $19.5
million, or 25.4%, compared to revenue of $76.9 million for fiscal year 2007.
This increase was primarily due to higher beginning backlog, increased
worldwide order volume, and an estimated $7.4 million favorable impact of
currency translation.

The following
is a comparison of fiscal year 2008 and fiscal year 2007 revenue for the
Sensors segment by geography:

|              |  |                         |      |      |   |          |  |            |      |  |  |      |  
|------------- |  | ----------------------- | ---- | ---- | - | -------- |  | ---------- | ---- |  |  | ---- | -
|Geography     |  | 2008                    |      | 2007 |   | Variance |  | % Variance |     
|              |  | (expressed in millions) |     
|Americas      |  | $                       | 25.9 |      | $ | 23.2     |  | $          | 2.7  |  |  | 11.6 | %
|Europe        |  |                         | 47.9 |      |   | 39.0     |  |            | 8.9  |  |  | 22.8 | %
|Asia          |  |                         | 22.6 |      |   | 14.7     |  |            | 7.9  |  |  | 53.7 | %
|Total Revenue |  | $                       | 96.4 |      | $ | 76.9     |  | $          | 19.5 |  |  | 25.4 | %

Gross ProfitGross profit was $54.6 million, an increase of
$11.8 million, or 27.6%, compared to gross profit of $42.8 million for fiscal
year 2007. Gross profit as a percentage of revenue was 56.6%, an increase of
1.0 percentage points from 55.6% for fiscal year 2007. This increase was
primarily due to increased volume.

Selling and
Marketing ExpenseSelling and marketing expense was $17.7 million,
an increase of $3.5 million, or 24.6%, compared to $14.2 million for fiscal
year 2007. This increase was primarily due to increased compensation, benefits,
and other costs to support strategic initiatives. Selling and marketing expense
as a percentage of revenue was 18.4%, compared to 18.5% for fiscal year 2007.

General and Administrative
ExpenseGeneral and administrative expense was $11.1
million, an increase of $1.5 million, or 15.6%, compared to $9.6 million for
fiscal year 2007, primarily due to increased compensation and benefits. General
and administrative expense as a percentage of revenue was 11.5%, compared to
12.5% for fiscal year 2007.

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Research and
Development ExpenseResearch and development expense was $5.1 million,
an increase of $0.9 million, or 21.4%, compared to $4.2 million for fiscal year
2007, due to a planned increase in spending. Research and development expense
as a percentage of revenue was 5.3%, compared to 5.5% for fiscal year 2007.

Income from
OperationsIncome from operations was $20.7 million, an
increase of $5.9 million, or 39.9%, compared to income from operations of $14.8
million for fiscal year 2007, primarily due to increased gross profit,
partially offset by planned increases in operating expenses to support
strategic initiatives. Operating income as a percentage of revenue was 21.5%,
compared to 19.2% for fiscal year 2007.

Cash FlowTotal cash and cash equivalents increased $4.8 million
during fiscal year 2009, primarily due to earnings and decreased working
capital requirements, partially offset by employee incentive and related benefit
payments, purchases of company stock, dividend payments, investment in property
and equipment, and the acquisition of SANS.

Total cash and
cash equivalents increased $9.8 million during fiscal year 2008, primarily due
to 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, an initial investment
towards the purchase of 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 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, and dividend
payments.

Cash flow from operating activities
provided cash of $43.8 million during fiscal year 2009, compared to cash provided
of $30.2 million and $44.9 million in fiscal year 2008 and 2007, respectively.
Fiscal year 2009 cash flow from operating activities was primarily due to
earnings and $52.1 million decreased accounts and unbilled receivables driven
by lower revenue volume. This cash provided was partially offset by $14.6
million decreased accounts payable primarily resulting from overall reduced
spending levels, $20.7 million decrease in advance payables received from
customers driven by decreased orders and negotiated payment terms, and $8.6
million incentive and benefit payments.

Fiscal year
2008 cash flow from operating activities was primarily due to earnings,
partially offset by $13.2 million contributions to a defined benefit pension
plan, $11.1 million increased working capital requirements, and $4.6 million
net cash usage for the discontinued Nano Instruments product line.

Fiscal year
2007 cash flow from operating activities was primarily due to earnings and a
$7.6 million increase in income taxes payable, partially offset by $9.2 million
increased working capital requirements and a $4.6 net increase in deferred tax
assets.

Cash flow from investing activitiesrequired
the use of cash totaling $33.6 million during fiscal year 2009, compared to
cash provided of $3.6 million during fiscal year 2008, and $5.2 million used
during fiscal year 2007. The cash usage for fiscal year 2009 was due to $25.1
million payments associated with the acquisition of SANS and $9.8 million
invested in property and equipment, partially offset by $1.3 million proceeds
from the sale of the Nano instruments product line in fiscal year 2008.

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.

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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.

Cash flow from financing activities
required a use of cash of $7.8 million during fiscal year 2009, compared to
$26.5 million and $41.5 million used in fiscal year 2008 and 2007,
respectively. The cash usage for fiscal year 2009 was primarily due to $12.8
million to purchase shares of the Companys common stock, payment of cash
dividends of $10.1 million, and repayment of interest-bearing debt of $2.3
million, partially offset by $16.0 million borrowings on the Companys credit
facility, and $1.6 million received from stock option exercises and stock
purchases under the Companys employee stock purchase plan.

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 $24.0 million borrowings on the Companys credit facility, 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.

During fiscal
years 2009, 2008 and 2007, the Company purchased approximately 0.5 million, 1.0
million, and 1.0 million shares of its common stock for $12.8 million, $38.8
million, and $37.9 million, respectively.

Liquidity and Capital ResourcesThe Company had cash and cash equivalents of $118.9
million at October 3, 2009. Of this amount, approximately $14.9 million was
located in North America, $84.1 million in Europe, and $19.9 million in Asia.
The North American balance was primarily invested in tax-free money market
funds and in bank deposits. In Europe, the balances were primarily invested in
Euro money market funds and bank deposits. In Asia, the balances were primarily
invested in bank deposits.

At October 3,
2009, the Companys capital structure was comprised of $40.2 million in
short-term debt and $204.0 million in Shareholders Investment. Total
interest-bearing debt at October 3, 2009 was $40.0 million, an increase of
$13.7 million from $26.3 million at September 27, 2008, due to $16.0 million of
additional borrowings on the credit facility, partially offset by scheduled
long term debt payments. 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. The borrowings on the credit facility
include, at the Companys discretion, optional month-to-month term renewals and
loan repricing until December 2012. Under the terms of the credit facility, the
Company has agreed to certain financial covenants, including, among other
covenants, 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 may restrict the Companys ability to pay dividends and
purchase outstanding shares of common stock. At October 3, 2009, the Company
was in compliance with these financial covenants.

Shareholders
Investment decreased by $1.0 million during fiscal year 2009, primarily due to
$12.8 million in purchases of the Companys common stock, $10.1 million in
dividends declared, partially offset by operating results, $3.3 million in
stock-based compensation, $2.5 million of foreign currency translation gains,
and $1.6 million received from stock option exercises and stock purchases under
the Companys employee stock purchase plan.

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, internal growth opportunities, capital expenditures and
Company dividends and share purchases, as well as to fund
strategic acquisitions.

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At October 3,
2009, the Companys contractual obligations were as follows:

|                               |  |       |        |                                                  |   |             |  |             |       |                    |   |       |  |   |       | 
|------------------------------ |  | ----- | ------ | ------------------------------------------------ | - | ----------- |  | ----------- | ----- | ------------------ | - | ----- |  | - | ----- | 
|                               |  |       |        | Payments Due by Period
 (expressed in thousands) |  
|Contractual
 Obligations(1)    |  | Total |        | Less than 1
 year                                |   | 1 - 3 years |  | 3 - 5 years |       | More than 5
 years |  
|Operating Lease Obligations    |  | $     | 17,088 |                                                  | $ | 5,095       |  | $           | 6,972 |                    | $ | 2,437 |  | $ | 2,584 | 
|Other Long-Term Obligations(2) |  |       | 7,444  |                                                  |   | 693         |  |             | 1,356 |                    |   | 1,086 |  |   | 4,309 | 
|Total                          |  | $     | 24,532 |                                                  | $ | 5,788       |  | $           | 8,328 |                    | $ | 3,523 |  | $ | 6,893 | 

| |     |                                                                                                                                                                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Long-term
 income tax liabilities for uncertain tax positions have been excluded from
 the contractual obligations table as the Company is not able to make a
 reasonably reliable estimate of the amount and period of related future
 payments. At October 3, 2009, the Companys long-term liability for uncertain
 tax positions was $3.6 million.
| |     |                                                                                                                                                                                                                                                                                                                                                       
| | (2) | Other long-term
 obligations include liabilities under pension and other retirement plans.                                                                                                                                                                                                                                                            

At October 3,
2009 the Company had letters of credit and guarantees outstanding totaling
$23.1 million and $2.7 million, respectively, primarily to bond advance
payments and performance related to customer contracts in the Test segment. The
Companys operating leases are primarily for office space and automobiles.

Off-Balance Sheet ArrangementsAt the end of fiscal year 2009, 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.

Critical Accounting PoliciesThe 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. For 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:
The Company is required to comply with a variety of technical accounting
requirements in order to achieve consistent and accurate revenue recognition.
The most significant area of judgment and estimation is percentage of
completion contract accounting. The Company develops cost estimates that
include materials, component parts, labor and overhead costs. Detailed costs
plans are developed for all aspects of the contracts during the bidding phase
of the contract. Cost estimates are largely based on actual historical
performance of similar projects combined with current knowledge of the projects
in progress. Significant factors that impact the cost estimates include
technical risk, inflationary cost of materials and labor, changes in scope and
schedule, and internal and subcontractor performance. Actual costs incurred
during the project phase are monitored and compared to the estimates on a
monthly basis. Cost estimates are revised based on changes in circumstances.
Anticipated losses on long-term contracts are recognized when such losses
become evident.

Inventories: The
Company maintains a material amount of inventory to support its engineering and
manufacturing operations. The Company establishes valuation reserves for
excess, slow moving, and obsolete inventory based on inventory levels, expected
product life, and forecasted sales demand. It is possible that an increase in
the Companys inventory reserves may be required in the future if there is a
significant decline in demand for the Companys products and the Company does
not adjust its manufacturing production accordingly.

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Impairment 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 disposition 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.

Goodwill: The
Company tests goodwill at least annually for impairment. Goodwill is also
tested for impairment as changes in circumstances occur indicating that the
carrying value may not be recoverable. Goodwill impairment testing first
requires a comparison of the fair value of each reporting unit to the carrying
value. If the carrying value of the reporting unit exceeds fair value, goodwill
is considered impaired. The fair value of a reporting unit is estimated using a
discounted cash flow model that requires input of certain estimates and
assumptions requiring management judgment, including projections of economic
conditions and customer demand, revenue and margins, changes in competition,
operating costs, and new product introductions. The Company believes the
estimates and assumptions used in determining the projected cash flows of its
reporting units are reasonable however, significant changes in estimates of
future cash flows, such as those caused by unforeseen events or changes in
market conditions could materially impact the fair value of a reporting unit
which could result in the recognition of a goodwill impairment charge.

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.

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.

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Recent Accounting PronouncementsIn June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168,
The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles as codified by Accounting Standards
Codification (ASC) 105. This standard establishes only two levels of U.S.
generally accepted accounting principles (GAAP), authoritative and
non-authoritative. The FASB Accounting Standards Codification (the
Codification) is the source of authoritative, nongovernmental GAAP, except
for rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the Codification will become
non-authoritative. ASC 105 is effective for interim or annual reporting periods
ending after September 15, 2009. The Company adopted the provisions of ASC 105
in the fourth quarter of fiscal year 2009 and included references to the ASC in
the Notes to the Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K. The Companys adoption of the provisions of ASC 105
did not have an impact on the consolidated financial statements, as the
Codification did not change or alter existing GAAP.

In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05),
an update to ASC 820, Fair Value Measurements and Disclosures. This update
provides amendments to reduce potential ambiguity in financial reporting when
measuring the fair value of liabilities. Among other provisions, this ASU
2009-05 provides clarification that, in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the valuation
techniques described in this update. ASU 2009-05 is effective for interim or
annual financial periods beginning after August 27, 2009. The Company does not
expect the adoption of ASU 2009-05 to have a material impact on its
consolidated financial statements.

In May 2009,
the FASB issued SFAS No. 165, Subsequent Events as codified by ASC 855-10.
This standard establishes general standards or accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. In addition, ASC 855 sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures an entity
should make about events or transactions that occurred after the balance sheet
date. ASC 855 is effective for interim or annual financial periods ending after
June 15, 2009. The Companys adoption of the provisions of ASC 855 during the
third quarter of fiscal year 2009 did not have an impact on the consolidated
financial statements.

In December
2008, the FASB issued FSP FAS 132R-1, Employers Disclosures about
Postretirement Benefit Plan Assets as codified by ASC 715-20-65-2. This
standard amends SFAS No. 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits as codified by ASC 715-20 and
requires additional disclosures regarding defined benefit plan assets,
including investment policies and strategies, major categories of plan assets,
valuation techniques used to measure the fair value of plan assets and
significant concentrations of risk within plan assets. ASC 715-20-65-2 is
effective for fiscal years ending after December 15, 2009. The Company does not
expect the adoption of ASC 715-20-65-2 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 as codified by ASC
815-40-15. This standard 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. ASC 815-40-15 is effective for fiscal
years beginning after December 15, 2008. The Company does not expect the
adoption of ASC 815-40-15 to have a material impact on its consolidated
financial statements.

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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 as codified by ASC 260-10-45. This standard 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. ASC 260-10-45 is effective for fiscal years beginning after December
15, 2008. The Company does not expect the adoption of ASC 260-10-45 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 as codified by ASC 350-30-65-1. This standard 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 as codified under ASC 350-30.
ASC 350-30-65-1 is intended to improve the consistency between the useful life
of a recognized intangible asset under ASC 350-30 and the period of the
expected cash flows used to measure the fair value of the asset under ASC 805
and other GAAP. ASC 350-30-65-1 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. The Company does not expect
the adoption of ASC 350-30-65-1 to have a material impact on its consolidated
financial statements.

In December
2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations As
codified by ASC 805. ASC 805 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.
ASC 805 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, ASC 805 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. ASC 805 is effective
for the Companys fiscal years beginning on or after December 15, 2008, with
early adoption prohibited. The Company does not expect the adoption of ASC 805
to have a material impact on its consolidated financial statements.

Quarterly Financial InformationRevenue and operating results reported on a quarterly
basis do not necessarily reflect trends in demand for the Companys products or
its operating efficiency. Revenue and operating results in any quarter may be
significantly affected by customer shipments, installation timing, or the
timing of the completion of one or more contracts where revenue is recognized
upon shipment or customer acceptance rather than on the
percentage-of-completion method of revenue recognition. The Companys use of
the percentage-of-completion revenue recognition method for large, long-term
projects generally has the effect of smoothing significant fluctuations from
quarter to quarter. See Note 1 to the Consolidated Financial Statements
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 expense. See
Notes 1 and 8 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 October 3, 2009 and
September 27, 2008 was as follows:

|                                                       |  |                |         |                                                 |   |                |  |                 |         |             |   |         |   |   |         | 
|------------------------------------------------------ |  | -------------- | ------- | ----------------------------------------------- | - | -------------- |  | --------------- | ------- | ----------- | - | ------- | - | - | ------- | 
|                                                       |  | First
 Quarter |         | Second
 Quarter                                 |   | Third
 Quarter |  | Fourth
 Quarter |         | Total
 Year |  
|                                                       |  |                |         | (expressed in thousands, except per share data) |   |                | 
|                                                       |  |                |         |                                                 |   |                | 
|2009                                                   |  |                |         |                                                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Revenue                                                |  | $              | 116,609 |                                                 | $ | 107,652        |  | $               | 90,779  |             | $ | 93,841  |   | $ | 408,881 | 
|Gross profit                                           |  |                | 44,221  |                                                 |   | 41,513         |  |                 | 34,604  |             |   | 31,278  |   |   | 151,616 | 
|Income (loss) before income taxes                      |  |                | 12,842  |                                                 |   | 10,359         |  |                 | 4,495   |             |   | (3,793  | ) |   | 23,903  | 
|Net income (loss)                                      |  | $              | 9,751   |                                                 | $ | 7,473          |  | $               | 3,149   |             | $ | (2,979  | ) | $ | 17,394  | 
|Earnings (loss) per share:                             |  |                |         |                                                 |   |                |  |                 |         |             |   |         |   |   |         | 
|Basic                                                  |  | $              | 0.58    |                                                 | $ | 0.45           |  | $               | 0.19    |             | $ | (0.18   | ) | $ | 1.04    | 
|Diluted                                                |  | $              | 0.57    |                                                 | $ | 0.45           |  | $               | 0.19    |             | $ | (0.18   | ) | $ | 1.03    | 
|                                                       |  |                |         |                                                 |   |                |  |                 |         |             |   |         |   |   |         | 
|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    | 

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

Foreign Currency Exchange RiskApproximately 65-70% of the Companys revenue has
historically been derived from shipments to customers outside of the United
States and about 59% of this revenue (approximately 40% 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

|                                                  |  |                          |        |      |   |        |  |   |        | 
|------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------ | 
|                                                  |  | 2009                     |        | 2008 |   | 2007   | 
|                                                  |  | (expressed in thousands) |       
|(Decrease) increase from currency translation on: |  |                          |        |      |   |        |  |   |        | 
|Orders                                            |  | $                        | (8,077 | )    | $ | 21,090 |  | $ | 9,107  | 
|Revenue                                           |  |                          | (9,921 | )    |   | 22,128 |  |   | 11,593 | 
|Net Income                                        |  | $                        | (581   | )    | $ | 2,243  |  | $ | 868    | 

The estimated net effect of
currency translation on orders, revenue, and net income was unfavorable in
fiscal year 2009 in comparison to fiscal year 2008, primarily driven by the unfavorable translation impact
associated with the strengthening in the value of the U.S. dollar against the
Euro during the first half of fiscal year 2009. This was partially offset by a favorable
translation impact associated with the weakening in the value of the U.S.
dollar against the Japanese Yen throughout fiscal year 2009.

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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 2009 revenue of approximately $18.3 million.

The Company has
operational procedures to mitigate these non-functional currency exposures. The
Company also utilizes 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 loss of $1.6 million in fiscal year 2009, a net gain of $0.6 million
in fiscal year 2008, and a net loss of $0.6 million in fiscal year 2007.
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 RatesThe Company is also directly exposed to changes in
market interest rates on cash, cash equivalents, short-term investments, and
debt and is indirectly exposed to the impact of market interest rates on
overall business activity.

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

At October 3,
2009, the Company had cash and cash equivalents of $118.9 million. Most of this
balance was invested in interest-bearing bank deposits or money market funds,
with interest rates re-set 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 $1.1
million on an annualized basis.

The Companys
short-term borrowings outstanding at the end of fiscal year 2009 consisted of
$40.0 million utilization of the revolving credit facility and $0.2 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 has
entered into floating to fixed rate interest swap agreements. 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.

A discount
rate of 5.5% and an expected rate increase in future compensation levels of
3.0% 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-40 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.

39

---

Table of Contents

|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|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 (as defined under Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934
(the 1934 Act)) as of October 3, 2009. 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, and that such
information required to be disclosed by the Company in the reports that it
files or submits under the 1934 Act is accumulated and communicated to the
Companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.

There have
been no changes in internal control over financial reporting during the fiscal
quarter ended October 3, 2009 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.

The Companys
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Exchange Act. The Companys internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements. Under the
supervision and with the participation of management, including its Chief
Executive Officer and Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of internal controls over financial reporting
as of October 3, 2009. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control  Integrated
Framework. Based on managements assessment using this framework,
management concluded that the Companys internal control over financial
reporting is effective as of October 3, 2009.

KPMG LLP, an
independent registered public accounting firm, has audited the consolidated
financial statements included in this Annual Report on Form 10-K and, as part
of this audit, has issued their report, included in Item 8, on the
effectiveness of the Companys internal control over financial reporting.

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

None.

PART III

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

The required
information with respect to the directors of the Company, the Companys Code of
Business Conduct, compliance with Section 16(a) of the Securities Exchange Act
of 1934, and the Companys Audit Committee, including the Audit Committee
financial experts, 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 10, 2010. Information regarding the Companys executive
officers is contained under Item 1 of Part I 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 headings Executive Compensation and Election of
Directors  Independent Directors Compensation in the Companys Proxy
Statement for the Annual Meeting of Shareholders scheduled to be held on
February 10, 2010.

40

---

Table of Contents

|         |                                                                                                
|-------- | -----------------------------------------------------------------------------------------------
|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 October 3, 2009:

|                                                           |  |                                                                                                                   |  |                                                                              |   |                                                                                                                                                                      |  |       |  | 
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | 
|Plan
 Category                                             |  | Number of Securities to
 be Issued Upon Exercise of
 Outstanding Options, Warrants
 and Rights
 (in thousands)(a) |  | Weighted-
 Average
 Exercise
 Price of
 Outstanding
 Warrants and
 Rights(b) |   | Number of Securities
 Remaining Available for
 Future Issuance Under
 Equity Compensation Plans
 (Excluding Securities Reflected
 in Column (a))(1)(in thousands)(c) | 
|                                                           |  |                                                                                                                   |  |                                                                              |   |                                                                                                                                                                      | 
|Equity compensation plans approved by security holders     |  | 1,566                                                                                                             |  |                                                                              | $ | 33.88                                                                                                                                                                |  | 1,437 |  | 
|                                                           |  |                                                                                                                   |  |                                                                              |   |                                                                                                                                                                      |  |       |  | 
|Equity compensation plans not approved by security holders |  |                                                                                                                  |  |                                                                              |   |                                                                                                                                                                     |  |      |  | 
|                                                           |  |                                                                                                                   |  |                                                                              |   |                                                                                                                                                                      |  |       |  | 
|Total                                                      |  | 1,566                                                                                                             |  |                                                                              | $ | 33.88                                                                                                                                                                |  | 1,437 |  | 
|                                                           |  |                                                                                                                   |  |                                                                              |   |                                                                                                                                                                      |  |       |  | 

(1) Includes 478 shares
available for issuance under the 2002 Employee Stock Purchase Plan as of
October 3, 2009.

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 10, 2010.

|         |                                                                            
|-------- | ---------------------------------------------------------------------------
|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 February 10, 2010.

|         |                                        
|-------- | ---------------------------------------
|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 10,
2010.

41

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Table of Contents

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                                                                            
|         |                                                            |                                               |                                                                                                                                     
|         |                                                            |                                               | Consolidated
 Balance Sheets  October 3, 2009 and September 27, 2008                                                               
|         |                                                            |                                               |                                                                                                                                     
|         |                                                            |                                               | Consolidated
 Statements of Income for the Years Ended October 3, 2009, September 27, 2008
 and September 29, 2007                  
|         |                                                            |                                               |                                                                                                                                     
|         |                                                            |                                               | Consolidated
 Statements of Shareholders Investment for the Years Ended October 3, 2009,
 September 27, 2008 and September 29, 2007
|         |                                                            |                                               |                                                                                                                                     
|         |                                                            |                                               | Consolidated
 Statements of Cash Flows for the Years Ended October 3, 2009, September 27,
 2008 and September 29, 2007              
|         |                                                            |                                               |                                                                                                                                     
|         |                                                            |                                               | 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 3.1 of the Companys Form 8-K Current Report filed on December 1, 2009.                                                                                                                     
| |                 |  |                                                                                                                                                                                                                                                                       
| | 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 (Director) 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 (Director) 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.                                               

42

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Table of Contents

| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.h |  | Description
 of the terms of employment of Susan E. Knight, pursuant to an offer letter,
 incorporated by reference to Exhibit 10.r of the Companys Form 10-Q/A for
 the fiscal quarter ended December 31, 2001.                                                                                                                                                                                                                 
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.i |  | Letter dated
 February 6, 1987 from MTS Sensor Technologie GmbH and Co. KG (formerly,
 Hellwig GmbH) regarding its pension commitment to Joachim Hellwig,
 incorporated by reference to Exhibit 10.p of the Companys Form 10-K filed
 for fiscal year ended October 2, 2004.                                                                                                                                                     
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.j |  | 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.k |  | Change in
 Control Agreement, dated December 31, 2008, between the Company and Laura B.
 Hamilton (Filed herewith).                                                                                                                                                                                                                                                                                                               
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.l |  | 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.m |  | 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.n |  | 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.o |  | 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.                                                 
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.p |  | Change in
 Control Agreement, dated December 31, 2008, between the Company and Susan E.
 Knight (Filed herewith).                                                                                                                                                                                                                                                                                                                 
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.q |  | Change in
 Control Agreement, dated December 31, 2008, between the Company and Kathleen
 M. Staby (Filed herewith).                                                                                                                                                                                                                                                                                                               
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.r |  | Severance
 Agreement, dated March 30, 2009, between the Company and Alfred Richter
 (Filed herewith).                                                                                                                                                                                                                                                                                                                             
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.s |  | Change in
 Control Agreement, dated March 30, 2009, between the Company and Alfred
 Richter (Filed herewith).                                                                                                                                                                                                                                                                                                                     
| |      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.t |  | Form of
 Notice of Grant of Restricted Stock Units under 2006 Stock Incentive Plan,
 incorporated herein by reference to Exhibit 10.1 of the Companys Form 8-K
 Current Report filed on June 29, 2009.                                                                                                                                                                                                                           

43

---

Table of Contents

| |      |  |                                                                                                                                                                                                         
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.u |  | Uniform
 Terms and Conditions to Restricted Stock Units under 2006 Stock Incentive
 Plan, incorporated herein by reference to Exhibit 10.2 of Companys Form 8-K
 Current Report filed on June 29, 2009.
| |      |  |                                                                                                                                                                                                         
| | 10.v |  | Form of Notice of Grant of Restricted Stock (Employee) under 2006
Stock Incentive Plan (Filed herewith).                                                                                                
| |      |  |                                                                                                                                                                                                         
| | 10.w |  | Uniform
 Terms and Conditions to Restricted Stock Awards (Employee) under 2006 Stock Incentive
 Plan (Filed herewith).                                                                                  
| |      |  |                                                                                                                                                                                                         
| | 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).                                                                              

44

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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 and
 Chief Executive Officer

Date: December
1, 2009

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 and
 Chief         |  | December 1,
 2009
|Laura B.
 Hamilton      |            | Executive
 Officer       |  |                  
|                        |            |                          |  |                  
|/s/ SUSAN E.
 KNIGHT    |            | Chief
 Financial Officer |  | December 1,
 2009
|Susan E.
 Knight        |            | and Vice
 President      |  |                  
|                        |            |                          |  |                  
|/s/ DAVID J. ANDERSON   |            | Director                 |  | December 1,
 2009
|David J. Anderson       |            |                          |  |                  
|                        |            |                          |  |                  
|/s/ JEAN-LOU CHAMEAU    |            | Director                 |  | December 1,
 2009
|Jean-Lou Chameau        |            |                          |  |                  
|                        |            |                          |  |                  
|/s/ MERLIN
 E. DEWING   |            | Director                 |  | December 1,
 2009
|Merlin E.
 Dewing       |            |                          |  |                  
|                        |            |                          |  |                  
|/s/ BRENDAN
 C. HEGARTY |            | Director                 |  | December 1,
 2009
|Brendan C.
 Hegarty     |            |                          |  |                  
|                        |            |                          |  |                  
|/s/ LOIS M.
 MARTIN     |            | Director                 |  | December 1,
 2009
|Lois M.
 Martin         |            |                          |  |                  
|                        |            |                          |  |                  
|/s/ BARB J.
 SAMARDZICH |            | Director                 |  | December 1,
 2009
|Barb J.
 Samardzich     |            |                          |  |                  
|                        |            |                          |  |                  
|/s/ GAIL P.
 STEINEL    |            | Director                 |  | December 1,
 2009
|Gail P.
 Steinel        |            |                          |  |                  

45

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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 through
 F-3 
|                                                                                                                                                                     |                  
|Consolidated Balance Sheets  October 3, 2009 and September 27, 2008                                                                                                 | F-4              
|                                                                                                                                                                     |                  
|Consolidated Statements of Income for the Years Ended
 October 3, 2009, September 27, 2008, and September 29, 2007                                                   | F-5              
|                                                                                                                                                                     |                  
|Consolidated Statements of Shareholders Investment
 and Comprehensive Income (Loss) for the Years Ended
 October 3, 2009, September 27, 2008 and September 29, 2007 | F-6              
|                                                                                                                                                                     |                  
|Consolidated Statements of Cash Flows for the Years Ended
 October 3, 2009, September 27, 2008 and September 29, 2007                                                | F-7              
|                                                                                                                                                                     |                  
|Notes to Consolidated Financial Statements                                                                                                                           | F-8 through
 F-35
|                                                                                                                                                                     |                  
|Financial Statement
 Schedule                                                                                                                                        |                  

|         |  |                                                                                       |             |  | 
|-------- |  | ------------------------------------------------------------------------------------- | ----------- |  | 
|Schedule |  |                                                                                       | Description |  | 
|         |  |                                                                                      
|II       |  | Summary of Consolidated Allowances
 For Doubtful Accounts and Restructuring
 Reserves | F-36       

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 October 3,
2009 and September 27, 2008, and the related consolidated statements of income,
shareholders investment and comprehensive income, and cash flows for each of
the years in the three-year period ended October 3, 2009. In connection with
our audits of the consolidated financial statements, we also have audited financial
statement schedule II. We also have audited MTS Systems Corporations internal
control over financial reporting as of October 3, 2009, based on criteria
established in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). MTS
Systems Corporation and subsidiaries management is responsible for these
consolidated financial statements, 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
these consolidated financial statements and an opinion on the Companys
internal control over financial reporting based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
consolidated financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting 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 audits also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.

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, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of MTS Systems Corporation and subsidiaries as of October 3, 2009 and
September 27, 2008, and the results of its operations and its cash flows for
each of the years in the three-year period ended October 3, 2009, in conformity
with U.S. generally accepted accounting principles. Also in our opinion, the
related financial statement schedule II, 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. Also in our opinion,
MTS Systems Corporation and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of October 3, 2009,
based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.

F-2

---

Table of Contents

As disclosed in Note 8 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 as of September 30, 2007.

|                        |             
|----------------------- | ------------
|                        | /s/ KPMG LLP
|                        |             
|Minneapolis,
 Minnesota |             
|December 1,
 2009       |             

F-3

---

Table of Contents

Consolidated Balance Sheets(October 3 and September 27,
respectively)

|                                                                                                        |  |                          |         |      |   |         | 
|------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | 
|Assets                                                                                                  |  | 2009                     |         | 2008 |  
|                                                                                                        |  | (expressed in thousands) |        
|Current Assets:                                                                                         |  |                          |         |      |   |         | 
|Cash and cash equivalents                                                                               |  | $                        | 118,885 |      | $ | 114,099 | 
|Accounts receivable, net of allowance for doubtful accounts of $1,410
 and $1,008 respectively          |  |                          | 72,553  |      |   | 101,331 | 
|Unbilled accounts receivable                                                                            |  |                          | 27,246  |      |   | 43,022  | 
|Inventories                                                                                             |  |                          | 47,969  |      |   | 46,135  | 
|Prepaid expenses and other current assets                                                               |  |                          | 6,583   |      |   | 6,585   | 
|Deferred tax assets                                                                                     |  |                          | 12,322  |      |   | 11,825  | 
|Total current assets                                                                                    |  |                          | 285,558 |      |   | 322,997 | 
|Property and equipment, net                                                                             |  |                          | 56,118  |      |   | 50,534  | 
|Goodwill                                                                                                |  |                          | 15,206  |      |   | 1,668   | 
|Other intangibles, net                                                                                  |  |                          | 23,826  |      |   | 4,363   | 
|Other assets                                                                                            |  |                          | 4,181   |      |   | 17,283  | 
|Deferred tax assets                                                                                     |  |                          | 2,025   |      |   | 2,312   | 
|Total assets                                                                                            |  | $                        | 386,914 |      | $ | 399,157 | 
|                                                                                                        |  |                          |         |      |   |         | 
|Liabilities and Shareholders Investment                                                                |  |                          |         |      |   |         | 
|                                                                                                        |  |                          |         |      |   |         | 
|Current Liabilities:                                                                                    |  |                          |         |      |   |         | 
|Short-term borrowings                                                                                   |  | $                        | 40,182  |      | $ | 24,338  | 
|Current maturities of long-term debt                                                                    |  |                          |        |      |   | 2,308   | 
|Accounts payable                                                                                        |  |                          | 18,630  |      |   | 28,567  | 
|Accrued payroll and related costs                                                                       |  |                          | 25,376  |      |   | 33,819  | 
|Advance payments from customers                                                                         |  |                          | 46,739  |      |   | 64,979  | 
|Accrued warranty costs                                                                                  |  |                          | 9,774   |      |   | 6,107   | 
|Accrued income taxes                                                                                    |  |                          | 1,182   |      |   | 4,510   | 
|Deferred tax liabilities                                                                                |  |                          | 960     |      |   | 3,723   | 
|Other accrued liabilities                                                                               |  |                          | 25,149  |      |   | 17,219  | 
|Total current liabilities                                                                               |  |                          | 167,992 |      |   | 185,570 | 
|Deferred tax liabilities                                                                                |  |                          | 3,843   |      |   | 1,354   | 
|Non-current accrued income taxes                                                                        |  |                          | 3,591   |      |   | 4,009   | 
|Pension benefit plan                                                                                    |  |                          | 1,917   |      |   | 245     | 
|Other long-term liabilities                                                                             |  |                          | 5,606   |      |   | 3,037   | 
|Total liabilities                                                                                       |  |                          | 182,949 |      |   | 194,215 | 
|                                                                                                        |  |                          |         |      |   |         | 
|Shareholders Investment:                                                                               |  |                          |         |      |   |         | 
|Common stock, 25¢ par value; 64,000 shares authorized:
 16,564 and 16,976 shares issued and outstanding |  |                          | 4,141   |      |   | 4,244   | 
|Retained earnings                                                                                       |  |                          | 174,301 |      |   | 175,216 | 
|Accumulated other comprehensive income                                                                  |  |                          | 25,523  |      |   | 25,482  | 
|Total shareholders investment                                                                          |  |                          | 203,965 |      |   | 204,942 | 
|Total liabilities and shareholders investment                                                          |  | $                        | 386,914 |      | $ | 399,157 | 

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 October 3, September 27, and September 29, respectively)

|                                                             |  |      |         |      |   |         |   |   |         |  
|------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                             |  | 2009 |         | 2008 |   | 2007    |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|Revenue:                                                     |  |      |         |      |   |         |   |   |         |  
|Product                                                      |  | $    | 349,502 |      | $ | 395,173 |   | $ | 350,156 |  
|Service                                                      |  |      | 59,379  |      |   | 65,342  |   |   | 59,935  |  
|Total
 Revenue                                               |  |      | 408,881 |      |   | 460,515 |   |   | 410,091 |  
|Cost of
 Sales:                                              |  |      |         |      |   |         |   |   |         |  
|Product                                                      |  |      | 224,279 |      |   | 235,861 |   |   | 206,067 |  
|Service                                                      |  |      | 32,986  |      |   | 34,401  |   |   | 30,386  |  
|Total Cost
 of Sales                                         |  |      | 257,265 |      |   | 270,262 |   |   | 236,453 |  
|Gross
 Profit                                                |  |      | 151,616 |      |   | 190,253 |   |   | 173,638 |  
|Operating
 Expenses:                                         |  |      |         |      |   |         |   |   |         |  
|Selling and marketing                                        |  |      | 71,571  |      |   | 76,867  |   |   | 68,907  |  
|General and administrative                                   |  |      | 39,129  |      |   | 35,393  |   |   | 32,216  |  
|Research and development                                     |  |      | 16,322  |      |   | 16,232  |   |   | 19,285  |  
|Total
 Operating Expenses                                    |  |      | 127,022 |      |   | 128,492 |   |   | 120,408 |  
|Gain on sale of assets                                       |  |      |        |      |   |        |   |   | 742     |  
|Income
 From Operations                                      |  |      | 24,594  |      |   | 61,761  |   |   | 53,972  |  
|Interest expense                                             |  |      | (2,024  | )    |   | (1,083  | ) |   | (1,309  | )
|Interest income                                              |  |      | 1,108   |      |   | 4,033   |   |   | 3,899   |  
|Other income, net                                            |  |      | 225     |      |   | 749     |   |   | 28      |  
|Income
 Before Income Taxes and Discontinued Operations      |  |      | 23,903  |      |   | 65,460  |   |   | 56,590  |  
|Provision for Income Taxes                                   |  |      | 6,509   |      |   | 18,350  |   |   | 15,549  |  
|Income
 Before Discontinued Operations                       |  |      | 17,394  |      |   | 47,110  |   |   | 41,041  |  
|Discontinued
 Operations:                                    |  |      |         |      |   |         |   |   |         |  
|(Loss) income from
 discontinued operations, net of tax      |  |      |        |      |   | (368    | ) |   | 955     |  
|Net gain on disposal of
 discontinued businesses, net of tax |  |      |        |      |   | 2,449   |   |   |        |  
|Income
 from Discontinued Operations, net of tax             |  |      |        |      |   | 2,081   |   |   | 955     |  
|Net Income                                                   |  | $    | 17,394  |      | $ | 49,191  |   | $ | 41,996  |  
|Earnings
 Per Share                                          |  |      |         |      |   |         |   |   |         |  
|Basic:                                                       |  |      |         |      |   |         |   |   |         |  
|Income Before Discontinued
 Operations                       |  | $    | 1.04    |      | $ | 2.72    |   | $ | 2.29    |  
|Discontinued Operations:                                     |  |      |         |      |   |         |   |   |         |  
|(Loss) income from discontinued operations, net of tax       |  |      |        |      |   | (0.02   | ) |   | 0.05    |  
|Net gain on disposal of discontinued businesses, net of tax  |  |      |        |      |   | 0.14    |   |   |        |  
|Income
 from Discontinued Operations, net of tax             |  |      |        |      |   | 0.12    |   |   | 0.05    |  
|Earnings
 Per Share - Basic                                  |  | $    | 1.04    |      | $ | 2.84    |   | $ | 2.34    |  
|Diluted:                                                     |  |      |         |      |   |         |   |   |         |  
|Income Before Discontinued
 Operations                       |  | $    | 1.03    |      | $ | 2.68    |   | $ | 2.24    |  
|Discontinued Operations:                                     |  |      |         |      |   |         |   |   |         |  
|(Loss) income from discontinued operations, net of tax       |  |      |        |      |   | (0.02   | ) |   | 0.05    |  
|Net gain on disposal of discontinued businesses, net of tax  |  |      |        |      |   | 0.14    |   |   |        |  
|Income
 from Discontinued Operations, net of tax             |  |      |        |      |   | 0.12    |   |   | 0.05    |  
|Earnings
 Per Share - Diluted                                |  | $    | 1.03    |      | $ | 2.80    |   | $ | 2.29    |  

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

F-5

---

Table of Contents

|                                                                                                              
|--------------------------------------------------------------------------------------------------------------
|Consolidated Statements of Shareholders Investment and Comprehensive
 Income (Loss)                          
|(For the Fiscal Years Ended
 October 3, September 27, and September 29, respectively, expressed in
 thousands)

|                                              |  |                |        |                              |   |       |                    |                                              |                                |   |   |         |   |   |        |   |   |         |  
|--------------------------------------------- |  | -------------- | ------ | ---------------------------- | - | ----- | ------------------ | -------------------------------------------- | ------------------------------ | - | - | ------- | - | - | ------ | - | - | ------- | -
|                                              |  |                |        |                              |   |       |                    | AccumulatedOtherComprehensive
 Income (Loss) |                                |   |  
|                                              |  | Common Stock   |        | Additional
 Paid-In
 Capital |   |       |                    |                                              | TotalShareholders
 Investment |  
|                                              |  | Shares
 Issued |        |                              |   |       | Retained
 Earnings |                                              |                                |  
|                                              |  |                | Amount |                              |   |       |                    |                                             
|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 ASC 715-20 |  |                |       |                              |   |      |                    |                                              |                               |   |   |        |   |   | (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 |  
|Net income                                    |  |                |       |                              |   |      |                    |                                              |                               |   |   | 17,394  |   |   |       |   |   | 17,394  |  
|Foreign currency translation                  |  |                |       |                              |   |      |                    |                                              |                               |   |   |        |   |   | 2,459  |   |   | 2,459   |  
|Pension benefit plan adjustments              |  |                |       |                              |   |      |                    |                                              |                               |   |   |        |   |   | (982   | ) |   | (982    | )
|Derivative instruments                        |  |                |       |                              |   |      |                    |                                              |                               |   |   |        |   |   | (1,436 | ) |   | (1,436  | )
|Total comprehensive income                    |  |                |       |                              |   |      |                    |                                              |                               |   |   | 17,394  |   |   | 41     |   |   | 17,435  |  
|Exercise of stock options                     |  |                | 40     |                              |   | 10    |                    |                                              | 899                            |   |   |        |   |   |       |   |   | 909     |  
|Stock-based compensation                      |  |                | 17     |                              |   | 4     |                    |                                              | 3,327                          |   |   |        |   |   |       |   |   | 3,331   |  
|Tax shortfall from equity compensation        |  |                |       |                              |   |      |                    |                                              | (491                           | ) |   |        |   |   |       |   |   | (491    | )
|Issuance for employee stock purchase plan     |  |                | 36     |                              |   | 9     |                    |                                              | 709                            |   |   |        |   |   |       |   |   | 718     |  
|Common stock purchased and retired            |  |                | (505   | )                            |   | (126  | )                  |                                              | (4,444                         | ) |   | (8,253  | ) |   |       |   |   | (12,823 | )
|Dividends, $0.60 per share                    |  |                |       |                              |   |      |                    |                                              |                               |   |   | (10,056 | ) |   |       |   |   | (10,056 | )
|Balance, October 3, 2009                      |  |                | 16,564 |                              | $ | 4,141 |                    | $                                            |                               |   | $ | 174,301 |   | $ | 25,523 |   | $ | 203,965 |  

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

F-6

---

Table of Contents

|                                                                                    
|------------------------------------------------------------------------------------
|Consolidated
 Statements of Cash Flows                                              
|(For the Fiscal Years Ended
 October 3, September 27 and September 29, respectively)

|                                                                                       |  |                          |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                       |  | 2009                     |         | 2008 |   | 2007    |  
|                                                                                       |  | (expressed in thousands) |        
|Cash Flows from Operating Activities:                                                  |  |                          |         |      |   |         |   |   |         |  
|Net income                                                                             |  | $                        | 17,394  |      | $ | 49,191  |   | $ | 41,996  |  
|Adjustments to reconcile net income to net cash provided by operating
 activities:     |  |                          |         |      |   |         |   |   |         |  
|Loss (income) from discontinued operations                                             |  |                          |        |      |   | 368     |   |   | (955    | )
|Net gain on disposal of discontinued operations                                        |  |                          |        |      |   | (2,449  | ) |   |        |  
|Gain on sale of assets                                                                 |  |                          |        |      |   |        |   |   | (742    | )
|Stock-based compensation                                                               |  |                          | 3,384   |      |   | 4,199   |   |   | 5,023   |  
|Excess tax benefits from stock-based compensation                                      |  |                          | (4      | )    |   | (925    | ) |   | (2,123  | )
|Charge for fair value mark-up of acquired inventory                                    |  |                          | 1,859   |      |   |        |   |   |        |  
|Net periodic pension benefit cost                                                      |  |                          | 738     |      |   | 1,282   |   |   | 1,208   |  
|Depreciation and amortization                                                          |  |                          | 12,132  |      |   | 9,207   |   |   | 7,985   |  
|Deferred income taxes                                                                  |  |                          | (364    | )    |   | (5,726  | ) |   | (4,599  | )
|Bad debt provision                                                                     |  |                          | 755     |      |   | (111    | ) |   | 320     |  
|Changes in operating assets and liabilities, excluding the effect of
 the acquisition: |  |                          |         |      |   |         |   |   |         |  
|Accounts and unbilled contracts receivable                                             |  |                          | 52,129  |      |   | (27,462 | ) |   | (11,414 | )
|Inventories                                                                            |  |                          | 5,980   |      |   | (3,191  | ) |   | (1,733  | )
|Prepaid expenses and other assets                                                      |  |                          | (6,657  | )    |   | (5,911  | ) |   | (3,489  | )
|Accounts payable                                                                       |  |                          | (14,582 | )    |   | 6,138   |   |   | 4,994   |  
|Accrued payroll and related costs                                                      |  |                          | (8,571  | )    |   | 4,441   |   |   | (654    | )
|Advance payments from customers                                                        |  |                          | (20,654 | )    |   | 13,398  |   |   | (1,054  | )
|Accrued warranty costs                                                                 |  |                          | 3,614   |      |   | (138    | ) |   | 138     |  
|Other liabilities                                                                      |  |                          | (3,031  | )    |   | 5,613   |   |   | 8,581   |  
|Contributions to pension benefit plan                                                  |  |                          | (488    | )    |   | (13,198 | ) |   | (257    | )
|Operating activities of discontinued operations                                        |  |                          | 204     |      |   | (4,552  | ) |   | 1,690   |  
|Net Cash Provided by Operating Activities                                              |  |                          | 43,838  |      |   | 30,174  |   |   | 44,915  |  
|Cash Flows from Investing Activities:                                                  |  |                          |         |      |   |         |   |   |         |  
|Additions to property and equipment                                                    |  |                          | (9,757  | )    |   | (9,752  | ) |   | (12,040 | )
|Purchase of business                                                                   |  |                          | (25,143 | )    |   | (13,737 | ) |   |        |  
|Net proceeds from sale of businesses                                                   |  |                          | 1,330   |      |   | 10,293  |   |   | 1,000   |  
|Proceeds from maturity of short-term investments                                       |  |                          |        |      |   | 19,050  |   |   | 71,260  |  
|Purchases of short-term investments                                                    |  |                          |        |      |   | (2,000  | ) |   | (64,735 | )
|Investing activities of discontinued operations                                        |  |                          |        |      |   | (287    | ) |   | (695    | )
|Net Cash (Used in) Provided by Investing Activities                                    |  |                          | (33,570 | )    |   | 3,567   |   |   | (5,210  | )
|Cash Flows from Financing Activities:                                                  |  |                          |         |      |   |         |   |   |         |  
|Net receipts under short-term borrowings                                               |  |                          | 15,796  |      |   | 23,866  |   |   | 36      |  
|Repayments of long-term debt                                                           |  |                          | (2,308  | )    |   | (6,683  | ) |   | (6,683  | )
|Excess tax benefits from stock-based compensation                                      |  |                          | 4       |      |   | 925     |   |   | 2,123   |  
|Cash dividends                                                                         |  |                          | (10,112 | )    |   | (10,478 | ) |   | (7,988  | )
|Proceeds from exercise of stock options and employee stock purchase
 plan              |  |                          | 1,627   |      |   | 7,866   |   |   | 9,256   |  
|Payments to purchase and retire common stock                                           |  |                          | (12,823 | )    |   | (42,042 | ) |   | (38,236 | )
|Net Cash Used in Financing Activities                                                  |  |                          | (7,816  | )    |   | (26,546 | ) |   | (41,492 | )
|Effect of Exchange Rate Changes on Cash and Cash
 Equivalents                          |  |                          | 2,334   |      |   | 2,559   |   |   | 8,170   |  
|Cash and Cash Equivalents:                                                             |  |                          |         |      |   |         |   |   |         |  
|Increase during the year                                                               |  |                          | 4,786   |      |   | 9,754   |   |   | 6,383   |  
|Balance, beginning of year                                                             |  |                          | 114,099 |      |   | 104,345 |   |   | 97,962  |  
|Balance, end of year                                                                   |  | $                        | 118,885 |      | $ | 114,099 |   | $ | 104,345 |  
|Supplemental Disclosures of Cash Flows:                                                |  |                          |         |      |   |         |   |   |         |  
|Cash paid during the year for:                                                         |  |                          |         |      |   |         |   |   |         |  
|Interest                                                                               |  | $                        | 1,596   |      | $ | 726     |   | $ | 1,052   |  
|Income taxes                                                                           |  |                          | 13,250  |      |   | 22,157  |   |   | 11,172  |  

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

F-7

---

Table of Contents

Notes to Consolidated
Financial Statements

1. Summary of Significant Accounting
Policies:

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

Fiscal YearThe Companys
fiscal year ends on the Saturday closest to September 30. The Companys fiscal
year ended October 3, 2009 consisted of 53 weeks. The Companys fiscal years
ended September 27, 2008 and September 29, 2007 each consisted of 52 weeks.

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

Revenue RecognitionOrders that
are manufactured and delivered in less than six months with routine
installations and no special acceptance protocol 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 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 identifies components of
the arrangement which are considered software-related. 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, 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 the percentage of completion
method (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.

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.

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Table of Contents

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

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

Foreign CurrencyThe financial
position and results of operations of the Companys foreign subsidiaries are
measured using local currency as the functional currency. Assets and
liabilities are translated using fiscal period-end exchange rates, and monthly
statements of income are translated using average exchange rates applicable to
each month, 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 $2.5 million, $3.9 million, and
$9.3 million for fiscal years 2009, 2008, and 2007 respectively. Gains and losses
from foreign currency transactions are recognized in the Consolidated
Statements of Income. The Company recorded net foreign currency transaction
(losses)/gains of ($1.6) million, $0.6 million, and ($0.6) million in fiscal
years 2009, 2008, and 2007, respectively.

Cash and Cash EquivalentsCash 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 InvestmentsThe Company
held no short-term investments as of October 3, 2009 or 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 ContractsThe Company
grants credit to customers, but it generally does not require collateral or
other security from domestic customers. When deemed appropriate, receivables
from customers located outside the United States are supported by letters of
credit from financial institutions. The allowance for doubtful accounts is
based on managements assessment of the collectibility of specific customer
accounts and includes consideration of the credit worthiness and financial
condition of those specific customers. The Company records an allowance to
reduce receivables to the amount that is reasonably believed to be collectible
and considers factors such as the financial condition of the customer and the
aging of the receivables. If there is a deterioration of a customers financial
condition, if the Company becomes aware of additional information related to
the credit worthiness of a customer, or if future actual default rates on trade
receivables in general differ from those currently anticipated, the Company may
have to adjust its allowance for doubtful accounts, which would affect earnings
in the period the adjustments were made.

The Company
enters into long-term contracts for customized equipment sold to its customers.
Under the terms of such contracts, revenue recognized using the
percentage-of-completion method may be invoiced upon completion of contractual
milestones, shipment to the customer, or installation and customer acceptance.
Unbilled amounts relating to these contracts are reflected as Unbilled Accounts
Receivable in the accompanying Consolidated Balance Sheets. Amounts unbilled at
October 3, 2009 are expected to be invoiced during fiscal year 2010.

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InventoriesInventories
consist of material, labor, and overhead costs and are stated at the lower of
cost or market value, determined under the first-in, first-out accounting
method. Inventories at October 3, 2009 and September 27, 2008 were as follows:

|                                                   |  |                          |        |      |   |        | 
|-------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | 
|                                                   |  | 2009                     |        | 2008 |  
|                                                   |  | (expressed in thousands) |       
|Customer projects in
 various stages of completion |  | $                        | 15,075 |      | $ | 14,257 | 
|Components, assemblies and
 parts                  |  |                          | 32,894 |      |   | 31,878 | 
|Total                                              |  | $                        | 47,969 |      | $ | 46,135 | 

Software Development CostsThe Company
capitalizes certain software development costs related to 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 the greater of straight-line or 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 years ended
October 3, 2009 and September 27, 2008. Amortization expense for software
development costs was $0.7 million for the fiscal year ended October 3, 2009.
No amortization expense was recognized during the year ended September 27,
2008. See Note 4 to the Consolidated Financial Statements for additional
information on capitalized software development costs.

Impairment of Long-lived AssetsThe Company
reviews the carrying value of long-lived assets or asset groups, 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.

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Table of Contents

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

| |                                            
| | -------------------------------------------
| | Buildings
 and improvements: 10 to 40 years
| | Machinery
 and equipment: 3 to 10 years    

Building and
equipment additions are generally depreciated on a straight-line basis for
financial reporting purposes and on an accelerated basis for income tax
purposes. See Note 4 to the Consolidated Financial Statements for additional
information on property and equipment.

Goodwill and Intangible AssetsGoodwill
represents the excess of acquisition costs over the fair value of the net
assets of businesses acquired. Goodwill is not amortized to income, but instead
tested at least annually for impairment. Goodwill is also tested for impairment
as changes in circumstances occur indicating that the carrying value may not be
recoverable.

Goodwill
impairment testing first requires a comparison of the fair value of each
reporting unit to the carrying value. If the carrying value of the reporting
unit exceeds fair value, goodwill is considered impaired. Impairment testing
for indefinite-lived intangible assets requires a comparison between the fair
value and the carrying value of the asset. If the carrying value of the asset
exceeds its fair value, the asset is reduced to fair value.

Intangible
assets with finite lives are amortized on a straight-line basis over the
expected period to be benefited by future cash flows, and reviewed for
impairment. Fair values of goodwill and intangible assets are primarily
determined using discounted cash flow analyses. At both October 3, 2009 and
September 27, 2008, the Company determined there was no impairment of its
goodwill or intangible assets. See Note 4 to the Consolidated Financial
Statements for additional information on goodwill and intangible assets.

Other AssetsOther assets
at October 3, 2009 and September 27, 2008 include security deposits paid on
leased property and cash redemption values on group insurance policies. Other
assets at September 27, 2008 also include a $13.7 million investment in SANS
Group (SANS). See Note 3 to the Consolidated Financial Statements for
additional information regarding the acquisition of the SANS business.

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 to
twenty-four 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 general
warranty provisions 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. In addition, warranty provisions are also recognized
for certain nonrecurring product claims that are individually significant.

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Table of Contents

Warranty
provisions and claims for the years ended October 3, 2009 and September 27,
2008, were as follows:

|                       |  |                          |        |      |   |        |  
|---------------------- |  | ------------------------ | ------ | ---- | - | ------ | -
|                       |  | 2009                     |        | 2008 |  
|                       |  | (expressed in thousands) |       
|Beginning balance      |  | $                        | 6,107  |      | $ | 6,205  |  
|Warranty claims        |  |                          | (9,122 | )    |   | (7,643 | )
|Warranty provisions    |  |                          | 12,736 |      |   | 7,585  |  
|Acquisition of SANS    |  |                          | 73     |      |   |       |  
|Translation adjustment |  |                          | (20    | )    |   | (40    | )
|Ending balance         |  | $                        | 9,774  |      | $ | 6,107  |  

Derivative Financial InstrumentsEffective
December 28, 2008, the Company adopted the provisions of the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an Amendment to SFAS No. 133 as codified by FASB Accounting
Standards Codification (ASC) 815. ASC 815 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.

The Companys
results of operations could be materially impacted by changes in foreign
currency exchange rates, as well as interest rates on its floating rate
indebtedness. In an effort to manage exposure to these risks, the Company
periodically enters into forward and option currency exchange contracts and
interest rate swaps. Because the market value of these hedging 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. The derivative contracts contain credit risk to the extent that the
Companys bank counterparties may be unable to meet the terms of the
agreements. The amount of such credit risk is generally limited to the
unrealized gains, if any, in such contracts. Such risk is minimized by limiting
those counterparties to major financial institutions of high credit quality.
For derivative instruments executed under master netting arrangements, the Company
has the contractual right to offset fair value amounts recognized for the right
to reclaim cash collateral with obligations to return cash collateral. The
Company does not offset fair value amounts recognized on these derivative
instruments. As of October 3, 2009, the Company does not have any foreign
exchange contracts with credit-risk related contingent features.

The Companys
foreign exchange cash flow hedges and interest rate swaps are designated and
qualify as hedging instruments pursuant to ASC 815. The Companys balance sheet
hedges are accounted for and reported under the guidance of ASC 830-20-10. The
fair value of the Companys designated and undesignated outstanding hedge
derivative assets and liabilities were reported in the October 3, 2009
Consolidated Balance Sheet as follows:

|                                      |  |                                             |     |                            |   |       | 
|------------------------------------- |  | ------------------------------------------- | --- | -------------------------- | - | ----- | 
|                                      |  | October 3, 2009                             |    
|                                      |  | Prepaid Expenses
 and Other
 Current Assets |     | Other Accrued
 Liabilities |  
|                                      |  | (expressed in thousands)                    |    
|Designated hedge
 derivatives:        |  |                                             |     |                            |   |       | 
|Foreign exchange cash flow hedges     |  | $                                           | 234 |                            | $ | 470   | 
|Interest rate swaps                   |  |                                             |    |                            |   | 1,894 | 
|Total designated hedge derivatives    |  |                                             | 234 |                            |   | 2,364 | 
|                                      |  |                                             |     |                            |   |       | 
|Hedge derivatives not
 designated:    |  |                                             |     |                            |   |       | 
|Foreign exchange balance sheet hedges |  |                                             |    |                            |   | 729   | 
|Total hedge derivatives               |  | $                                           | 234 |                            | $ | 3,093 | 

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Table of Contents

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 these contracts are reported
as a component in Accumulated Other Comprehensive Income (AOCI) within
Shareholders Investment on the Consolidated Balance Sheets and reclassified
into earnings in the same period during which the underlying hedged transaction
affects earnings. The effective portion of the cash flow hedges represents the
change in fair value of the hedge that offsets the change in the functional
currency value of the hedged item. The Company periodically assesses whether
its currency exchange contracts are effective and, when a contract is
determined to be no longer effective as a hedge, the Company discontinues hedge
accounting prospectively. Subsequent changes in the market value of ineffective
currency exchange contracts are recognized as an increase or decrease in
Revenue on the Consolidated Statement of Income.

At October 3,
2009 and September 27, 2008, the Company had outstanding cash flow hedge
currency exchange contracts with gross notional U.S. dollar equivalent amounts
of $16.6 million and $59.1 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 $11.0 million and $39.8
million at October 3, 2009 and September 27, 2008, respectively. At October 3,
2009 the net market value of the foreign currency exchange contracts was a net
liability of $0.3 million, consisting of $0.5 million in liabilities and $0.2
million in offsetting assets. At September 27, 2008, the net market value of
foreign currency exchange contracts was a net asset of $0.6 million, consisting
of $1.1 million in assets and $0.5 million in offsetting liabilities.

The pretax
amounts recognized in AOCI on currency exchange contracts for the fiscal year
ended October 3, 2009, including gains (losses) reclassified into earnings in
the Consolidated Statements of Income and gains (losses) recognized in other
comprehensive income (OCI), are as follows:

|                                                                                                                                           |  |                          |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------ | -
|                                                                                                                                           |  | 2009                     |       
|                                                                                                                                           |  | (expressed in thousands) |       
|Beginning unrealized net gain in AOCI                                                                                                      |  | $                        | 108    |  
|Net loss reclassified into Revenue (effective portion)                                                                                     |  |                          | 1,969  |  
|Net loss reclassified into Revenue upon the removal of hedge
 designations on underlying foreign currency transactions that were cancelled |  |                          | 46     |  
|Net loss recognized in OCI (effective portion)                                                                                             |  |                          | (2,642 | )
|Ending unrealized net loss in AOCI                                                                                                         |  | $                        | (519   | )

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 October 3, 2009
and September 27, 2008. At October 3, 2009 and September 27, 2008, the amount
projected to be reclassified from AOCI into earnings in the next 12 months was
a net loss of $0.5 million and a net gain of $0.4 million, respectively. The
maximum remaining maturity of any forward or optional contract at October 3,
2009 and September 27, 2008 was 0.7 years and 1.3 years, respectively.

Interest Rate SwapsThe Company also uses floating to fixed interest rate
swaps to mitigate its exposure to changes in interest rates related to a
portion of its floating rate indebtedness. The Company has designated these
interest rate swaps as cash flow hedges. As a result, changes in the fair value
of the interest rate swap are recorded in AOCI within Shareholders Investment
on the Consolidated Balance Sheets.

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Table of Contents

At October 3,
2009, the Company had outstanding interest rate swaps with total notional
amounts of $40.0 million, which equals the amount of outstanding credit
facility borrowings as of that date. At September 27, 2008, the Company had an
outstanding interest rate swap with a total notional amount of $13.0 million.
Every month, the Company pays fixed interest on these interest rate swaps in
exchange for interest received at monthly U.S. LIBOR. At October 3, 2009 and
September 27, 2008, the weighted-average fixed interest rate payable by the
Company under the terms of the interest rate swap arrangements was 3.31% and
4.24%, respectively. Because there is a 45 basis-point differential between the
variable-rate interest paid by the Company on its outstanding credit facility
borrowings and the variable-rate interest received on the interest rate swaps,
the overall effective interest rate applicable to outstanding credit facility
borrowings at October 3, 2009 and September 27, 2008, under the terms of the
credit facility borrowings and interest rate swap agreements, was 3.76% and
4.69%, respectively. The total market value of the interest rate swaps at
October 3, 2009 and September 27, 2008 was a liability of $1.9 million and $0.2
million, respectively.

The pretax
amounts recognized in AOCI on interest rate swaps for the fiscal year ended
October 3, 2009 are as follows:

|                                                                 |  |                          |        |  
|---------------------------------------------------------------- |  | ------------------------ | ------ | -
|                                                                 |  | 2009                     |       
|                                                                 |  | (expressed in thousands) |       
|Beginning unrealized net
 loss in AOCI                           |  | $                        | (199   | )
|Net loss reclassified into
 interest expense (effective portion) |  |                          | 970    |  
|Net loss recognized in OCI
 (effective portion)                  |  |                          | (2,665 | )
|Ending unrealized net loss
 in AOCI                              |  | $                        | (1,894 | )

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 October 3,
2009 and September 27, 2008, the Company had outstanding balance sheet hedge currency
exchange contracts with gross notional U.S. dollar equivalent amounts of $54.5
million and $17.3 million, respectively. Upon netting offsetting contracts by
counterparty banks 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 at October 3, 2009 and
September 27, 2008 was $12.7 million and $0.5 million, respectively. At October
3, 2009, the net market value of the balance sheet foreign currency exchange
contracts was a net liability of $0.7 million. On September 27, 2008, the net
market value of the balance sheet forward exchange contracts was less than $0.1
million.

The net loss
recognized in the Consolidated Statements of Income on balance sheet hedge
currency exchange contracts during the fiscal year ended October 3, 2009 is as
follows:

|                                          |  |                          |        |  
|----------------------------------------- |  | ------------------------ | ------ | -
|                                          |  | 2009                     |       
|                                          |  | (expressed in thousands) |       
|Net loss recognized in
 Other income, net |  | $                        | (1,863 | )

Income TaxesThe Company records a tax provision for the
anticipated tax consequences of the reported results of operations. Deferred
tax assets and liabilities are measured using the currently enacted tax rates
that apply to taxable income in effect for the years in which those deferred
tax assets and liabilities are expected to be realized or settled. The Company
records a valuation allowance to reduce deferred tax assets to the amount that
is believed more likely than not to be realized. The Company believes it is
more likely than not that forecasted income, including income that may be
generated as a result of certain tax planning strategies, together with the tax
effects of the deferred tax liabilities, will be sufficient to fully recover
the remaining net realizable value of its deferred tax assets. In the event
that all or part of the net deferred tax assets are determined not to be
realizable in the future, an adjustment to the valuation allowance would be
charged to earnings in the period such determination is made. In addition, the
calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of complex tax laws. Resolution of
these uncertainties in a manner inconsistent with managements expectations
could have a material impact on the Companys financial condition and operating
results. See Note 8 to the Consolidated Financial Statements for additional
information on income taxes.

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Table of Contents

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 1.3 million, 0.9 million, and 0.5 million weighted common shares have
been excluded from the diluted weighted shares outstanding calculation for the
fiscal year ended October 3, 2009, September 27, 2008, and September 29, 2007,
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:

|                                                |  |                                                  |        |      |   |        |  |   |        | 
|----------------------------------------------- |  | ------------------------------------------------ | ------ | ---- | - | ------ |  | - | ------ | 
|                                                |  | 2009                                             |        | 2008 |   | 2007   | 
|                                                |  | (expressed
 in thousands, except per share data) |       
|                                                |  |                                                  |        |      |   |        |  |   |        | 
|Income before discontinued operations           |  | $                                                | 17,394 |      | $ | 47,110 |  | $ | 41,041 | 
|Income from discontinued operations, net of tax |  |                                                  |       |      |   | 2,081  |  |   | 955    | 
|Net income                                      |  | $                                                | 17,394 |      | $ | 49,191 |  | $ | 41,996 | 
|Weighted average common shares outstanding      |  |                                                  | 16,793 |      |   | 17,351 |  |   | 17,980 | 
|Dilutive potential common shares                |  |                                                  | 38     |      |   | 193    |  |   | 350    | 
|Total dilutive common shares                    |  |                                                  | 16,831 |      |   | 17,544 |  |   | 18,330 | 
|Earnings per share:                             |  |                                                  |        |      |   |        |  |   |        | 
|Basic:                                          |  |                                                  |        |      |   |        |  |   |        | 
|Income before discontinued operations           |  | $                                                | 1.04   |      | $ | 2.72   |  | $ | 2.29   | 
|Income from discontinued operations, net of tax |  |                                                  |       |      |   | 0.12   |  |   | 0.05   | 
|Earnings per share                              |  | $                                                | 1.04   |      | $ | 2.84   |  | $ | 2.34   | 
|Diluted:                                        |  |                                                  |        |      |   |        |  |   |        | 
|Income before discontinued operations           |  | $                                                | 1.03   |      | $ | 2.68   |  | $ | 2.24   | 
|Income from discontinued operations, net of tax |  |                                                  |       |      |   | 0.12   |  |   | 0.05   | 
|Earnings per share                              |  | $                                                | 1.03   |      | $ | 2.80   |  | $ | 2.29   | 

Stock-Based CompensationThe Company measures 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, and recognizes the cost 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 future periods, the
compensation expense recorded 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.

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Table of Contents

Comprehensive Income (Loss)Comprehensive Income (Loss), a component of
Shareholders Investment, for the fiscal years ended October 3, 2009, September
27, 2008 and September 29, 2007 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 ASC 715-20, 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 ASC 715-20, 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 9 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:

|                                                         |  |                                                            |        |                                                                            |   |                                            |   |                                                         |        |  |   |        |  
|-------------------------------------------------------- |  | ---------------------------------------------------------- | ------ | -------------------------------------------------------------------------- | - | ------------------------------------------ | - | ------------------------------------------------------- | ------ |  | - | ------ | -
|                                                         |  | Derivative
 Financial
 Instrument
 Unrealized
 Gain (Loss) |        | Minimum
 Pension
 Liability
 and other
 Pension
 Benefit Plan
 Adjustments |   | Foreign
 Currency
 Translation
 Adjustment |   | Total
 Accumulated
 Other
 Comprehensive
 Income (Loss) |       
|                                                         |  | (expressed in thousands)                                   |       
|Balances at September 30, 2006                           |  | $                                                          | 343    |                                                                            | $ | (750                                       | ) | $                                                       | 12,517 |  | $ | 12,110 |  
|Foreign exchange translation adjustments                 |  |                                                            |       |                                                                            |   | (91                                        | ) |                                                         | 9,389  |  |   | 9,298  |  
|Minimum pension liability adjustment, net of tax of $490 |  |                                                            |       |                                                                            |   | 738                                        |   |                                                         |       |  |   | 738    |  
|Change in unrealized loss, net of tax of ($366)          |  |                                                            | (612   | )                                                                          |   |                                           |   |                                                         |       |  |   | (612   | )
|Realized gain, net of tax of ($74)                       |  |                                                            | (123   | )                                                                          |   |                                           |   |                                                         |       |  |   | (123   | )
|Adjustment to initially apply FASB                       |  |                                                            |        |                                                                            |   |                                            |   |                                                         |        |  |   |        |  
|ASC 715-20, net of tax of ($431)                         |  |                                                            |       |                                                                            |   | (998                                       | ) |                                                         |       |  |   | (998   | )
|Balances at September 29, 2007                           |  | $                                                          | (392   | )                                                                          | $ | (1,101                                     | ) | $                                                       | 21,906 |  | $ | 20,413 |  
|Foreign exchange translation adjustments                 |  |                                                            |       |                                                                            |   | (29                                        | ) |                                                         | 3,888  |  |   | 3,859  |  
|Minimum pension liability adjustment, net of tax of $374 |  |                                                            |       |                                                                            |   | 866                                        |   |                                                         |       |  |   | 866    |  
|Change in unrealized loss, net of tax of ($523)          |  |                                                            | (973   | )                                                                          |   |                                           |   |                                                         |       |  |   | (973   | )
|Realized gain, net of tax of $892                        |  |                                                            | 1,293  |                                                                            |   | 24                                         |   |                                                         |       |  |   | 1,317  |  
|Balances at September 27, 2008                           |  | $                                                          | (72    | )                                                                          | $ | (240                                       | ) | $                                                       | 25,794 |  | $ | 25,482 |  
|Foreign exchange translation adjustments                 |  |                                                            |       |                                                                            |   |                                           |   |                                                         | 2,459  |  |   | 2,459  |  
|Pension benefit plan adjustments, net of tax of ($429)   |  |                                                            |       |                                                                            |   | (992                                       | ) |                                                         |       |  |   | (992   | )
|Change in unrealized loss, net of tax of ($1,910)        |  |                                                            | (3,397 | )                                                                          |   |                                           |   |                                                         |       |  |   | (3,397 | )
|Realized loss, net of tax of $1,028                      |  |                                                            | 1,961  |                                                                            |   | 10                                         |   |                                                         |       |  |   | 1,971  |  
|Balances at October 3, 2009                              |  | $                                                          | (1,508 | )                                                                          | $ | (1,222                                     | ) | $                                                       | 28,253 |  | $ | 25,523 |  

F-16

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Table of Contents

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 June 2009, the FASB issued SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles as codified by Accounting Standards Codification (ASC)
105. This standard establishes only two levels of U.S. generally accepted
accounting principles (GAAP), authoritative and non-authoritative. The FASB
Accounting Standards Codification (the Codification) is the source of
authoritative, nongovernmental GAAP, except for rules and interpretive releases
of the SEC, which are sources of authoritative GAAP for SEC registrants. All
other non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative. ASC 105 is effective for interim or
annual reporting periods ending after September 15, 2009. The Company adopted
the provisions of ASC 105 in the fourth quarter of fiscal year 2009 and
included references to the ASC in the Notes to the Consolidated Financial
Statements, as appropriate. The Companys adoption of the provisions of ASC 105
did not have an impact on the consolidated financial statements, as the
Codification did not change or alter existing GAAP.

In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05),
an update to ASC 820, Fair Value Measurements and Disclosures. This update
provides amendments to reduce potential ambiguity in financial reporting when
measuring the fair value of liabilities. Among other provisions, this ASU
2009-05 provides clarification that, in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the valuation
techniques described in this update. ASU 2009-05 is effective for interim or
annual financial periods beginning after August 27, 2009. The Company does not
expect the adoption of ASU 2009-05 to have a material impact on its
consolidated financial statements.

In May 2009,
the FASB issued SFAS No. 165, Subsequent Events as codified by ASC 855-10.
This standard establishes general standards or accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. In addition, ASC 855 sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures an entity
should make about events or transactions that occurred after the balance sheet
date. ASC 855 is effective for interim or annual financial periods ending after
June 15, 2009. The Companys adoption of the provisions of ASC 855 during the
third quarter of fiscal year 2009 did not have an impact on the consolidated
financial statements.

In December
2008, the FASB issued FSP FAS 132R-1, Employers Disclosures about
Postretirement Benefit Plan Assets as codified by ASC 715-20-65-2. This
standard amends SFAS No. 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits as codified by ASC 715-20 and
requires additional disclosures regarding defined benefit plan assets,
including investment policies and strategies, major categories of plan assets,
valuation techniques used to measure the fair value of plan assets and
significant concentrations of risk within plan assets. ASC 715-20-65-2 is
effective for fiscal years ending after December 15, 2009. The Company does not
expect the adoption of ASC 715-20-65-2 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 as codified by ASC 815-40-15.
This standard 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. ASC 815-40-15 is effective for fiscal
years beginning after December 15, 2008. The Company does not expect the
adoption of ASC 815-40-15 to have a material impact on its consolidated
financial statements.

F-17

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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 as codified by ASC 260-10-45. This standard 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. ASC 260-10-45 is effective for fiscal years beginning after December
15, 2008. The Company does not expect the adoption of ASC 260-10-45 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 as codified by ASC 350-30-65-1. This standard 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 as codified under ASC 350-30.
ASC 350-30-65-1 is intended to improve the consistency between the useful life
of a recognized intangible asset under ASC 350-30 and the period of the
expected cash flows used to measure the fair value of the asset under ASC 805
and other GAAP. ASC 350-30-65-1 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. The Company does not expect
the adoption of ASC 350-30-65-1 to have a material impact on its consolidated
financial statements.

In December
2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations As
codified by ASC 805. ASC 805 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.
ASC 805 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, ASC 805 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. ASC 805 is effective for the
Companys fiscal years beginning on or after December 15, 2008, with early
adoption prohibited. The Company does not expect the adoption of ASC 805 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 October 3, 2009, September 27, 2008, and
September 29, 2007, the Company awarded stock options, employee stock purchase
plan shares, and restricted stock grants. During the year ended October 3,
2009, the Company also awarded restricted stock units under the 2006 stock
plan. At October 3, 2009, a total of 1,437,231 shares were available for future
grant under these plans.

Stock-Based Compensation ExpenseThe effect of recording stock-based compensation
expense for the years ended October 3, 2009, September 27, 2008, and September
29, 2007 was as follows (in thousands, except per share data):

|                                                                              |  |      |        |      |   |        |   |   |        |  
|----------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                              |  | 2009 |        | 2008 |   | 2007   |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|Stock-based compensation expense by type of award:                            |  |      |        |      |   |        |   |   |        |  
|Employee stock options                                                        |  | $    | 2,478  |      | $ | 3,591  |   | $ | 4,388  |  
|Employee stock purchase plan (ESPP)                                           |  |      | 242    |      |   | 191    |   |   | 189    |  
|Restricted stock grants and units                                             |  |      | 612    |      |   | 441    |   |   | 441    |  
|Amounts capitalized as inventory                                              |  |      | (775   | )    |   | (938   | ) |   | (1,080 | )
|Amounts recognized in income for amounts previously capitalized as
 inventory |  |      | 827    |      |   | 914    |   |   | 1,085  |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|Total stock-based compensation included in income from operations             |  |      | 3,384  |      |   | 4,199  |   |   | 5,023  |  
|Income tax benefit on stock-based compensation                                |  |      | (1,091 | )    |   | (1,421 | ) |   | (1,669 | )
|Net compensation expense included in net income                               |  | $    | 2,293  |      | $ | 2,778  |   | $ | 3,354  |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|Earnings per share:                                                           |  |      |        |      |   |        |   |   |        |  
|Basic                                                                         |  | $    | 0.14   |      | $ | 0.16   |   | $ | 0.19   |  
|Diluted                                                                       |  | $    | 0.14   |      | $ | 0.16   |   | $ | 0.18   |  
|                                                                              |  |      |        |      |   |        |   |   |        |  
|Tax effect on:                                                                |  |      |        |      |   |        |   |   |        |  
|Cash flows from operating activities                                          |  | $    | (4     | )    | $ | (925   | ) | $ | (2,123 | )
|Cash flows from financing activities                                          |  | $    | 4      |      | $ | 925    |   | $ | 2,123  |  

F-18

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Table of Contents

At October 3,
2009, there was $2.5 million of total stock option expense related to
non-vested awards not yet recognized, which is expected to be recognized over a
weighted average period of approximately 1.4 years. At October 3, 2009, there
was $0.4 million and $0.7 million of total restricted stock expense related to
non-vested awards of restricted stock grants and restricted stock units,
respectively, not yet recognized, which is expected to be recognized over a
weighted average period of approximately 2.0 years and 2.8 years, respectively.

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.
The weighted average per share fair value of stock options granted during the
fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007
was $4.71, $7.53, and $10.51, respectively. The weighted average assumptions
used to determine fair value of stock options granted during those fiscal years
were as follows:

|                         |  |      |      |      |  |      |   |  |      |  
|------------------------ |  | ---- | ---- | ---- |  | ---- | - |  | ---- | -
|                         |  | 2009 |      | 2008 |  | 2007 |  
|Expected life (in years) |  |      | 2.7  |      |  | 2.6  |   |  | 2.6  |  
|Risk-free interest rate  |  |      | 1.4  | %    |  | 2.8  | % |  | 4.9  | %
|Expected volatility      |  |      | 41.4 | %    |  | 33.3 | % |  | 31.1 | %
|Dividend yield           |  |      | 2.9  | %    |  | 1.7  | % |  | 1.0  | %

The expected
life represents the period that the stock option awards are expected to be
outstanding and was determined based on historical and anticipated future
exercise and expiration patterns. The risk-free interest rate used is based on
the yield of constant maturity U.S. Treasury bonds on the grant date with a
remaining term equal to the expected life of the grant. The Company estimates
stock price volatility based on a historical weekly price observation. The
dividend yield assumption is based on the annualized current dividend divided
by the share price on the grant date.

Awards of
restricted stock grants and restricted stock units both are valued based on the
market value of the Companys shares at the date of grant. The value of
restricted stock grants and restricted stock units 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 OptionsStock 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.

F-19

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Table of Contents

Stock option
activity for the fiscal years ended October 3, 2009, September 27, 2008, and
September 29, 2007 was as follows (in thousands, except per share amounts):

|                                           |  |        |       |       |   |        |  |       |       |        |   |       |  |  |       |   |   |       | 
|------------------------------------------ |  | ------ | ----- | ----- | - | ------ |  | ----- | ----- | ------ | - | ----- |  |  | ----- | - | - | ----- | 
|                                           |  | 2009   |       | 2008  |   | 2007   | 
|                                           |  | Shares |       | WAEP* |   | Shares |  | WAEP* |       | Shares |   | WAEP* | 
|Options outstanding at
 beginning of year  |  |        | 1,572 |       | $ | 37.59  |  |       | 1,588 |        | $ | 34.60 |  |  | 1,667 |   | $ | 28.06 | 
|Granted                                    |  |        | 273   |       | $ | 20.60  |  |       | 377   |        | $ | 35.87 |  |  | 416   |   | $ | 45.49 | 
|Exercised                                  |  |        | (40   | )     | $ | 22.44  |  |       | (332  | )      | $ | 21.62 |  |  | (426  | ) | $ | 20.08 | 
|Forfeited or expired                       |  |        | (313  | )     | $ | 34.36  |  |       | (61   | )      | $ | 35.87 |  |  | (69   | ) | $ | 31.92 | 
|Options outstanding at end
 of year        |  |        | 1,492 |       | $ | 35.56  |  |       | 1,572 |        | $ | 37.59 |  |  | 1,588 |   | $ | 34.60 | 
|Options eligible for
 exercise at year-end |  |        | 892   |       | $ | 38.90  |  |       | 821   |        | $ | 35.68 |  |  | 763   |   | $ | 27.05 | 
|*Weighted
 Average Exercise Price         

Options
outstanding at October 3, 2009 had a weighted average remaining contractual
term of 2.7 years, and an aggregate intrinsic value of $2.0 million. Options
eligible for exercise at October 3, 2009 had a weighted average remaining
contractual term of 1.9 years, and no aggregate intrinsic value.

The total
intrinsic value of stock options exercised during the fiscal years ended
October 3, 2009, September 27, 2008, and September 29, 2007 were less than $0.1
million, $5.8 million and $9.6 million, respectively.

Restricted StockThe Company awards directors and key employees
restricted stock grants and restricted stock units that vest over three years.
For restricted stock grants awarded to directors, participants are entitled to cash dividends and voting
rights on unvested shares, but the sale and transfer of these shares is
restricted during the vesting period. For restricted stock grants awarded
to employees, participants were not entitled to
cash dividends and voting rights on unvested shares.

Restricted
stock grant activity for the fiscal years ended October 3, 2009, September 27,
2008, and September 29, 2007 was as follows (in thousands, except per share
amounts):

|                                         |  |        |     |         |   |        |  |         |     |        |   |         |  |  |     |   |   |       | 
|---------------------------------------- |  | ------ | --- | ------- | - | ------ |  | ------- | --- | ------ | - | ------- |  |  | --- | - | - | ----- | 
|                                         |  | 2009   |     | 2008    |   | 2007   | 
|                                         |  | Shares |     | WAGDFV* |   | Shares |  | WAGDFV* |     | Shares |   | WAGDFV* | 
|Unvested shares at
 beginning of year    |  |        | 20  |         | $ | 39.29  |  |         | 22  |        | $ | 38.64   |  |  | 22  |   | $ | 34.06 | 
|Granted                                  |  |        | 29  |         | $ | 24.76  |  |         | 12  |        | $ | 38.30   |  |  | 11  |   | $ | 42.49 | 
|Vested                                   |  |        | (10 | )       | $ | 38.99  |  |         | (11 | )      | $ | 36.62   |  |  | (11 | ) | $ | 33.57 | 
|Forfeited                                |  |        | (3  | )       | $ | 26.91  |  |         | (3  | )      | $ | 39.87   |  |  |    |   | $ |      | 
|Unvested shares at end of
 year          |  |        | 36  |         | $ | 28.72  |  |         | 20  |        | $ | 39.29   |  |  | 22  |   | $ | 38.64 | 
|*Weighted
 Average Grant Date Fair Value

Restricted
stock unit activity for the fiscal years ended October 3, 2009, was as follows
(in thousands, except per share amounts):

|                                         |  |        |    |         |   |       | 
|---------------------------------------- |  | ------ | -- | ------- | - | ----- | 
|                                         |  | 2009   |   
|                                         |  | Shares |    | WAGDFV* |  
|Outstanding at beginning of
 year        |  |        |   |         | $ |      | 
|Granted                                  |  |        | 39 |         | $ | 20.55 | 
|Vested                                   |  |        |   |         | $ |      | 
|Forfeited                                |  |        | (1 | )       | $ | 20.55 | 
|Outstanding at end of year               |  |        | 38 |         | $ | 20.55 | 
|*Weighted
 Average Grant Date Fair Value |  |        |    |         |   |       | 

F-20

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Table of Contents

Employee Stock Purchase PlanThe 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 2009 with the combined
issuance of 36,333 shares at a weighted average price of $19.75. In fiscal
years 2008 and 2007, purchases were 20,733 and 21,351 shares, respectively,
with weighted average share prices of $33.15 and $32.83, respectively. At
October 3, 2009, the number of shares remaining for issuance under the ESPP was
478,136.

3. Acquisitions & Divestitures:

Business AcquisitionOn September 28, 2008, the Company acquired
substantially all of the assets of SANS. SANS has manufacturing facilities in
both Shenzhen and Shanghai, China, and is headquartered in Shenzhen. SANS
manufactures material testing solutions and offers a variety of products,
including electro-mechanical and static-hydraulic testing machines. The
acquisition accelerates the Companys China growth strategy while also
broadening its product offering worldwide.

The total
purchase price for SANS was $49.4 million, including direct acquisition costs
of $2.9 million. As of October 3, 2009, approximately $41.7 million of the total
purchase price was paid, including the $2.9 million of direct acquisition
costs. The remaining liability of approximately $7.7 million is included in
Other Accrued Liabilities on the October 3, 2009 Consolidated Balance Sheet,
and is expected to be paid during the next twelve months. The results of
operations for SANS have been included in the Companys Consolidated Statements
of Income since the date of acquisition, and are reported in the Companys Test
segment. Pro forma results have not been included as the impact of the
acquisition is not material.

The purchase
price for SANS was allocated based on the fair values of assets acquired and
liabilities assumed. The following table summarizes the allocation of the SANS
purchase price, including acquisition costs, to the fair values of the assets
acquired and liabilities assumed at the date of acquisition:

|                                                           |  |                           |        | 
|---------------------------------------------------------- |  | ------------------------- | ------ | 
|                                                           |  | September
 28, 2008       |       
|                                                           |  | (expressed
 in thousands) |       
|Accounts receivable,
 inventories and other current assets |  | $                         | 18,548 | 
|Property and equipment                                     |  |                           | 6,631  | 
|Other intangible assets (1)                                |  |                           | 17,887 | 
|Goodwill                                                   |  |                           | 13,604 | 
|Total assets acquired                                      |  |                           | 56,670 | 
|Current liabilities assumed                                |  |                           | 7,318  | 
|Net assets acquired                                        |  | $                         | 49,352 | 

| |     |                                                                                                                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Intangible
 assets include patents, trade names, non-compete agreements and land use
 rights in the amounts of $9.2 million, $5.1 million $2.4 million and $1.2
 million, respectively. See Note 4 in the Notes to Consolidated Financial
 Statements for additional information on intangible assets.

Discontinued OperationsOn 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.

The Company does not allocate
interest income or interest expense to discontinued operations. There were no
significant operating results of discontinued operations during the fiscal year
ended October 3, 2009. Operating results of the discontinued operations
included in the Companys results for the fiscal years ended September 27,
2008, and September 29, 2007 were as follows:

F-21

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Table of Contents

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

There
were no significant assets or liabilities of discontinued operations at October
3, 2009. The assets and liabilities of discontinued operations at September 27,
2008 were as follows:

|                                                             |  |                          |     | 
|------------------------------------------------------------ |  | ------------------------ | --- | 
|                                                             |  | 2008                     |    
|                                                             |  | (expressed in thousands) |    
|Accounts receivable, net of allowances for doubtful accounts |  | $                        | 149 | 
|Unbilled accounts receivable                                 |  |                          | 88  | 
|Current deferred tax assets                                  |  |                          | 143 | 
|Total assets of discontinued operations (1)                  |  | $                        | 380 | 
|                                                             |  |                          |     | 
|Accrued income taxes                                         |  | $                        | 177 | 
|Total liabilities of discontinued operations (2)             |  | $                        | 177 | 

| |     |                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Total
 assets of discontinued operations balance is reported in Prepaid Expenses and
 Other Current Assets in the accompanying Consolidated Balance Sheet.
| |     |                                                                                                                                                           
| | (2) | Total
 liabilities of discontinued operations balance is reported in Other Accrued
 Liabilities in the accompanying Consolidated Balance Sheet.           

4. Capital Assets:

Property and Equipment

Property
and equipment at October 3, 2009 and September 27, 2008 consist of the
following:

|                              |  |                          |         |      |   |         |  
|----------------------------- |  | ------------------------ | ------- | ---- | - | ------- | -
|                              |  | 2009                     |         | 2008 |  
|                              |  | (expressed in thousands) |        
|Land and improvements         |  | $                        | 1,716   |      | $ | 1,668   |  
|Buildings and improvements    |  |                          | 52,921  |      |   | 45,700  |  
|Machinery and equipment       |  |                          | 96,156  |      |   | 91,851  |  
|Total                         |  |                          | 150,793 |      |   | 139,219 |  
|Less accumulated depreciation |  |                          | (94,675 | )    |   | (88,685 | )
|Property and equipment, net   |  | $                        | 56,118  |      | $ | 50,534  |  

Goodwill

The
changes to the carrying amount of goodwill for fiscal years ended October 3,
2009 and September 27, 2008 were as follows:

|                     |  |                          |        |      |   |       | 
|-------------------- |  | ------------------------ | ------ | ---- | - | ----- | 
|                     |  | 2009                     |        | 2008 |  
|                     |  | (expressed in thousands) |       
|Beginning balance    |  | $                        | 1,668  |      | $ | 1,642 | 
|Acquisition of SANS  |  |                          | 13,604 |      |   |      | 
|Currency translation |  |                          | (66    | )    |   | 26    | 
|Ending balance       |  | $                        | 15,206 |      | $ | 1,668 | 

F-22

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Table of Contents

At
October 3, 2009 and September 27, 2009, $13.5 million and $1.7 million of
goodwill was associated with the Test and Sensors segments, respectively. At
September 27, 2008, goodwill of $1.7 million was associated entirely with the
Sensors segment.

Other Intangible Assets

Other
intangible assets at October 3, 2009 and September 27, 2008 consist of the
following:

|                           |  |                          |        |                           |   |                     |   |                                            |        |  |  |      | 
|-------------------------- |  | ------------------------ | ------ | ------------------------- | - | ------------------- | - | ------------------------------------------ | ------ |  |  | ---- | 
|                           |  | October 3, 2009          |       
|                           |  | Gross Carrying
 Amount   |        | Accumulated
 Amortization |   | Net Carrying
 Value |   | Weighted
 Average
 Useful Life
 (in Years) |       
|                           |  | (expressed in thousands) |       
|Software development costs |  | $                        | 8,062  |                           | $ | (729                | ) | $                                          | 7,333  |  |  | 5.0  | 
|Patents                    |  |                          | 9,225  |                           |   | (652                | ) |                                            | 8,573  |  |  | 15.4 | 
|Trademarks and trade names |  |                          | 5,583  |                           |   | (412                | ) |                                            | 5,171  |  |  | 30.2 | 
|Non-compete agreements     |  |                          | 2,435  |                           |   | (812                | ) |                                            | 1,623  |  |  | 3.0  | 
|Land-use rights            |  |                          | 1,144  |                           |   | (18                 | ) |                                            | 1,126  |  |  | 47.8 | 
|                           |  | $                        | 26,449 |                           | $ | (2,623              | ) | $                                          | 23,826 |  |  | 15.6 | 

|                           |  |                          |       |                           |   |                     |   |                                            |       |  |  |      | 
|-------------------------- |  | ------------------------ | ----- | ------------------------- | - | ------------------- | - | ------------------------------------------ | ----- |  |  | ---- | 
|                           |  | September 27, 2008       |      
|                           |  | Gross Carrying
 Amount   |       | Accumulated
 Amortization |   | Net Carrying
 Value |   | Weighted
 Average
 Useful Life
 (in Years) |      
|                           |  | (expressed in thousands) |      
|Software development costs |  | $                        | 4,155 |                           | $ |                    |   | $                                          | 4,155 |  |  | 5.0  | 
|Trademarks and trade names |  |                          | 435   |                           |   | (227                | ) |                                            | 208   |  |  | 33.0 | 
|                           |  | $                        | 4,590 |                           | $ | (227                | ) | $                                          | 4,363 |  |  | 7.7  | 

Amortization
expense recognized during the fiscal years ended October 3, 2009 and September
27, 2008 was $2.4 million and less than $0.1 million, respectively. The
estimated future amortization expense related to other intangible assets for
the next five fiscal years is as follows:

|            |  |                           |       | 
|----------- |  | ------------------------- | ----- | 
|Fiscal Year |  | Amortization
 Expense     |      
|            |  | (expressed in
 thousands) |      
|2010        |  | $                         | 3,286 | 
|2011        |  | $                         | 3,285 | 
|2012        |  | $                         | 2,473 | 
|2013        |  | $                         | 2,473 | 
|2014        |  | $                         | 1,744 | 

Future
amortization amounts presented above are estimates. Actual future amortization
expense may be different, due to future acquisitions, impairments, changes in
amortization periods, or other factors.

F-23

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Table of Contents

5. Business Segment Information:

The
Companys Chief Executive Officer and management regularly review financial
information for the Companys three discrete operating units. Based on
similarities in the economic characteristics, nature of products and services,
production processes, type or class of customer served, method of distribution
and regulatory environments, the operating units have been aggregated for
financial statement purposes and categorized 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,
legal, finance and accounting, and general and administrative costs, are
allocated to the reportable segments primarily on the basis of revenue.

Financial
information by reportable segment for the fiscal years ended October 3, 2009,
September 27, 2008, and September 29, 2007, were as follows:

|                               |  |                          |         |      |   |         |  |   |         | 
|------------------------------ |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|                               |  | 2009                     |         | 2008 |   | 2007    | 
|                               |  | (expressed in thousands) |        
|Revenue                        |  |                          |         |      |   |         |  |   |         | 
|Test                           |  | $                        | 342,595 |      | $ | 364,068 |  | $ | 333,185 | 
|Sensors                        |  |                          | 66,286  |      |   | 96,447  |  |   | 76,906  | 
|Total Revenue                  |  | $                        | 408,881 |      | $ | 460,515 |  | $ | 410,091 | 
|                              
|Income from Operations         |  |                          |         |      |   |         |  |   |         | 
|Test                           |  | $                        | 17,494  |      | $ | 41,108  |  | $ | 39,215  | 
|Sensors                        |  |                          | 7,100   |      |   | 20,653  |  |   | 14,757  | 
|Total Income from Operations   |  | $                        | 24,594  |      | $ | 61,761  |  | $ | 53,972  | 
|                              
|Identifiable Assets            |  |                          |         |      |   |         |  |   |         | 
|Test                           |  | $                        | 289,700 |      | $ | 301,346 |  | $ | 261,040 | 
|Sensors                        |  |                          | 97,214  |      |   | 97,431  |  |   | 83,864  | 
|Discontinued Operations        |  |                          |        |      |   | 380     |  |   | 8,077   | 
|Total Assets                   |  | $                        | 386,914 |      | $ | 399,157 |  | $ | 352,981 | 
|                              
|Other Segment Data             |  |                          |         |      |   |         |  |   |         | 
|Test:                          |  |                          |         |      |   |         |  |   |         | 
|Goodwill                       |  | $                        | 13,538  |      | $ |        |  | $ |        | 
|Capital expenditures           |  |                          | 8,134   |      |   | 7,643   |  |   | 8,908   | 
|Depreciation and amortization  |  | $                        | 10,090  |      | $ | 7,317   |  | $ | 6,290   | 
|Sensors:                       |  |                          |         |      |   |         |  |   |         | 
|Goodwill                       |  | $                        | 1,668   |      | $ | 1,668   |  | $ | 1,642   | 
|Capital expenditures           |  |                          | 1,623   |      |   | 2,109   |  |   | 3,132   | 
|Depreciation
 and amortization |  | $                        | 2,042   |      | $ | 1,890   |  | $ | 1,695   | 

F-24

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Table of Contents

Geographic
information was as follows:

|                                  |  |      |                          |      |   |         |  |   |         | 
|--------------------------------- |  | ---- | ------------------------ | ---- | - | ------- |  | - | ------- | 
|                                  |  | 2009 |                          | 2008 |   | 2007    | 
|                                  |  |      | (expressed in thousands) |     
|Revenue                           |  |      |                          |      |   |         |  |   |         | 
|United States                     |  | $    | 123,336                  |      | $ | 147,766 |  | $ | 134,889 | 
|Europe, excluding Germany         |  |      | 95,368                   |      |   | 92,995  |  |   | 97,867  | 
|China                             |  |      | 61,209                   |      |   | 35,325  |  |   | 30,571  | 
|Japan                             |  |      | 47,500                   |      |   | 48,802  |  |   | 42,600  | 
|Germany                           |  |      | 33,341                   |      |   | 58,962  |  |   | 49,597  | 
|Asia, excluding Japan & China     |  |      | 29,439                   |      |   | 55,396  |  |   | 40,180  | 
|Other                             |  |      | 18,688                   |      |   | 21,269  |  |   | 14,387  | 
|Total Revenue                     |  | $    | 408,881                  |      | $ | 460,515 |  | $ | 410,091 | 
|                                  |  |      |                          |      |   |         |  |   |         | 
|Property and Equipment, Net       |  |      |                          |      |   |         |  |   |         | 
|United States                     |  | $    | 34,613                   |      | $ | 38,915  |  | $ | 35,312  | 
|Europe                            |  |      | 12,668                   |      |   | 10,085  |  |   | 12,403  | 
|Asia                              |  |      | 8,837                    |      |   | 1,534   |  |   | 2,032   | 
|Total Property and Equipment, Net |  | $    | 56,118                   |      | $ | 50,534  |  | $ | 49,747  | 

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

6. Fair Value Measurements

ASC 820-10 AdoptionEffective September
28, 2008, the Company adopted certain of the provisions of SFAS No. 157, Fair Value
Measurements as codified by ASC 820-10. ASC 820-10 provides a framework for
measuring fair value under GAAP, and defines fair value as the price that would
be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date (exit price).
ASC 820-10 clarifies that a fair value measurement should include an adjustment
for risk if market participants would include a risk adjustment in pricing the
related asset or liability.

In February 2008, the FASB issued FSP 157-2 as codified by ASC 820-10-15-1A.
ASC 820-10-15-1A delays the effective date of ASC 820-10 to fiscal years beginning
after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities
except those that are recognized or disclosed at fair vailue in the financial
statements on a recurring basis (at least annually). The Company elected the partial deferral
of ASC 820-10 under the provisions of ASC 820-10-15-1A related to its application when
evaluating goodwill, other intangible assets and other long-lived assets for
impairment. The Company does not expect the adoption of the deferred portions
of ASC 820-10 to have a material impact on its consolidated financial statements.

In determining the fair value of financial assets
and liabilities, the Company currently utilizes market data or other
assumptions that it believes market participants would use in pricing the asset
or liability, and adjusts for non-performance and/or other risk associated with
the Company as well as counterparties, as appropriate.

ASC 820-10 establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value into three broad levels. The three levels of the fair
value hierarchy are as follows:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1:
 Inputs are unadjusted quoted prices which are available in active markets for
 identical assets or liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Level 2: Inputs are
 other-than-quoted prices in active markets included in Level 1, which are
 either directly or indirectly observable, such as quoted prices for similar
 assets or liabilities in active markets, or for identical assets or
 liabilities in inactive markets. Level 2 includes those financial assets and
 liabilities that are valued using models or other valuation methodologies.
 The models used are primarily industry-standard, and consider various
 assumptions, including quoted forward prices, time value, volatility factors,
 and current contractual prices for the underlying instruments, as well as
 other relevant economic measures. Substantially all of the assumptions used
 in these valuation models are observable in the marketplace.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Level 3: Inputs are
 unobservable and reflect the Companys own assumptions used to measure assets
 and liabilities at fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-25

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Table of Contents

The hierarchy gives the
highest priority to Level 1, as this level provides the most reliable measure
of fair value, while giving the lowest priority to Level 3.

Financial Instruments Measured at Fair Value on a Recurring
Basis 
As of October 3, 2009, financial assets and liabilities subject to fair value
measurements on a recurring basis are as follows:

|                       |  |                          |   |         |   |         |  |       |   |  |   |       | 
|---------------------- |  | ------------------------ | - | ------- | - | ------- |  | ----- | - |  | - | ----- | 
|                       |  | Level 1                  |   | Level 2 |   | Level 3 |  | Total |  
|                       |  | (expressed in thousands) |  
|Assets:                |  |                          |   |         |   |         |  |       |   |  |   |       | 
|Currency contracts(1)  |  | $                        |  |         | $ | 234     |  | $     |  |  | $ | 234   | 
|Total assets           |  | $                        |  |         | $ | 234     |  | $     |  |  | $ | 234   | 
|                       |  |                          |   |         |   |         |  |       |   |  |   |       | 
|Liabilities:           |  |                          |   |         |   |         |  |       |   |  |   |       | 
|Currency contracts(1)  |  | $                        |  |         | $ | 1,199   |  | $     |  |  | $ | 1,199 | 
|Interest rate swaps(2) |  |                          |   |         |   | 1,894   |  |       |  |  |   | 1,894 | 
|Total liabilities      |  | $                        |  |         | $ | 3,093   |  | $     |  |  | $ | 3,093 | 

| |     |                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------
| | (1) | Based on observable market
 transactions of spot currency rates and forward currency rates on
 equivalently-termed instruments.
| |     |                                                                                                                                
| | (2) | Based on LIBOR and swap
 rates.                                                                                                

Financial Instruments not Measured at Fair Value 
Certain of the Companys financial instruments are not measured at fair value
but nevertheless are recorded at carrying amounts approximating fair value,
based on their short-term nature or variable interest rate. These financial
instruments include cash and cash equivalents, accounts receivable, accounts
payable and short-term borrowings.

ASC 825 Adoption 
Effective September 28, 2008, the Company adopted the provisions of SFAS No.
159, The Fair Value Option for Financial Assts and Financial Liabilities 
Including an Amendment of SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. as codified by ASC 825. ASC 825 provides an
option to elect fair value as an alternative measurement for selected financial
assets and liabilities not previously carried at fair value. Upon adoption of
ASC 825, the Company evaluated its existing eligible financial assets and
liabilities and determined that the risk of volatility in earnings, which could
result from underlying changes in the fair values of those assets and
liabilities, was not significant. As a result, the Company did not elect to
apply the fair value provisions to any of them. However, because the election
to apply the provisions of ASC 825 is determined on an instrument-by-instrument
basis, the Company may elect the fair value measurement option on future
eligible financial assets and liabilities.

7. Financing:

Short-term borrowings at
October 3, 2009 and September 27, 2008 consist of the following:

|                                                                                                                                                                                                                   |  |                          |        |      |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------ | ---- | - | ------ | 
|                                                                                                                                                                                                                   |  | 2009                     |        | 2008 |  
|                                                                                                                                                                                                                   |  | (expressed in thousands) |       
|Bank line of credit, monthly U.S. LIBOR
 plus 45 basis points (0.76% rate in effect at October 3, 2009), maturing
 October 2009, with optional month-to-month term renewal and loan repricing
 until December 2012 |  | $                        | 11,000 |      | $ | 11,000 | 
|Bank line of credit, monthly U.S. LIBOR
 plus 45 basis points (0.70% rate in effect at October 3, 2009), maturing
 October 2009, with optional month-to-month term renewal and loan repricing
 until December 2012 |  |                          | 13,000 |      |   | 13,000 | 
|Bank line of credit, monthly U.S. LIBOR
 plus 45 basis points (0.70% rate in effect at October 3, 2009), maturing
 October 2009, with optional month-to-month term renewal and loan repricing
 until December 2012 |  |                          | 10,000 |      |   |       | 
|Bank line of credit, monthly U.S. LIBOR
 plus 45 basis points (0.70% rate in effect at October 3, 2009), maturing
 October 2009, with optional month-to-month term renewal and loan repricing
 until December 2012 |  |                          | 6,000  |      |   |       | 
|Notes payable, non-interest bearing                                                                                                                                                                                |  |                          | 182    |      |   | 338    | 
|Total Short-Term Borrowings                                                                                                                                                                                        |  | $                        | 40,182 |      | $ | 24,338 | 

F-26

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Table of Contents

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 October 3, 2009, outstanding borrowings under
the Credit Facility aggregated $40.0 million.

The weighted average interest rate on outstanding borrowings under the
Credit Facility during the fiscal years ended October 3, 2009 and September 27, 2008 was
1.32% and 2.95%, respectively. In order to mitigate its exposure to interest rate
increases on its floating rate indeptedness, the Company has entered into floating
to fixed interest rate swaps. The Company intends to renew each of the outstanding borrowings on the
credit facility monthly throughout the entire term of the interest rate swap arrangement directly
associated with each borrowing. See Note 1 to the Consolidated Financial Statements for
additional information on the interest rate swaps.

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 October 3, 2009, the prime rate of 3.25% was
the applicable ABR. The adjusted LIBOR is generally determined based on the
multiple of 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 October 3, 2009, the spread of the adjusted LIBOR plus the applicable margin
ranged from 0.69% to 1.05%. 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 each the fiscal years ended
October 3, 2009 and September 27, 2008, commitment fees incurred on the Credit
Facility were less than $0.1 million.

Notes payable at October 3,
2009 and September 27, 2008 consisted of non-interest bearing notes payable to
vendors by the Companys Japanese Sensors subsidiary.

At October 3, 2009 the
Company had no outstanding long-term debt obligations. Long-term debt at
September 27, 2008 was as follows:

|                                                                                    |  |      |        |  
|----------------------------------------------------------------------------------- |  | ---- | ------ | -
|                                                                                    |  | 2008 |       
|                                                                                    |  |      |        |  
|7.5% note, unsecured, due in semi-annual installments of $1,154,
 expired July 2009 |  | $    | 2,308  |  
|Less Current Maturities of Long-Term Debt                                           |  |      | (2,308 | )
|Total Long-Term Debt, Less Current Maturities                                       |  | $    |       |  

The Company is subject to
financial covenants, among other restrictions, under the Credit Facility,
including, among other covenants, 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 October 3,
2009 and September 27, 2008, the Company was in compliance with these financial
covenants.

At October 3, 2009, the
Company had outstanding letters of credit and guarantees totaling $23.1 million
and $2.7 million, respectively, primarily to bond advance payments and
performance related to customer contracts in the Test segment.

F-27

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Table of Contents

8. Income Taxes:

The components
of income before income taxes for the fiscal years ended October 3, 2009,
September 27, 2008, and September 29, 2007 were as follows:

|                                                                                                                                                                    |  |                          |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                                                                                                    |  | 2009                     |        | 2008 |   | 2007   |  
|                                                                                                                                                                    |  | (expressed in thousands) |       
|Income before income taxes and discontinued
 operations:                                                                                                            |  |                          |        |      |   |        |   |   |        |  
|Domestic                                                                                                                                                            |  | $                        | 15,965 |      | $ | 29,745 |   | $ | 31,211 |  
|Foreign                                                                                                                                                             |  |                          | 7,938  |      |   | 35,715 |   |   | 25,379 |  
|Total                                                                                                                                                               |  | $                        | 23,903 |      | $ | 65,460 |   | $ | 56,590 |  
|                                                                                                                                                                    |  |                          |        |      |   |        |   |   |        |  
|The
 provision for income taxes from continuing operations for the fiscal years
 ended October 3, 2009, September 27, 2008, and September 29, 2007 was as
 follows:
|                                                                                                                                                                   
|                                                                                                                                                                    |  | 2009                     |        | 2008 |   | 2007   |  
|                                                                                                                                                                    |  | (expressed in thousands) |       
|Current provision (benefit):                                                                                                                                        |  |                          |        |      |   |        |   |   |        |  
|Federal                                                                                                                                                             |  | $                        | (601   | )    | $ | 9,016  |   | $ | 7,791  |  
|State                                                                                                                                                               |  |                          | 5      |      |   | 1,080  |   |   | 1,530  |  
|Foreign                                                                                                                                                             |  |                          | 7,435  |      |   | 11,943 |   |   | 10,425 |  
|Deferred                                                                                                                                                            |  |                          | (330   | )    |   | (3,689 | ) |   | (4,197 | )
|Total provision                                                                                                                                                     |  | $                        | 6,509  |      | $ | 18,350 |   | $ | 15,549 |  

A
reconciliation from the federal statutory income tax rate to the Companys
effective income tax rate for the fiscal years ended October 3, 2009, September
27, 2008, and September 29, 2007 is as follows:

|                                                                   |  |      |     |      |  |      |   |  |    |  
|------------------------------------------------------------------ |  | ---- | --- | ---- |  | ---- | - |  | -- | -
|                                                                   |  | 2009 |     | 2008 |  | 2007 |  
|                                                                   |  |      |     |      |  |      |   |  |    |  
|United States federal statutory income tax
 rate                   |  |      | 35  | %    |  | 35   | % |  | 35 | %
|Tax benefit of export sales                                        |  |      |    |      |  |     |   |  | (1 | )
|Foreign provision (less than) greater than
 of U.S. tax rate       |  |      | 1   |      |  | (1   | ) |  | (2 | )
|Settlement of audits, favorable resolution
 of accrued tax matters |  |      |    |      |  | (2   | ) |  |   |  
|State income taxes, net of federal benefit                         |  |      | 1   |      |  | 1    |   |  | 1  |  
|Research and development tax credits                               |  |      | (13 | )    |  |     |   |  | (5 | )
|Domestic production activities deduction                           |  |      | (1  | )    |  | (1   | ) |  | (1 | )
|Foreign tax credits                                                |  |      |    |      |  | (5   | ) |  |   |  
|Valuation allowances against deferred tax
 assets                  |  |      | 1   |      |  |     |   |  |   |  
|Tax exempt income                                                  |  |      |    |      |  |     |   |  | (1 | )
|Nondeductible stock option expense and
 other permanent items      |  |      | 3   |      |  | 1    |   |  | 2  |  
|Effective income tax rate                                          |  |      | 27  | %    |  | 28   | % |  | 28 | %

A summary of the deferred tax
assets and liabilities for the fiscal years ended October 3, 2009, September
27, 2008, and September 29, 2007 is as follows:

|                                                     |  |                          |        |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                                                     |  | 2009                     |        | 2008 |   | 2007   |  
|                                                     |  | (expressed in thousands) |       
|Deferred Tax Asset:                                  |  |                          |        |      |   |        |   |   |        |  
|Accrued compensation and benefits                    |  | $                        | 9,212  |      | $ | 7,887  |   | $ | 6,907  |  
|Inventory reserves                                   |  |                          | 3,621  |      |   | 1,679  |   |   | 2,466  |  
|Intangible assets                                    |  |                          | 109    |      |   |       |   |   | (61    | )
|Allowance for doubtful accounts                      |  |                          | 132    |      |   | 163    |   |   | 215    |  
|Other assets                                         |  |                          | 2,991  |      |   | 3,323  |   |   | 655    |  
|Net operating loss carryovers                        |  |                          | 2,093  |      |   | 2,555  |   |   | 1,483  |  
|Unrealized derivative instrument losses              |  |                          | 804    |      |   | 82     |   |   | 119    |  
|Capital loss carryovers                              |  |                          |       |      |   |       |   |   | 34     |  
|Research and development and foreign tax
 credits    |  |                          | 1,187  |      |   | 2,713  |   |   | 305    |  
|Total deferred tax asset before valuation
 allowance |  |                          | 20,149 |      |   | 18,402 |   |   | 12,123 |  
|Less valuation allowance                             |  |                          | (987   | )    |   | (809   | ) |   | (781   | )
|Total Deferred Tax Asset                             |  | $                        | 19,162 |      | $ | 17,593 |   | $ | 11,342 |  
|Deferred Tax Liability:                              |  |                          |        |      |   |        |   |   |        |  
|Property and equipment                               |  | $                        | 7,485  |      | $ | 4,193  |   | $ | 3,784  |  
|Intangible Assets                                    |  |                          |       |      |   | 40     |   |   |       |  
|Foreign deferred revenue and other                   |  |                          | 2,133  |      |   | 4,300  |   |   | 4,197  |  
|Total Deferred Tax Liability                         |  | $                        | 9,618  |      | $ | 8,533  |   | $ | 7,981  |  
|Net Deferred Tax Asset                               |  | $                        | 9,544  |      | $ | 9,060  |   | $ | 3,361  |  

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As of October 3, 2009, the
Companys French, Swedish, Chinese and one of its German subsidiaries had net
operating loss carryovers of $3.3 million, $0.6 million, $0.2 million and $2.5
million, respectively. These net operating loss carryovers will not expire
under local tax law, except for China which has a five year limitation. The Company
determined that the benefit of the German and Swedish subsidiaries net
operating loss carryover of $2.5 million and $0.6 million, respectively are not
likely to be realized. Accordingly, as of October 3, 2009, the Company had a
full valuation allowance against each of the German and Swedish subsidiaries
deferred tax assets in the amount of $0.8 million, and $0.2 million,
respectively.

During fiscal year 2009,
U.S. research and development tax credit legislation was extended with an
effective date retroactive to January 1, 2008. This legislation allowed the
Company to recognize $3.0 million of tax benefits in fiscal year 2009, partly
due to tax credits available on applicable research and development spending by
the Company during the last three fiscal quarters of fiscal year 2008 and
partly due to a full year of credit for fiscal year 2009.

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.

According to ASC 740-30,
income taxes are not provided on undistributed earnings of international
subsidiaries that are permanently reinvested. At October 3, 2009, undistributed
earnings permanently reinvested in international subsidiaries were
approximately $119 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
October 3, 2009, September 27, 2008, September 29, 2007, the Company recognized
(shortfalls)/benefits of ($0.5) million, $1.3 million, and $2.7 million,
respectively, related to the Companys equity compensation plans. These
(shortfalls)/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. 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.

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Effective September 30,
2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes as codified by ASC 740-10. ASC
740-10 clarifies the accounting for uncertainty in income taxes recognized in
an entitys financial statements 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, ASC
740-10 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.

A summary of changes in the
Companys liability for unrecognized tax benefits for the fiscal years ended
October 3, 2009 and September 27, 2008 is as follows:

|                                                                      |  |                          |       |      |   |       |  
|--------------------------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ----- | -
|                                                                      |  | 2009                     |       | 2008 |  
|                                                                      |  | (expressed in thousands) |      
|Beginning balance                                                     |  | $                        | 4,009 |      | $ | 5,252 |  
|(Decrease) increase due to tax positions
 related to the current year |  |                          | (151  | )    |   | 162   |  
|Decrease due to settlement of tax positions
 related to prior years   |  |                          |      |      |   | (867  | )
|Decrease due to lapse of statute of
 limitations                      |  |                          | (267  | )    |   | (575  | )
|Exchange rate change                                                  |  |                          |      |      |   | 37    |  
|Ending balance                                                        |  | $                        | 3,591 |      | $ | 4,009 |  

Included in the balance of
unrecognized tax benefits at October 3, 2009 are potential benefits of $1.7
million that, if recognized, would favorably impact the effective tax rate on
continuing operations.

At October 3, 2009 and
September 27, 2008, the Company had accrued interest related to uncertain
income tax positions of approximately $0.7 million and $0.5 million,
respectively. At October 3, 2009 and September 27, 2008, no accrual for
penalties related to uncertain tax positions existed. Upon adoption of ASC 740-10,
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.

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 October 3, 2009, the Company does
not expect significant changes in the amount of unrecognized tax benefits
during the next twelve months.

The Companys domestic entity and certain of its foreign subsidiaries are
expected to receive income tax refunds within the next twelve months. As a result, the
Company has recognized a current income tax
receivable of $3.3 million at October 3, 2009, which is included in Prepaid
Expenses and Other Current Assets on the Consolidated Balance Sheet.

9. 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.

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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, $2.2 million, and $1.9 million in
fiscal years 2009, 2008, and 2007, 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 $2.6 million, $2.7 million, and $2.7 million in fiscal years 2009,
2008, and 2007, 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, termination, disability, or death, as defined in the
plan. The Company uses a September 30 measurement date for this defined benefit
retirement plan.

During the
fiscal year ended October 3, 2009, the Company initiated workforce reduction
actions, in order to align the Companys operating cost structure with changing
market conditions. These actions resulted in both voluntary and involuntary
terminations of German employees who are eligible to receive future benefits
under the German defined benefit pension plan. The voluntary termination
actions were executed under early retirement plan arrangements which provide,
among other benefits, special termination benefits involving the Companys
funding of the defined benefit pension plan for future service periods in
effect throughout the contractual term of each early retirement arrangement.
During the fiscal year ended October 3, 2009, the Company recognized costs of
$0.3 million associated with these special termination benefits. The special
termination benefits are to be paid directly from the Companys assets
throughout the contractual terms of the arrangements, the lengths of which
range from approximately 1.0 to 5.5 years. See Note 10 to the Consolidated
Financial Statements for additional information regarding the Companys cost
reduction actions that were initiated during the fiscal year ended October 3,
2009.

The Company
recognizes the funded status of the defined benefit pension in its statement of
financial position, recognizes changes in that funded status in the year in
which the changes occur through comprehensive income, and measures the plans
assets and its obligations that determine its funded status as of the end of
the Companys fiscal year.

The pretax
amounts recognized in Accumulated Other Comprehensive Income as of October 3,
2009 and September 27, 2008 consist of the following:

|                   |  |                          |       |      |   |     | 
|------------------ |  | ------------------------ | ----- | ---- | - | --- | 
|                   |  | 2009                     |       | 2008 |  
|                   |  | (expressed in thousands) |      
|Actuarial net loss |  | $                        | 1,750 |      | $ | 329 | 
|Prior service cost |  |                          |      |      |   | 15  | 
|                   |  | $                        | 1,750 |      | $ | 344 | 

The portion of
the pretax amount in Accumulated Other Comprehensive Income at September 27,
2008 that was recognized during the fiscal year ended October 3, 2009 was less
than $0.1 million. The portion of the pretax amount in Accumulated Other
Comprehensive Income at October 3, 2009 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.

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The following
is a summary of the changes in benefit obligations and plan assets during the
fiscal years ended October 3, 2009 and September 27, 2008:

|                                                 |  |                          |        |      |   |        |  
|------------------------------------------------ |  | ------------------------ | ------ | ---- | - | ------ | -
|                                                 |  | 2009                     |        | 2008 |  
|                                                 |  | (expressed in thousands) |       
|Change in benefit obligation:                    |  |                          |        |      |   |        |  
|Projected benefit
 obligation, beginning of year |  | $                        | 13,020 |      | $ | 13,117 |  
|Service cost                                     |  |                          | 400    |      |   | 551    |  
|Interest cost                                    |  |                          | 764    |      |   | 740    |  
|Actuarial loss (gain)                            |  |                          | 1,283  |      |   | (1,439 | )
|Exchange rate change                             |  |                          | 167    |      |   | 361    |  
|Benefits paid                                    |  |                          | (303   | )    |   | (310   | )
|Special termination
 benefits                    |  |                          | 262    |      |   |       |  
|Projected benefit
 obligation, end of year       |  | $                        | 15,593 |      | $ | 13,020 |  
|                                                 |  |                          |        |      |   |        |  
|Change in plan assets:                           |  |                          |        |      |   |        |  
|Fair value of plan assets,
 beginning of year    |  | $                        | 12,775 |      | $ |       |  
|Actual return on plan
 assets                    |  |                          | 695    |      |   | (116   | )
|Employer contributions                           |  |                          | 488    |      |   | 13,198 |  
|Exchange rate change                             |  |                          | 21     |      |   | 3      |  
|Benefits paid                                    |  |                          | (303   | )    |   | (310   | )
|Fair value of plan assets,
 end of year          |  | $                        | 13,676 |      | $ | 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 October 3, 2009 and September
27, 2008:

|                                                    |  |                          |        |      |   |      |  
|--------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ---- | -
|                                                    |  | 2009                     |        | 2008 |  
|                                                    |  | (expressed in thousands) |       
|Funded status:                                      |  |                          |        |      |   |      |  
|Funded status, end of year                          |  | $                        | (1,917 | )    | $ | (245 | )
|Accumulated other
 comprehensive loss               |  |                          | 1,750  |      |   | 344  |  
|Net amount recognized                               |  | $                        | (167   | )    | $ | 99   |  
|                                                    |  |                          |        |      |   |      |  
|Amounts recognized in consolidated balance sheets:  |  |                          |        |      |   |      |  
|Pension benefit plan                                |  | $                        | (1,917 | )    | $ | (245 | )
|Deferred income taxes                               |  |                          | 528    |      |   | 104  |  
|Accumulated other
 comprehensive income, net of tax |  |                          | 1,222  |      |   | 240  |  
|Net amount recognized                               |  | $                        | (167   | )    | $ | 99   |  

The weighted
average assumptions used to determine the defined benefit retirement plan
obligation at October 3, 2009 and September 27, 2008, and also the net periodic
benefit cost for the following fiscal year, were as follows:

|                                                         |  |      |   |      |  
|-------------------------------------------------------- |  | ---- | - | ---- | -
|                                                         |  | 2009 |   | 2008 |  
|Discount rate                                            |  | 5.5  | % | 6.4  | %
|Expected rate of return on
 plan assets                  |  | 5.9  | % | 5.9  | %
|Expected rate of increase
 in future compensation levels |  | 3.0  | % | 3.2  | %

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

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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 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 October 3, 2009 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 October 3, 2009 and
September 27, 2008, by asset category, is as follows:

|                          |  |       |   |       |  
|------------------------- |  | ----- | - | ----- | -
|                          |  | 2009  |   | 2008  |  
|Fixed income securities   |  | 71.0  | % | 76.3  | %
|Equity securities         |  | 19.3  | % | 9.6   | %
|Cash and cash equivalents |  | 2.3   | % | 8.6   | %
|Other                     |  | 7.4   | % | 5.5   | %
|                          |  | 100.0 | % | 100.0 | %

Net periodic
benefit cost for the Companys defined retirement plan for the fiscal years
ended October 3, 2009, September 27, 2008, and September 29, 2007 included the
following components:

|                                |  |                          |      |      |   |       |   |   |       | 
|------------------------------- |  | ------------------------ | ---- | ---- | - | ----- | - | - | ----- | 
|                                |  | 2009                     |      | 2008 |   | 2007  |  
|                                |  | (expressed in thousands) |     
|Service cost                    |  | $                        | 400  |      | $ | 551   |   | $ | 513   | 
|Interest cost                   |  |                          | 764  |      |   | 740   |   |   | 562   | 
|Expected return on plan
 assets |  |                          | (702 | )    |   | (44   | ) |   |      | 
|Net amortization and
 deferral  |  |                          | 14   |      |   | 35    |   |   | 133   | 
|Special termination
 benefits   |  |                          | 262  |      |   |      |   |   |      | 
|Net periodic benefit cost       |  | $                        | 738  |      | $ | 1,282 |   | $ | 1,208 | 

The
accumulated benefit obligation of the Companys defined benefit retirement plan
as of October 3, 2009 and September 27, 2008 was $14.4 million and $11.8
million, respectively. During fiscal year 2007, the Company was required to
recognize an additional minimum pension liability due to the fact that the fair
value of pension plan assets was less than the accumulated benefit obligation
at the end of the plan year. As a result, 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:

Future Benefit payments:

|                   |  |                          |       | 
|------------------ |  | ------------------------ | ----- | 
|Fiscal Year        |  | Pension
 Benefits        |      
|                   |  | (expressed in thousands) |      
|2010               |  | $                        | 434   | 
|2011               |  |                          | 554   | 
|2012               |  |                          | 620   | 
|2013               |  |                          | 695   | 
|2014               |  |                          | 752   | 
|2015
 through 2019 |  |                          | 4,676 | 
|                   |  | $                        | 7,731 | 

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10. Severance Costs:

The
Company initiated workforce reduction actions throughout fiscal year 2009, in
order to align the Companys operating cost structure with changing market
conditions. As a result of the workforce reduction actions, the Company incurred
severance and benefit costs totaling $12.1 million during the fiscal year ended
October 3, 2009, of which $10.9 million and $1.2 million was reported in the
Test and Sensors segments, respectively. At October 3, 2009, the remaining
severance liability was $8.4 million, of which $5.6 million will be paid over
the next twelve months.

The
following table summarizes the severance charges included in the Companys
Consolidated Statement of Income for fiscal year ended October 3, 2009:

|                            |  |                          |        | 
|--------------------------- |  | ------------------------ | ------ | 
|                            |  | 2009                     |       
|                            |  | (expressed in thousands) |       
|Cost
 of sales              |  | $                        | 6,770  | 
|Research
 and development   |  |                          | 155    | 
|Selling
 and marketing      |  |                          | 3,989  | 
|General
 and administrative |  |                          | 1,171  | 
|Total severance costs       |  | $                        | 12,085 | 

11. 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 $5.9 million,
$5.4 million, and $5.4 million for fiscal years 2009, 2008, and 2007,
respectively. The Company has operating lease commitments for equipment, land,
and facilities that expire on various dates through 2056. Minimum annual rental
commitments for the next five fiscal years and thereafter are as follows:

|           |  |                          |        | 
|---------- |  | ------------------------ | ------ | 
|Year       |  | Payments                 |       
|           |  | (expressed in thousands) |       
|2010       |  | $                        | 5,095  | 
|2011       |  |                          | 4,154  | 
|2012       |  |                          | 2,818  | 
|2013       |  |                          | 1,659  | 
|2014       |  |                          | 778    | 
|Thereafter |  |                          | 2,584  | 
|           |  | $                        | 17,088 | 

12. Related Party Transactions:

During
the fiscal years ended October 3, 2009, September 27, 2008 and September 29,
2007, MTS Sensors purchased mechanical components and remote-mechanic workbench
services from Mark-Tronik GmbH (Mark-Tronik) aggregating approximately $1.1
million, $1.6 million and $1.4 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 October 3, 2009 and September 27, 2008, net outstanding payments due to
Mark-Tronik by MTS Sensors were less than $0.1 million.

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During
the fiscal year ended October 3, 2009 the Company purchased legal services from
Gray Plant Mooty Mooty and Bennett, P.A. (GPM) aggregating to approximately
$0.2 million. A shareholder of GPM is a related party to management of the
Company. At October 3, 2009 net outstanding payments due to GPM by the Company
was less than $0.1 million.

13. Subsequent Events:

The
Company has evaluated the period beginning October 4, 2009 through December 1,
2009, the date the Companys annual financial statements were issued, and
concluded there were no other events or transactions occurring during this
period that required recognition or additional disclosure in the financial
statements.

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MTS SYSTEMS CORPORATION AND SUBSIDIARIES

SCHEDULE II -
SUMMARY OF CONSOLIDATED ALLOWANCES

FOR DOUBTFUL ACCOUNTS AND RESTRUCTURING
RESERVES

FOR THE FISCAL YEARS ENDED OCTOBER 3, 2009,
SEPTEMBER 27, 2008,AND SEPTEMBER 29, 2007

(expressed in thousands)

|                                  |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|--------------------------------- |  | --------------------------- | ----- | ------------------------- | - | ------------------------------- | - | --------------------- | ---- | - | - | ----- | 
|                                  |  | Balance
 Beginning
 of Year |       | Provisions/
 (Recoveries) |   | Amounts
 Written-Off/
 Payments |   | Balance
 End of
 Year |     
|                                  |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|Allowance
 for Doubtful Accounts: |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|                                  |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|2009                              |  | $                           | 1,008 |                           | $ | 755                             |   | $                     | (353 | ) | $ | 1,410 | 
|                                  |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|2008                              |  |                             | 1,518 |                           |   | (111                            | ) |                       | (399 | ) |   | 1,008 | 
|                                  |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|2007                              |  |                             | 1,350 |                           |   | 320                             |   |                       | (152 | ) |   | 1,518 | 
|                                  |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|Restructuring
 Reserves:          |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|                                  |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|2009                              |  | $                           |      |                           | $ |                                |   | $                     |     |   | $ |      | 
|                                  |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|2008                              |  |                             |      |                           |   |                                |   |                       |     |   |   |      | 
|                                  |  |                             |       |                           |   |                                 |   |                       |      |   |   |       | 
|2007                              |  |                             | 40    |                           |   |                                |   |                       | (40  | ) |   |      | 

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