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United States
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-Q

or

_________________

Commission File Number 0-2382

MTS SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)

Registrant’s telephone number:   (952) 937-4000

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.

     X          Yes                               No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

     X          Yes                               No

The number of shares outstanding of the Registrant’s common stock as of August 6, 2004 was 20,441,219 shares.

MTS SYSTEMS CORPORATION

REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED JUNE 26, 2004

INDEX

1

PART I — FINANCIAL INFORMATION
Item 1.   Financial Statements

MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(unaudited — in thousands, except per share data)

The accompanying notes to consolidated financial statements are an integral part of these statements.

2

MTS SYSTEMS CORPORATION
Consolidated Statements of Income
(unaudited — in thousands, except per share data)

The accompanying notes to consolidated financial statements are an integral part of these statements.

3

MTS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
(unaudited — in thousands)

The accompanying notes to consolidated financial statements are an integral part of these statements.

4

MTS SYSTEMS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.   Basis of Presentation

The consolidated financial statements include the accounts of MTS SYSTEMS CORPORATION and its wholly owned subsidiaries (the “Company”). All significant intercompany balances and transactions have been eliminated.

The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished in these financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The accompanying financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2003 Form 10-K filed with the SEC. Interim results of operations for the three- and nine-month periods ended June 26, 2004 are not necessarily indicative of the results to be expected for the full year.

Certain prior year amounts included in the accompanying financial statements have been reclassified to conform to the current year’s presentation. Such reclassifications had no effect on the Company’s previously reported financial position, net income or cash flows.

Critical Accounting Policies

The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company’s results of operations and financial position and may require the application of a higher level of judgment by the Company’s management and, as a result, are subject to an inherent degree of uncertainty.

Revenue Recognition. Orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocol are considered to involve separable elements for revenue recognition purposes. Sufficient evidence of fair value of these elements exists to allow revenue recognition for these systems upon shipment, less the greater of the fair value associated with installation and training (if applicable) or the amount of revenue that is deemed contingent upon these elements, which is deferred until customer acceptance. In cases where special acceptance protocols exist, installation and training are not considered to be separable from the other elements of the arrangement. Accordingly, revenue for these systems is recognized upon the completion of installation and fulfillment of obligations specific to the terms of the arrangement.

Revenue on contracts requiring longer delivery periods, generally longer than six months (long-term contracts), is recognized using the percentage-of-completion method based on the cost incurred to date relative to estimated total cost of the contract. In most cases, orders with complex installations and/or unusual acceptance protocols involve long-term contracts for custom systems that follow the percentage-of-completion method of revenue recognition through customer acceptance. However, when elements that would not separately fall within the scope of accounting literature prescribing percentage-of-completion accounting are included in an arrangement, the fair value of these elements is separated from the arrangement and accounted for as such services are provided.

The Company enters into long-term contracts for customized equipment sold to its customers. Under the terms of such contracts, revenue recognized using the percentage-of-completion method may not, in certain circumstances, be invoiced until completion of contractual milestones, upon shipment of the equipment, or upon installation and acceptance by the customer. Unbilled amounts for these contracts appear in the Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable.

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

Inventories.   Inventories consist of material, labor and overhead costs and are stated at the lower of cost or market, determined under the first-in, first-out accounting method. Inventories at June 26, 2004 and September 27, 2003, respectively, were as follows:

5

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Warranty Obligations.   Sales of the Company’s products and systems are subject to limited warranty guarantees. For sales that include installation services, system guarantees typically extend for a period of twelve months from the date of either shipment or system acceptance. Product guarantees typically extend for a period of twenty-four months from the date of purchase. Standard warranty terms are included in customer contracts. Under the terms of these warranties, the Company is obligated to repair or replace any components or assemblies it deems defective due to workmanship or materials. The Company reserves the right to reject warranty claims where it determines that failure is due to normal wear, customer modifications, improper maintenance, or misuse. The Company records warranty provisions monthly based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects historical warranty incidence over the preceding twelve-month period. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. Warranty provisions and claims for the periods ended June 26, 2004 and June 28, 2003 were as follows:

Stock-Based Compensation

The Company accounts for stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25 and has elected to not expense these arrangements under Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” If compensation expense for employee stock-based compensation had been determined based on the fair value at the grant dates consistent with the methods provided in SFAS No. 123, the Company’s net income and earnings per share for the periods ended June 26, 2004 and June 28, 2003 would have been as follows:

6

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

2.   Recently Issued Accounting Standards

In December 2003, the Financial Accounting Standards Board (“FASB”) issued revisions to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” These revisions require changes to existing disclosures as well as new disclosures related to pension and other postretirement benefit plans. The annual disclosure requirements for the Company’s foreign retirement plans apply to fiscal years ending after June 15, 2004 and will be incorporated in the Company’s year-end Consolidated Financial Statements for fiscal 2004. Interim period disclosure requirements related to the components of net periodic benefit cost were effective for the first interim period beginning after December 15, 2003, and have been included in Note 9 of the Condensed Notes to Consolidated Financial Statements within this Form 10-Q. Interim period disclosure requirements related to contributions are effective for the first interim period following the application of the annual disclosure requirements and will be incorporated in interim period financial statements following the Company’s fiscal 2004 year-end.

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

3.   Discontinued Operations

During the second and third quarters of fiscal 2003, the Company sold its Automation division, which was based in New Ulm, Minnesota and also maintained operations in Montgomeryville, Pennsylvania and Freiburg and Straslund, Germany. On March 31, 2003, the Company sold substantially all of the net assets and intellectual property associated with the Automation division’s gradient amplifier product line. On April 11, 2003, the Company sold all the remaining net assets of the North American Automation division, based in New Ulm, Minnesota, and on April 30, 2003 sold to the same buyer its stock in the Automation division’s German operations, which completed the sale of the Company’s entire Automation division and its exit from the motor and amplifier business. In March 2003, the Company discontinued the custom military business of its Automation division.

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

Following are the operating results of the discontinued operations included in the Company’s results for the three- and nine-month periods ended June 28, 2003:

7

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

4.   Earnings Per Common Share

Basic net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the applicable periods. Diluted net earnings per share includes the potentially dilutive effect of common shares issued in connection with outstanding stock options using the treasury stock method. A reconciliation of these amounts is as follows:

5.   Business Segment Information

The Company’s Chief Executive Officer and its management regularly review financial information for the Company’s discrete business units. Based on similarities in the economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution and regulatory environments, the operating units have been aggregated for financial statement purposes into two reportable segments called Test and Industrial. The Test segment provides testing equipment, integrated software, and consulting services to the ground vehicles, aerospace, and

8

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

infrastructure markets. The Industrial segment provides component solutions, such as position sensors, that automate machines and machine tools, as well as components for aerospace applications.

The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements found in the Company’s 2003 Form 10-K. In evaluating each segment’s performance, management focuses on income from operations. This measurement excludes interest income and expense, income taxes and other non-operating items. Corporate expenses, including costs associated with various support functions such as human resources, information technology, finance and accounting, and general and administrative costs, are allocated to the reportable segments primarily on the basis of revenue.

Financial information by reportable segment is as follows:

6.   Derivative Instruments and Hedging Activities

The Company enters into foreign currency forward exchange contracts with highly rated financial institutions to hedge the U.S. dollar value of expected cash flows denominated in foreign currencies. The contracts are designated as foreign currency cash flow hedges, and subsequent changes in the market value of the contracts are recorded in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet until they are recognized in earnings at the time the expected cash flow occurs.

The Company periodically assesses whether the foreign currency forward exchange contracts are effective in hedging the change in dollar value of the expected foreign currency cash flows. In the period when a contract is no longer effective as a hedge, the Company discontinues hedge accounting prospectively and records the unrealized gains or losses recorded in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet within Other Income (Expense), net on the Consolidated Statement of Income. Subsequent changes in market value are recorded in Other Income (Expense), net on the Consolidated Statement of Income.

The Company also uses foreign currency forward exchange contracts to hedge the functional currency value of monetary assets and liabilities denominated in foreign currencies. The related gains and losses are included in Other Income (Expense), net on the Consolidated Statement of Income. The Company does not use derivative financial instruments for speculative or trading purposes.

At June 26, 2004 and June 28, 2003, the Company had outstanding foreign currency forward exchange contracts with gross U.S. dollar notional equivalent amounts of $25.2 million and $24.5 million, respectively. The market value of the foreign currency forward exchange contracts was ($0.5) million at June 28, 2003. At June 26, 2004, the market value of foreign currency forward exchange contracts was not material. The amounts recognized in earnings as a result of the ineffectiveness of cash flow hedges were not material for the three-month periods ended June 26, 2004 and June 28, 2003. As of June 26, 2004, no material amount was projected to be reclassified from Accumulated Other Comprehensive Income into earnings over the next 12 months. As of June 28, 2003, approximately ($0.6) was projected to be reclassified from Accumulated Other Comprehensive Income into earnings over the next 12 months. The maximum maturity length of any derivative was 1 year at June 26, 2004 and 0.9 years at June 28, 2003.

9

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

7.   Comprehensive Income

Comprehensive income consists of net income, unrealized gains or losses on investments classified as available-for-sale, derivative instrument gains or losses, and foreign currency translation adjustments and is presented as a component of Shareholders’ Investment on the Consolidated Balance Sheet. There were no significant unrealized gains or losses from available-for-sale securities as of June 26, 2004 or June 28, 2003.

Comprehensive income for the periods ended June 26, 2004 and June 28, 2003 was as follows:

8.   Retirement Benefit Plan

One of the Company’s international subsidiaries has a non-contributory, unfunded defined benefit retirement plan for eligible employees. This plan provides benefits based on the employee’s years of service and compensation during the years immediately preceding retirement, early retirement, termination, disability, or death, as defined in the plan.

The cost for the plan for the periods ended June 26, 2004 and June 28, 2003 includes the following components:

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

MTS Systems Corporation is a global supplier of testing products that help customers accelerate and improve their design, development, and manufacturing processes. MTS products are used for determining the mechanical behavior of materials, products, and structures and include computer-based testing and simulation systems, modeling and testing software, and consulting services. The Company is also a leading manufacturer of industrial position sensors. MTS had 1,630 employees and revenue of $340 million for the fiscal year ended September 27, 2003.

Overall Results

Three Months Ended June 26, 2004 (“Third Quarter of Fiscal 2004”) Compared to Three Months Ended June 28, 2003 (“Third Quarter of Fiscal 2003”)

Orders for the Third Quarter of Fiscal 2004 decreased 18.5% to $79.7 million compared to $97.8 million for the Third Quarter of Fiscal 2003, primarily driven by decreased volume in the Test segment in both North America and Europe, partially offset by an increase in Industrial segment volume across all geographic areas. Fiscal 2003 orders included a

10

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Overall Results (continued)

$10 million ground vehicle order that did not recur in fiscal 2004. Backlog of undelivered orders at June 26, 2004 was $204.1 million, a decrease of 5.3% from backlog of $215.5 million at March 27, 2004, primarily due to decreased order volume. Revenue of $91.5 million for the Third Quarter of Fiscal 2004 increased 15.4% compared to revenue of $79.3 million for the Third Quarter of Fiscal 2003, primarily due to higher beginning backlog, project timing and a $3.2 million favorable impact from currency translation. Income before discontinued operations for the Third Quarter of Fiscal 2004 was $6.6 million, or $0.31 per diluted share, an increase of 61.0% compared to $4.1 million, or $0.19 per diluted share, for the Third Quarter of Fiscal 2003, primarily driven by higher volume in both segments as well as $1.1 million of foreign currency transaction losses in fiscal 2003 that did not repeat in fiscal 2004. Net income for the Third Quarter of Fiscal 2004 was $6.6 million, or $0.31 per diluted share, an increase of 15.8% compared to $5.7 million, or $0.27 per diluted share, for the Third Quarter of Fiscal 2003. Third Quarter of Fiscal 2003 includes a $1.2 million gain from the sale of discontinued businesses and $0.4 million income from discontinued operations in fiscal 2003.

Nine Months Ended June 26, 2004 (“First Nine Months of Fiscal 2004”) Compared to Nine Months Ended June 28, 2003 (“First Nine Months of Fiscal 2003”)

Orders for the First Nine Months of Fiscal 2004 increased 24.7% to $314.4 million compared to $252.1 million for the First Nine Months of Fiscal 2003, primarily the result of booking, in the First Quarter of Fiscal 2004, two large, multi-year, international contracts for test equipment, software and support totaling in excess of $48 million. Excluding these bookings, orders for the First Nine Months of Fiscal 2004 increased 5.7%, driven by increased volume in the Test segment in Asia and the Industrial segment in Europe and Asia. Backlog of undelivered orders at June 26, 2004 increased 28.1% to $204.1 million, compared to backlog of $159.3 million at September 27, 2003 on higher order volume, partially offset by the unusually large cancellation in January 2004 of a $10.4 million customer order that was included in backlog at September 27, 2003. Revenue of $264.4 million for the First Nine Months of Fiscal 2004 increased 2.9% compared to $257.0 million for the First Nine Months of Fiscal 2003, driven by a $13.2 million favorable impact from currency translation. Excluding the impact of currency translation, revenue for the First Nine Months of Fiscal 2004 would have decreased $5.8 million, primarily due to lower beginning backlog and reduced short-cycle business in the Test segment, partially offset by an increase in volume in the Industrial segment. Income before discontinued operations for the First Nine Months of Fiscal 2004 was $20.7 million, or $0.96 per diluted share, an increase of 27.8% compared to $16.2 million, or $0.76 per diluted share, for the First Nine Months of Fiscal 2003, primarily reflecting increased volume in both business segments as well as $1.6 million of foreign currency transaction losses in fiscal 2003 that did not repeat in fiscal 2004. Net income for the First Nine Months of Fiscal 2004 was $20.7 million, or $0.96 per diluted share, an increase of 36.2% compared to $15.2 million, or $0.71 per diluted share, for the First Nine Months of Fiscal 2003, which included a $1.0 million loss from discontinued operations.

Critical Accounting Policies

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

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

Inventories.   The Company maintains a material amount of inventory to support its engineering and manufacturing operations, and a certain amount of judgment is required in determining the appropriate reserve levels required for slow-moving, excess, and obsolete inventories. While the Company expects its sales to grow, a reduction in its sales could reduce the demand for the Company’s products, and additional inventory reserves may be required.

11

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Critical Accounting Policies (continued)

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.

New Accounting Principles

In December 2003, the Financial Accounting Standards Board (“FASB”) issued revisions to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” These revisions require changes to existing disclosures as well as new disclosures related to pension and other postretirement benefit plans. The annual disclosure requirements for the Company’s foreign retirement plans apply to fiscal years ending after June 15, 2004 and will be incorporated in the Company’s year-end Consolidated Financial Statements for fiscal 2004. Interim period disclosure requirements related to the components of net periodic benefit cost were effective for the first interim period beginning after December 15, 2003, and have been included in Note 9 of the Condensed Notes to Consolidated Financial Statements within this Form 10-Q. Interim period disclosure requirements related to contributions are effective for the first interim period following the application of the annual disclosure requirements and will be incorporated in interim period financial statements following the Company’s fiscal 2004 year-end.

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

Orders and Backlog

Third Quarter of Fiscal 2004 Compared to Third Quarter of Fiscal 2003

Orders during the Third Quarter of Fiscal 2004 aggregated $79.7 million, a decrease of 18.5% compared to orders of $97.8 million booked during the Third Quarter of Fiscal 2003. The decrease is primarily the result of decreased volume in the Test segment in Europe and the North America, partially offset by an increase in Industrial segment volume across all geographic areas. Fiscal 2003 results included a $10 million ground vehicle order that did not recur in fiscal 2004.

Orders for the Test segment in the Third Quarter of Fiscal 2004 decreased 24.9% to $64.4 million, compared to orders of $85.7 million for the Third Quarter of Fiscal 2003. This decrease was largely due to decreased volume in both Europe and the Americas. The Test segment accounted for 80.8% of total Company orders for the Third Quarter of Fiscal 2004, compared to 87.6% for the Third Quarter of Fiscal 2003.

Orders for the Industrial segment in the Third Quarter of Fiscal 2004 increased 26.4% to $15.3 million, compared to orders of $12.1 million for the Third Quarter of Fiscal 2003. This increase was largely due to increased volume in the Sensors business across all geographic areas and higher demand in the AeroMet business. The Industrial segment accounted for 19.2% of total Company orders in the Third Quarter of Fiscal 2004, compared to 12.4% in the Third Quarter of Fiscal 2003.

Backlog of undelivered orders at June 26, 2004 was $204.1 million, a decrease of 5.3% from backlog of $215.5 million at March 27, 2004. The decrease is primarily due to the lower order volume. While the Company’s backlog is subject to order cancellations, the Company seldom experiences cancellations of orders larger than $1.0 million.

12

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Orders and Backlog (continued)

First Nine Months of Fiscal 2004 Compared to First Nine Months of Fiscal 2003

Orders during the First Nine Months of Fiscal 2004 aggregated $314.4 million, an increase of 24.7% compared to orders of $252.1 million booked during the First Nine Months of Fiscal 2003. The increase is primarily the result of booking two large, multi-year, international contracts for test equipment, software and support totaling in excess of $48 million. Excluding these bookings, orders for the First Nine Months of Fiscal 2004 increased 5.7%, driven by increased volume in the Test segment in Asia and the Industrial segment in Europe and Asia.

Orders for the Test segment in the First Nine Months of Fiscal 2004 increased 26.4% to $274.0 million, compared to orders of $216.7 million for the First Nine Months of Fiscal 2003. The increase is largely due to the two large orders totaling in excess of $48 million. Excluding these bookings, orders for the First Nine Months of Fiscal 2004 increased 4.3%, driven by increased volume in Asia, partially offset by decreases in Europe and North America. The Test segment accounted for 87.2% of total Company orders during the First Nine Months of Fiscal 2004, compared to 86.0% for the First Nine Months of Fiscal 2003.

Orders for the Industrial segment in the First Nine Months of Fiscal 2004 increased 14.1% to $40.4 million, compared to orders of $35.4 million in the First Nine Months of Fiscal 2003. The increase reflects continued strength in the Sensors business across all geographic locations. The Industrial segment accounted for 12.8% of total Company orders for the First Nine Months of Fiscal 2004, compared to 14.0% for the First Nine Months of Fiscal 2003.

Backlog of undelivered orders at June 26, 2004 was $204.1 million, an increase of 28.1% from backlog of $159.3 million at September 27, 2003. The increase is due to increased order volume, partially offset by the unusually large cancellation in January 2004 of a $10.4 million customer order that was included in backlog at September 27, 2003. While the Company’s backlog is subject to order cancellations, the Company seldom experiences cancellations of orders larger than $1.0 million.

Results of Operations

Third Quarter of Fiscal 2004 Compared to Third Quarter of Fiscal 2003

Revenue for the Third Quarter of Fiscal 2004 was $91.5 million, an increase of $12.2 million, or 15.4%, compared to revenue of $79.3 million for the Third Quarter of Fiscal 2003. Revenue from international customers for the Third Quarter of Fiscal 2004 represented 56.8% of total revenue, compared to 56.2% for the Third Quarter of Fiscal 2003. Revenue generated by the Test segment was $76.6 million for the Third Quarter of Fiscal 2004, an increase of 14.8%, from revenue of $66.7 million for the Third Quarter of Fiscal 2003. The increase is primarily due to timing of large custom projects and a $2.6 million favorable impact from currency translation. Excluding the impact of currency translation, revenue for the Test segment for the Third Quarter of Fiscal 2004 would have increased by approximately $7.3 million compared to the Third Quarter of Fiscal 2003. Industrial segment revenue increased 18.3%, to $14.9 million, for the Third Quarter of Fiscal 2004 from $12.6 million for the Third Quarter of Fiscal 2003, driven by increased volume in the Sensors business and a $0.6 million favorable impact from currency translation. Excluding the impact of currency translation, revenue for the Industrial segment for the Third Quarter of Fiscal 2004 would have increased by approximately $1.7 million compared to the Third Quarter of Fiscal 2003.

Gross profit for the Third Quarter of Fiscal 2004 increased 20.2%, to $36.9 million, compared to gross profit of $30.7 million for the Third Quarter of Fiscal 2003. Gross profit as a percentage of revenue was 40.3% for the Third Quarter of Fiscal 2004, an increase of 1.6 percentage points from 38.7% for the Third Quarter of Fiscal 2003. Gross profit as a percent of revenue for the Test segment was 38.8% for the Third Quarter of Fiscal 2004 compared to 36.6% for the Third Quarter of Fiscal 2003. This increase of 2.2 percentage points was primarily due to volume and productivity improvements as well as a favorable impact from currency translation of 1.0 percentage point. Excluding the impact of currency translation, gross profit for the Test segment as a percentage of revenue for the Third Quarter of Fiscal 2004 would have been 37.8%. Gross profit as a percent of revenue for the Industrial segment decreased to 48.4% for the Third Quarter of Fiscal 2004, compared to 50.1% for the Third Quarter of Fiscal 2003, primarily due to unfavorable product mix.

13

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations (continued)

Selling expenses for the Third Quarter of Fiscal 2004 increased to $15.3 million, or 17.7%, from $13.0 million for the Third Quarter of Fiscal 2003. Selling expense as a percentage of revenue increased to 16.7% for the Third Quarter of Fiscal 2004, compared to 16.4% for the Third Quarter of Fiscal 2003, primarily due to increased investment in marketing initiatives.

General and administrative expenses totaled $7.8 million for the Third Quarter of Fiscal 2004, an increase of 18.2% compared to $6.6 million for the Third Quarter of Fiscal 2003. This increase was primarily due to consulting and legal expenses of $0.9 million and $0.3 million, respectively. General and administrative expense as a percentage of revenue increased to 8.5% for the Third Quarter of Fiscal 2004, compared to 8.3% for the Third Quarter of Fiscal 2003.

Research and development expenses totaled $3.5 million for the Third Quarter of Fiscal 2004, a decrease of 12.5% compared to $4.0 million for the Third Quarter of Fiscal 2003, reflecting $0.8 million decrease due to near term resource and project reprioritization, partially offset by $0.3 million increased investment in the software and consulting market. Research and development expense as a percentage of revenue decreased to 3.8% for the Third Quarter of Fiscal 2004, compared to 5.0% for the Third Quarter of Fiscal 2003.

Income from operations increased 43.1% to $10.3 million for the Third Quarter of Fiscal 2004, compared to $7.2 million for the Third Quarter of Fiscal 2003. Income from operations in the Test segment increased $2.1 million, or 34.4%, to $8.2 million for the Third Quarter of Fiscal 2004, compared to $6.1 for the Third Quarter of Fiscal 2003, primarily due to higher volume, improved productivity and a $1.4 million favorable impact of foreign currency translation. Excluding the impact of currency translation, income from operations for the Test segment for the Third Quarter of Fiscal 2004 would have been $6.8 million. Income from operations in the Industrial segment increased by $1.0 million to $2.1 million for the Third Quarter of Fiscal 2004, compared to $1.1 million for the Third Quarter of Fiscal 2003, due to improved volume.

Interest expense was $0.8 million for the Third Quarter of Fiscal 2004, relatively flat compared to the Third Quarter of Fiscal 2003.

Interest income decreased $0.2 million to $0.5 million for the Third Quarter of Fiscal 2004, compared to $0.7 million for the Third Quarter of 2003, reflecting an increase in tax exempt investments yielding lower pre-tax rates of interest in the Third Quarter of Fiscal 2004 versus the Third Quarter of Fiscal 2003.

Other income (expense), net increased $1.5 million to income of $0.6 million for the Third Quarter of Fiscal 2004, compared to an expense of $0.9 million for the Third Quarter of Fiscal 2003, primarily due to $1.1 million of losses on foreign currency transactions in the Third Quarter of Fiscal 2003 that did not recur in the Third Quarter of Fiscal 2004.

Income before discontinued operations increased 61.0% to $6.6 million for the Third Quarter of Fiscal 2004, compared to $4.1 million for the Third Quarter of Fiscal 2003, primarily driven by increased volume, productivity improvements and currency translation, partially offset by an increase in the effective tax rate. The effective tax rate for the Third Quarter of Fiscal 2004 was 37.5%, an increase of 4.5 percentage points, compared to a tax rate of 33.0% for the Third Quarter of Fiscal 2003, reflecting an adjustment for a change in estimate in the Company’s anticipated annual tax rate for fiscal year 2004 to 34.7%. This increased tax rate is attributed to higher anticipated earnings and a reduction in the expected research and development tax credits and export tax benefit.

Net income was $6.6 million for the Third Quarter of Fiscal 2004, compared to $5.7 million for the Third Quarter of Fiscal 2003. The increase was largely due to improved income from operations and currency translation, partially offset by $1.6 million of income from discontinued operations during the Third Quarter of Fiscal 2003. Translating foreign-denominated net income into U.S. dollars resulted in an increase in net income for the Third Quarter of Fiscal 2004 of approximately $1.0 million. Excluding the impact of currency, net income for the Third Quarter of Fiscal 2004 would have been $5.6 million.

14

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations (continued)

First Nine Months of Fiscal 2004 Compared to First Nine Months of Fiscal 2003

Revenue for the First Nine Months of Fiscal 2004 was $264.4 million, an increase of $7.4 million, or 2.9%, compared to revenue of $257.0 million for the First Nine Months of Fiscal 2003. Revenue from international customers for the First Nine Months of Fiscal 2004 represented 57.0% of total revenue, compared to 53.3% for the First Nine Months of Fiscal 2003. Revenue generated by the Test segment was $223.0 million for the First Nine Months of Fiscal 2004, an increase of 0.7% from $221.4 million for the First Nine Months of Fiscal 2003. The increase is primarily due to a $10.6 million favorable impact from foreign currency translation. Excluding the impact of currency translation, revenue for the Test segment for the First Nine Months of Fiscal 2004 would have decreased by approximately $9.0 million compared to the First Nine Months of Fiscal 2003, driven by lower beginning backlog and a reduction in short-cycle business. Industrial segment revenue increased 16.3%, to $41.4 million, for the First Nine Months of Fiscal 2004 from $35.6 million for the First Nine Months of Fiscal 2003, driven by increased volume in the Sensors business and a $2.7 million favorable impact from foreign currency translation. Excluding the impact of currency translation, revenue for the Industrial segment for the First Nine Months of Fiscal 2004 would have increased by approximately $3.1 million compared to the First Nine Months of Fiscal 2003.

Gross profit for the First Nine Months of Fiscal 2004 increased 10.9%, to $105.8 million, compared to gross profit of $95.4 million for the First Nine Months of Fiscal 2003. Gross profit as a percentage of revenue was 40.0% for the First Nine Months of Fiscal 2004, an increase of 2.9 percentage points from 37.1% for the First Nine Months of Fiscal 2003. Gross profit as a percent of revenue for the Test segment was 38.4% for the First Nine Months of Fiscal 2004 compared to 35.4% for the First Nine Months of Fiscal 2003, primarily due to productivity improvements, partially offset by an unfavorable impact of currency translation of 0.7 percentage points. Excluding the impact of currency translation, gross profit as a percentage of revenue for the Third Quarter of Fiscal 2004 would have been 39.1%. Gross profit as a percent of revenue for the Industrial segment increased to 48.6% for the First Nine Months of Fiscal 2004, compared to 47.7% for the First Nine Months of Fiscal 2003, primarily due to favorable product mix in the First Nine Months of Fiscal 2004 and costs associated with a canceled customer contract in the First Nine Months of Fiscal 2003. There was no significant impact on gross profit for the Industrial segment for the First Nine Months of Fiscal 2004 as a result of translating foreign-denominated gross profit into U.S. dollars.

Selling expenses for the First Nine Months of Fiscal 2004 increased to $43.8 million, or 11.5%, from $39.3 million for the First Nine Months of Fiscal 2003, primarily due to increased investment in marketing initiatives. Selling expense as a percentage of revenue increased to 16.6% for the First Nine Months of Fiscal 2004, compared to 15.3% for the First Nine Months of Fiscal 2003.

General and administrative expenses totaled $20.9 million for the First Nine Months of Fiscal 2004, an increase of 4.0% compared to $20.1 million for the First Nine Months of Fiscal 2003. This increase was primarily due to an increase in consulting expenses of $1.0 million. General and administrative expense as a percentage of revenue for the First Nine Months of Fiscal 2004 was 7.9%, relatively flat compared to the First Nine Months of Fiscal 2003.

Research and development expenses totaled $10.5 million for the First Nine Months of Fiscal 2004, a decrease of 9.5% compared to $11.6 million for the First Nine Months of Fiscal 2003. This decrease was primarily due to near term resource and project reprioritization, partially offset by $0.6 million increased investment in the software and consulting market. Research and development expense as a percentage of revenue decreased to 4.0% for the First Nine Months of Fiscal 2004, compared to 4.5% for the First Nine Months of Fiscal 2003.

Income from operations increased 25.8% to $30.7 million for the First Nine Months of Fiscal 2004, compared to $24.4 million for the First Nine Months of Fiscal 2003. Income from operations in the Test segment increased 18.3% to $25.8 million for the First Nine Months of Fiscal 2004 compared to $21.8 million for the First Nine Months of Fiscal 2003, primarily due to improved productivity and a $1.0 million favorable impact from foreign currency translation. Excluding the impact of currency translation, income from operations for the Test segment for the First Nine Months of Fiscal 2004 would have been $24.8 million. Income from operations in the Industrial segment increased by 88.5% to $4.9 million for the First Nine Months of Fiscal 2004, compared to $2.6 million for the First Nine Months of Fiscal 2003, due to improved volume and a $0.6 million favorable impact from foreign currency translation. Excluding the impact of

15

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Results of Operations (continued)

currency translation, income from operations for the Industrial segment for the First Nine Months of Fiscal 2004 would have been $4.3 million.

Interest expense decreased $0.7 million to $2.1 million for the First Nine Months of Fiscal 2004, compared to $2.8 million for the First Nine Months of Fiscal 2003, due to a reduction in the Company’s long-term debt obligations.

Interest income decreased $0.4 million to $1.4 million for the First Nine Months of Fiscal 2004, compared to $1.8 million for the First Nine Months of 2003, reflecting an increase in tax exempt investments yielding lower pre-tax rates of interest in the First Nine Months of Fiscal 2004 versus the First Nine Months of Fiscal 2003.

Other income, net increased $1.1 million to $1.9 million for the First Nine Months of Fiscal 2004, compared to $0.8 million for the First Nine Months of 2003. Other income for the First Nine Months of Fiscal 2004 primarily reflects $1.1 million of gains on foreign currency transactions. Other income for the First Nine Months of Fiscal 2003 consisted primarily of a one-time gain of $1.3 million from proceeds from penalties associated with a cancelled customer contract, partially offset by $0.8 million of losses on foreign currency transactions.

Income before discontinued operations increased 27.8% to $20.7 million for the First Nine Months of Fiscal 2004, compared to $16.2 million for the First Nine Months of Fiscal 2003, primarily driven by increased volume, productivity improvements, and as $1.6 million of foreign currency transaction losses in fiscal 2003 that did not recur in fiscal 2004. These items were partially offset by an increase in the Company’s effective tax rate. The effective tax rate for the First Nine Months of Fiscal 2004 was 34.7%, an increase of 1.7 percentage points compared to a tax rate of 33.0% for the First Nine Months of Fiscal 2003. This increased tax rate is attributed to higher anticipated earnings and a reduction in the expected research and development tax credits and export tax benefit. The tax rate for fiscal year 2004 is expected to be approximately 34.7% but may vary due to the Company’s mix of U.S. and foreign income, foreign exports, and other items.

Net income was $20.7 million for the First Nine Months of Fiscal 2004, compared to $15.2 million for the First Nine Months of Fiscal 2003. The increase was largely due to improved income from operations in the First Nine Months of Fiscal 2004 and a $1.0 million loss on discontinued operations in the First Nine Months of Fiscal 2003. Translating foreign-denominated net income into U.S. dollars resulted in an increase in net income for the First Nine Months of Fiscal 2004 of approximately $1.1 million. Excluding the impact of currency, net income for the First Nine Months of Fiscal 2004 would have been $19.6 million.

Capital Resources and Liquidity

Total cash flow for the First Nine Months of Fiscal 2004 increased from the First Nine Months of Fiscal 2003 due to the conversion of short-term investments to cash and cash equivalents, reduction in long-term debt payments, proceeds received from the exercise of stock options, and improved earnings, partially offset by an increase in share repurchases and significant improvements in accounts receivable and inventories in the First Nine Months of Fiscal 2003. During the First Nine Months of Fiscal 2004, cash, cash equivalents and short-term investments increased by $13.9 million. The Company believes that its anticipated operating cash flow, funds available from cash and cash equivalents totaling $146.7 million at June 26, 2004, and unused financing sources are adequate to fund ongoing operations, capital expenditures, and share repurchases, as well as to fund internal growth opportunities and strategic acquisitions.

Cash flows from operating activities provided cash of $36.8 million for the First Nine Months of Fiscal 2004, compared to cash provided of $52.4 million for the First Nine Months of Fiscal 2003. The decrease in cash provided by operating activities is primarily due to significant improvements in accounts receivable and inventory made in the First Nine Months of Fiscal 2003 totaling $35.5 million, partially offset by lower income tax payments of $5.4 million, increased advanced payments from customers of $6.4 million and improved earnings of $4.6 million in the First Nine Months of Fiscal 2004.

Cash flows from investing activities provided cash totaling $56.2 million for the First Nine Months of Fiscal 2004, compared to a cash usage of $4.2 million for the First Nine Months of Fiscal 2003. The increase in cash provided by

16

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Capital Resources and Liquidity (continued)

investing activities was primarily the result of $70.2 million increased net proceeds from the conversion of short-term investments to cash and cash equivalents in the First Nine Months of Fiscal 2004, partially offset by $12.4 million of cash proceeds from the sale of discontinued businesses in fiscal 2003.

Cash flows from financing activities required the use of cash totaling $22.3 million for the First Nine Months of Fiscal 2004, compared to a cash usage of $14.8 million for the First Nine Months of Fiscal 2003. This increase in cash usage resulted from increased payments to purchase and retire common stock of $20.8 million, partially offset by reduced long-term debt payments of $8.3 million and increased proceeds from stock option exercises of $3.7 million.

Under the terms of its credit agreements, the Company has agreed to certain financial covenants. At June 26, 2004, the Company was in compliance with the financial terms and conditions of its debt and credit facility agreements.

On January 27, 2004 the Company announced that its Board of Directors authorized the repurchase of 2.5 million shares of its common stock. The authorization allows the Company to purchase the shares at prevailing market prices in the open market, via block purchases or in private transactions, and may be discontinued at any time. During the First Nine Months of Fiscal 2004, the Company purchased 1,124,000 shares of its common stock for $26.7 million.

Other Matters

The Company is exposed to market risk from changes in foreign currency exchange rates that can affect its results from operations and financial condition. To minimize this risk, the Company manages exposure to changes in foreign currency rates through its regular operating and financing activities and, when deemed appropriate, through the use of foreign currency forward exchange contracts. These contracts are used to hedge the Company’s overall exposure to exchange rate fluctuations, as the gains and losses on these contracts offset gains and losses on the assets, liabilities, and cash flows being hedged.

The Company’s dividend policy is to maintain a payout ratio that allows dividends to increase with the long-term growth of earnings per share, while sustaining dividends through economic cycles. The Company’s dividend payout ratio target is approximately 25% of earnings per share over the long term.

Forward-Looking Statements

Statements included or incorporated by reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-Q which are not historical or current facts are “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. The following important facts, among others, could affect the Company’s actual results in the future and could cause the Company’s actual financial performance to differ materially from that expressed in any forward-looking statements:

17

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Forward-Looking Statements (continued)

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

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

At June 26, 2004, the Company had an investment portfolio consisting of investments maturing in less than 90 days, accounted for as cash equivalents. These cash equivalents include fixed income securities that, because of their maturity dates or periodic repricing, are not subject to significant interest rate risk.

The Company operates internationally and thus is subject to foreign currency exchange rate changes. A hypothetical 10% appreciation in foreign currencies against the U.S. dollar, assuming all other variables were held constant, would have resulted in an increase of approximately $10.3 million in revenue for the nine months ended June 26, 2004. A hypothetical 10% depreciation in foreign currencies against the U.S. dollar, assuming all other variables were held constant, would have resulted in a decrease of approximately $10.3 million in revenue for the nine months ended June 26, 2004. The Company enters into foreign currency forward exchange contracts to reduce its exposure to foreign currency exchange rate changes on intercompany foreign currency denominated cash flows and balance sheet positions. Additional information is included in Note 7 in the Condensed Notes to Consolidated Financial Statements.

At June 26, 2004, the Company’s long-term debt consisted of notes payable with fixed interest rates ranging from 6.0% to 7.5%. As such, interest rate fluctuations would not have an impact on interest expense or cash flows.

Item 4.   Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”) as of June 26, 2004. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports

18

Item 4.   Controls and Procedures (continued)

it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There have been no changes in internal controls over financial reporting during the fiscal quarter ended June 26, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

      None

Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

      Purchases of Company Equity Securities:

Item 3.   Defaults Upon Senior Securities

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

Item 5.   Other Information

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Item 6.   Exhibits and Reports on Form 8-K

      (a)   Exhibits:

      (b)   Reports on Form 8-K:

SIGNATURES

Pursuant to the requirements 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.

20

EXHIBIT INDEX TO FORM 10-Q