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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 May 4, 2005 was 19,789,284 shares.

MTS SYSTEMS CORPORATION

REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED APRIL 2, 2005

INDEX

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PART 1 – 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.

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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.

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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.

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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 U.S. generally accepted accounting principles 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 2004 Form 10-K filed with the SEC. Interim results of operations for the three- and six-month periods ended April 2, 2005 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 and net income. During the Second Quarter of Fiscal 2005, the Company reclassified its investment in highly rated liquid municipal securities and corporate preferred stock from cash equivalents to short-term investments. Previous period balances have been reclassified for comparability. The reclassification was based upon the securities having a final maturity date in excess of three months beyond the date of acquisition.

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 Accounts Receivable.

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

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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 April 2, 2005 and October 2, 2004 were as follows:

Warranty Obligations. Sales of the Company’s products and systems are subject to limited warranty guarantees that are included in customer contracts. For sales that include installation services, warranty guarantees typically extend for a period of twelve months from the date of either shipment or acceptance. Product guarantees typically extend for a period of twenty-four months from the date of purchase. Under the terms of these warranties, the Company is obligated to repair or replace any components or assemblies it deems defective due to workmanship or materials. The Company reserves the right to reject warranty claims where it determines that failure is due to normal wear, customer modifications, improper maintenance, or misuse. The Company records warranty provisions monthly based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects historical warranty claims experience over the preceding twelve-month period. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. Warranty provisions and claims for the periods ended April 2, 2005 and March 27, 2004 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 April 2, 2005 and March 27, 2004 would have been as follows:

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2. Recently Issued Accounting Standards

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, which clarifies the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005. No material impact on the Company’s financial statements is expected from the adoption of this standard.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment. SFAS No. 123R is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is to be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company will adopt the standard in the first quarter of fiscal year 2006. While the Company cannot precisely determine the impact on net earnings as a result of the adoption of SFAS No 123R, estimated compensation expense related to prior periods can be found in Note 1 in these Condensed Notes to Consolidated Financial Statements included in this Form 10-Q and in Note 1 in the Consolidated Financial Statements included in the Company’s October 2, 2004 Form 10-K. The ultimate amount of increased compensation expense will be dependent on the number of option shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.

In December 2004, the FASB issued Staff Position (“FSP”) No. 109-1, Application of FASB Statement No. 109 (“SFAS 109”), Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” FSP 109-1 clarifies that the manufacturer’s deduction provided for under the American Jobs Creation Act of 2004 (“AJCA”) should be accounted for as a special deduction in accordance with SFAS 109 and not as a tax rate reduction. The FASB also issued Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The Company is currently evaluating the potential impact of the various provisions of the AJCA on the Company’s financial statements.

3. 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. Substantially all options to acquire common shares have been included in the diluted weighted shares outstanding calculation for the periods ended April 2, 2005 and March 27, 2004 because the average market value was greater than the exercise price of substantially all outstanding options. A reconciliation of these amounts is as follows:

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4. Short-Term Investments

The Company classifies its debt securities as either held-to-maturity or available-for-sale investments. Held-to-maturity securities are carried at amortized cost, which approximates market value. All investments in available-for-sale securities are carried at fair value, and unrealized gains and losses are reported as a component of Accumulated Other Comprehensive Income. At April 2, 2005 and October 2, 2004, the Company held available-for-sale investments totaling $81.3 million and $62.4 million, respectively, and no held-to-maturity investments. As of April 2, 2005 available-for-sale securities consist of highly rated municipal obligations and corporate preferred stock, and time bank deposits of $74.8 million and $6.5 million, respectively. As of October 2, 2004 available-for-sale securities consist entirely of highly rated municipal obligations and corporate preferred stock. There were no significant unrealized gains or losses from investments in these available-for-sale securities as of April 2, 2005 and October 2, 2004.

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 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, produced by the Company’s AeroMet subsidiary.

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 2004 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.

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Financial information by reportable segment for the periods ended April 2, 2005 and March 27, 2004 was as follows:

6. Derivative Instruments and Hedging Activities

The Company periodically enters into contracts with banks to exchange currencies at a set future date and rate to maintain the functional currency value of estimated cash flows from specifically identified foreign currency exposures. Because the market value of these contracts is derived from current and expected exchange rates, these are classified as derivative financial instruments. The contracts are matched to the identified exposures and designated as foreign currency cash flow hedges. Subsequent changes in the market value of the contracts are recorded in Accumulated Other Comprehensive Income (Loss) within Shareholders Investment on the Consolidated Balance Sheet until they are recognized in earnings at the time the forecasted transactions occur. The Company periodically assesses whether the contracts are effective in hedging the change in dollar value of the expected foreign currency exposures. When a contract is no longer effective as a hedge, the Company discontinues hedge accounting prospectively and reclassifies the unrealized gains or losses accumulated in Accumulated Other Comprehensive Income (Loss) to Other Income, net on the Consolidated Statement of Income in the current period. Subsequent changes in the market value of the contract are recognized in current period earnings. The Company also uses foreign currency forward exchange contracts to hedge the functional currency value of current assets and liabilities denominated in foreign currencies. The related gains and losses are included in Other Income, net on the Consolidated Statement of Income. The Company does not use foreign exchange contracts for speculative or trading purposes.

At April 2, 2005 and March 27, 2004, the Company had outstanding foreign currency forward exchange contracts with gross U.S. dollar notional equivalent amounts of $105.1 million and $27.1 million, respectively. At April 2, 2005 and March 27, 2004, the market value of the foreign currency forward contracts was not material. The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was not material for the periods ended April 2, 2005 and March 27, 2004. At April 2, 2005 and March 27, 2004, the amount projected to be reclassified from Accumulated Other Comprehensive Income into earnings in the next 12 months was not material and approximately ($0.1) million, respectively. The maximum original maturity of any derivative was 1.96 and 1.30 years at April 2, 2005 and March 27, 2004, respectively.

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 April 2, 2005 or March 27, 2004.

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Comprehensive income for the periods ended April 2, 2005 and March 27, 2004 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 April 2, 2005 and March 27, 2004 included the following components:

Item 2. 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 1,615 employees and revenue of $367 million for the fiscal year ended October 2, 2004.

Overall Results

Three Months Ended April 2, 2005 ("Second Quarter of Fiscal 2005") Compared to Three Months Ended March 27, 2004 ("Second Quarter of Fiscal 2004")

Orders for the Second Quarter of Fiscal 2005 increased 45.8% to $127.6 million compared to $87.5 million for the Second Quarter of Fiscal 2004, primarily driven by increased volume in the Test segment in Asia, including the receipt of a $27 million multi-year order in the ground vehicles market and a $16 million multi-year order in the aerospace market. Volume also increased in the Industrial segment across all geographies. Backlog of undelivered orders at April 2, 2005 was approximately $231 million, an increase of 13.8% from backlog of approximately $203 million at January 1, 2005, due to increased order volume, compared to backlog of approximately $216 million at the end of the Second Quarter of Fiscal 2004. Revenue of $100.9 million for the Second Quarter of Fiscal 2005 increased 14.3% compared to revenue of $88.3 million for the Second Quarter of Fiscal 2004, primarily due to increased short-cycle business in both the Test and Industrial segments and an estimated $2.4 million favorable impact from currency translation. Income from operations for the Second Quarter of Fiscal 2005 was $12.7 million, an increase of 38.0% compared to $9.2 million for the Second Quarter of Fiscal 2004, primarily driven by increased volume and improved margins in the Test segment. Net income for the Second Quarter of Fiscal 2005 was $8.5 million, or $0.41 per diluted share, an increase of 30.8% compared to $6.5 million, or $0.30 per diluted share, for the Second Quarter of Fiscal 2004, primarily due to increased income from operations, partially offset by a higher effective income tax rate.

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Six Months Ended April 2, 2005 ("First Half of Fiscal 2005") Compared to Six Months Ended March 27, 2004 ("First Half of Fiscal 2004")

Orders for the First Half of Fiscal 2005 decreased 4.6% to $223.9 million compared to $234.7 million for the First Half of Fiscal 2004, primarily due to the prior year booking of two large, multi-year, international contracts in excess of $48 million. Excluding these bookings, orders for the First Half of Fiscal 2005 increased 19.9%, driven by increased volume in the Test segment in Asia, including the receipt of a $27 million multi-year order in the ground vehicles market and a $16 million multi-year order in the aerospace market. Volume also increased in the Industrial segment across all geographies. Backlog of undelivered orders at April 2, 2005 increased 16.1% to approximately $231 million, compared to backlog of approximately $199 million at October 2, 2004, on higher order volume. Revenue of $199.4 million for the First Half of Fiscal 2005 increased 15.3% compared to $172.9 million for the First Half of Fiscal 2004, driven by higher beginning backlog and increased short-cycle business in the Test segment, as well as an estimated $6.0 million favorable impact from currency translation. Income from operations for the First Half of Fiscal 2005 was $25.7 million, an increase of 26.0% compared to $20.4 million for the First Half of Fiscal 2004, primarily reflecting improved margins in the Test segment due to favorable product mix and increased volume in both business segments. Net income for the First Half of Fiscal 2005 was $16.7 million, or $0.81 per diluted share, an increase of 18.4% compared to $14.1 million, or $0.65 per diluted share, for the First Half of Fiscal 2004, primarily due to increased income from operations, partially offset by a higher effective income tax rate.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require the Company to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company’s results of operations and financial position and may require the application of a higher level of judgment by the Company’s management, and as a result are subject to an inherent degree of uncertainty. Further information is provided in Note 1 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 inventory valuation. While the Company expects its sales to grow, a reduction in its sales could reduce the demand for the Company’s products, and additional inventory valuation adjustments may be required.

Warranty Obligations. The Company is subject to warranty guarantees on sales of its products. A certain amount of judgment is required in determining appropriate reserve levels for anticipated warranty claims. While these reserve levels are based on historical warranty experience, they may not reflect the actual claims that will occur over the upcoming warranty period, and additional warranty reserves may be required.

New Accounting Principles

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, which clarifies the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005. No material impact on the Company’s financial statements is expected from the adoption of this standard.

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In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment. SFAS No. 123R is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is to be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company will adopt the standard in the first quarter of fiscal year 2006. While the Company cannot precisely determine the impact on net earnings as a result of the adoption of SFAS No 123R, estimated compensation expense related to prior periods can be found in Note 1 in these Condensed Notes to Consolidated Financial Statements included in this Form 10-Q and in Note 1 in the Consolidated Financial Statements included in the Company’s October 2, 2004 Form 10-K. The ultimate amount of increased compensation expense will be dependent on the number of option shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.

In December 2004, the FASB issued Staff Position (“FSP”) No. 109-1, Application of FASB Statement No. 109 (“SFAS 109”), Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” FSP 109-1 clarifies that the manufacturer’s deduction provided for under the American Jobs Creation Act of 2004 (“AJCA”) should be accounted for as a special deduction in accordance with SFAS 109 and not as a tax rate reduction. The FASB also issued Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The Company is currently evaluating the potential impact of the various provisions of the AJCA on the Company’s financial statements.

Orders and Backlog

Second Quarter of Fiscal 2005 Compared to Second Quarter of Fiscal 2004

Orders for the Second Quarter of Fiscal 2005 aggregated $127.6 million, an increase of 45.8% compared to orders of $87.5 million for the Second Quarter of Fiscal 2004. This increase is primarily driven by increased volume in the Test segment in Asia, including the receipt of a $27 million multi-year order in the ground vehicles market and a $16 million multi-year order in the aerospace market. Volume also increased in the Industrial segment across all geographies.

Orders for the Test segment in the Second Quarter of Fiscal 2005 increased 46.3% to $110.0 million, compared to orders of $75.2 million for the Second Quarter of Fiscal 2004. This increase was primarily due to increased volume in Asia, including the previously mentioned $27 million and $16 million multi-year bookings, partially offset by decreased volume in Europe. The Test segment accounted for 86.2% of total Company orders for the Second Quarter of Fiscal 2005, compared to 85.9% for the Second Quarter of Fiscal 2004.

Orders for the Industrial segment in the Second Quarter of Fiscal 2005 increased 43.1% to $17.6 million, compared to orders of $12.3 million for the Second Quarter of Fiscal 2004, reflecting higher worldwide demand in the Sensors business and a $1.7 million increase in AeroMet orders. The Industrial segment accounted for 13.8% of total Company orders in the Second Quarter of Fiscal 2005, compared to 14.1% in the Second Quarter of Fiscal 2004.

Backlog of undelivered orders at April 2, 2005 was approximately $231 million, an increase of 13.8% from backlog of $203 million at January 2, 2005, due to increased order volume. Backlog at March 27, 2004 was approximately $216 million. While the Company’s backlog is subject to order cancellations, the Company seldom experiences cancellations of orders larger than $1.0 million.

First Half of Fiscal 2005 Compared to First Half of Fiscal 2004

Orders during the First Half of Fiscal 2005 aggregated $223.9 million, a decrease of 4.6% compared to orders of $234.7 million for the First Half of Fiscal 2004. The decrease is primarily the result of the prior year booking of two large, multi-year, international contracts in excess of $48 million. Excluding these bookings, orders for the First Half of Fiscal 2005 increased 19.9%, driven by increased volume in the Test segment in Asia, including the receipt of a $27 million multi-year order in the ground vehicles market and a $16 million multi-year order in the aerospace market. Volume also increased in the Industrial segment across all geographies.

Orders for the Test segment for the First Half of Fiscal 2005 decreased 8.4% to $192.0 million, compared to orders of $209.6 million for the First Half of Fiscal 2004. The decrease is due to the previously mentioned $48 million bookings during the First Half of Fiscal 2004. Excluding these bookings, orders for the First Half of Fiscal 2005 increased 18.8% due to increased volume in Asia, including the previously mentioned $27 million and $16 million multi-year bookings, partially offset by decreased volume in North America and Europe. The Test segment accounted for 85.8% of total Company orders during the First Half of Fiscal 2005, compared to 89.3% for the First Half of Fiscal 2004.

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Orders for the Industrial segment for the First Half of Fiscal 2005 increased 27.1% to $31.9 million, compared to orders of $25.1 million for the First Half of Fiscal 2004. The increase primarily reflects continued strength in the Sensors business across all geographies. The Industrial segment accounted for 14.2% of total Company orders for the First Half of Fiscal 2005, compared to 10.7% for the First Half of Fiscal 2004.

Backlog of undelivered orders at April 2, 2005 was approximately $231 million, an increase of 16.1% from backlog of approximately $199 million at October 2, 2004, primarily due to higher order volume. 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

Second Quarter of Fiscal 2005 Compared to Second Quarter of Fiscal 2004

Revenue for the Second Quarter of Fiscal 2005 was $100.9 million, an increase of $12.6 million, or 14.3%, compared to revenue of $88.3 million for the Second Quarter of Fiscal 2004. Revenue from international customers for the Second Quarter of Fiscal 2005 represented 67.4% of total revenue, compared to 59.4% for the Second Quarter of Fiscal 2004. Test segment revenue for the Second Quarter of Fiscal 2005 was $84.9 million, an increase of $10.7 million, or 14.4%, from revenue of $74.2 million for the Second Quarter of Fiscal 2004. The increase is primarily due to increased short-cycle business and after-market product volume, as well as an estimated $1.9 million favorable impact from currency translation, partially offset by lower backlog at the beginning of the Second Quarter of Fiscal 2005 versus the Second Quarter of Fiscal 2004. Excluding the impact of currency translation, revenue for the Test segment for the Second Quarter of Fiscal 2005 would have increased by an estimated $8.8 million compared to the Second Quarter of Fiscal 2004. Industrial segment revenue for the Second Quarter of Fiscal 2005 was $16.0 million, an increase of $1.9 million, or 13.5%, compared to revenue of $14.1 million for the Second Quarter of Fiscal 2004, driven by increased volume in the Sensors business and an estimated $0.5 million favorable impact from currency translation. Excluding the impact of currency translation, revenue for the Industrial segment for the Second Quarter of Fiscal 2005 would have increased by an estimated $1.4 million compared to the Second Quarter of Fiscal 2004.

Gross profit for the Second Quarter of Fiscal 2005 increased 26.1%, to $42.5 million, compared to gross profit of $33.7 million for the Second Quarter of Fiscal 2004. Gross profit as a percentage of revenue was 42.1% for the Second Quarter of Fiscal 2005, an increase of 3.9 percentage points from 38.2% for the Second Quarter of Fiscal 2004. Gross profit as a percent of revenue for the Test segment was 42.1% for the Second Quarter of Fiscal 2005 compared to 36.2% for the Second Quarter of Fiscal 2004. This increase was primarily due to higher volume, favorable product mix and improved capacity utilization, partially offset by an unfavorable impact from currency translation of an estimated 0.4 percentage points. Excluding the impact of currency translation, gross profit for the Test segment as a percentage of revenue for the Second Quarter of Fiscal 2005 would have been an estimated 42.5%. Gross profit as a percent of revenue for the Industrial segment decreased 6.3 percentage points to 42.0% for the Second Quarter of Fiscal 2005, compared to 48.3% for the Second Quarter of Fiscal 2004, primarily due to unfavorable product mix and charges associated with excess and obsolete inventory, partially offset by a favorable impact from currency translation of an estimated 0.3 percentage points. Excluding the impact of currency translation, gross profit for the Industrial segment as a percentage of revenue for the Second Quarter of Fiscal 2005 would have been an estimated 41.7%.

Selling expense for the Second Quarter of Fiscal 2005 increased to $17.1 million, or 14.8%, from $14.9 million for the Second Quarter of Fiscal 2004, primarily due to increased investment in marketing initiatives in the Test segment and an estimated $0.3 million unfavorable impact of currency translation. Excluding the impact of currency translation, selling expense for the Second Quarter of Fiscal 2005 would have increased by an estimated 12.8% compared to the Second Quarter of Fiscal 2004. Selling expense as a percentage of revenue for the Second Quarter of Fiscal 2005 was 16.9%, flat with the Second Quarter of Fiscal 2004.

General and administrative expense totaled $8.3 million for the Second Quarter of Fiscal 2005, an increase of 29.7% compared to $6.4 million for the Second Quarter of Fiscal 2004. This increase was primarily due to a $1.8 million increase in legal, accounting, and strategic consulting expenses and an estimated $0.1 million unfavorable impact of currency translation. Excluding the impact of currency translation, general and administrative expense for the Second Quarter of Fiscal 2005 would have increased by an estimated 28.1% compared to the Second Quarter of Fiscal 2004. General and administrative expense as a percentage of revenue increased to 8.2% for the Second Quarter of Fiscal 2005, compared to 7.2% for the Second Quarter of Fiscal 2004.

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Research and development expense totaled $4.4 million for the Second Quarter of Fiscal 2005, an increase of 37.5% compared to $3.2 million for the Second Quarter of Fiscal 2004. This increase was primarily due to a planned increase in investments in new product development in the Test segment. Research and development expense as a percentage of revenue increased to 4.4% for the Second Quarter of Fiscal 2005, compared to 3.6% for the Second Quarter of Fiscal 2004. There was no significant impact on research and development expense from currency translation for the Second Quarter of Fiscal 2005.

Income from operations increased 38.0% to $12.7 million for the Second Quarter of Fiscal 2005, compared to $9.2 million for the Second Quarter of Fiscal 2004. Income from operations in the Test segment increased $4.0 million, or 54.8%, to $11.3 million for the Second Quarter of Fiscal 2005, compared to $7.3 million for the Second Quarter of Fiscal 2004, primarily due to higher volume, favorable product mix, improved capacity utilization, and an estimated $0.2 million favorable impact of currency translation, partially offset by $4.9 million increased operating expenses. Excluding the impact of currency translation, income from operations for the Second Quarter of Fiscal 2005 would have increased by an estimated 52.1% compared to the Second Quarter of Fiscal 2004. Income from operations in the Industrial segment decreased by $0.5 million to $1.4 million for the Second Quarter of Fiscal 2005, compared to $1.9 million for the Second Quarter of Fiscal 2004, primarily due to unfavorable product mix and charges associated with excess and obsolete inventory, partially offset by an estimated $0.1 million favorable impact of currency translation. Excluding the impact of currency translation, income from operations for the Second Quarter of Fiscal 2005 would have decreased by an estimated 31.6% compared to the Second Quarter of Fiscal 2004.

Interest expense was $0.5 million for the Second Quarter of Fiscal 2005, a decrease of $0.2 million compared to $0.7 million for the Second Quarter of Fiscal 2004, due to a reduction in the Company’s long-term debt obligations.

Interest income was $0.5 million for the Second Quarter of Fiscal 2005, a slight increase from interest income of $0.4 million for the Second Quarter of Fiscal 2004.

Other income, net decreased $0.5 million to income of $0.2 million for the Second Quarter of Fiscal 2005, compared to $0.7 million for the Second Quarter of Fiscal 2004, primarily due to reduced gains on foreign currency transactions.

Provision for income taxes totaled $4.4 million for the Second Quarter of Fiscal 2005, an increase of 41.9% compared to $3.1 million for the Second Quarter of Fiscal 2004. The effective tax rate for the Second Quarter of Fiscal 2005 was 34.4%, an increase of 2.3 percentage points compared to a tax rate of 32.1% for the Second Quarter of Fiscal 2004, reflecting a change in estimate in the Company’s anticipated annual tax rate for fiscal year 2005. The projected effective tax rate for fiscal year 2005 reflects an expected increase in the proportion of foreign income versus domestic income, higher expected pre-tax income, and unfavorable implications associated with the American Jobs Creation Act of 2004. The unfavorable implications of the new law include the partial loss of the extraterritorial income exclusion and no offsetting benefit from the manufacturing deduction for fiscal year 2005. The tax rate for fiscal year 2005 is expected to be approximately 35.7%. The actual effective rate may differ due to the Company’s actual mix of foreign and domestic income, foreign exports, and other items. Additionally, the Company has not yet concluded its analysis of the impact of the American Jobs Creation Act of 2004.

Net income was $8.5 million for the Second Quarter of Fiscal 2005, compared to $6.5 million for the Second Quarter of Fiscal 2004. The increase was primarily due to improved income from operations, partially offset by an increase in the Company’s effective tax rate. The estimated impact on net income from currency translation for the Second Quarter of Fiscal 2005 was $0.2 million. Excluding the impact of currency translation, net income for the Second Quarter of Fiscal 2005 would have been $8.3 million.

First Half of Fiscal 2005 Compared to First Half of Fiscal 2004

Revenue for the First Half of Fiscal 2005 was $199.4 million, an increase of $26.5 million, or 15.3%, compared to revenue of $172.9 million for the First Half of Fiscal 2004. Revenue from international customers for the First Half of Fiscal 2005 represented 66.0% of total revenue, compared to 57.1% for the First Half of Fiscal 2004. Revenue generated by the Test segment was $168.2 million for the First Half of Fiscal 2005, an increase of 14.9% from $146.4 million for the First Half of Fiscal 2004. The increase is primarily due to higher backlog at the beginning of fiscal year 2005 versus the beginning of Fiscal 2004, increased short-cycle business and after-market product volume, and an estimated $4.7 million favorable impact from currency translation. Excluding the impact of currency translation, revenue for the Test segment for the First Half of Fiscal 2005 would have increased by an estimated $17.1 million compared to the First Half of Fiscal 2004. Industrial segment revenue for the First Half of Fiscal 2005 was $31.2 million, an increase of $4.7 million, or 17.7%, compared to revenue of $26.5 million for the First Half of Fiscal 2004, primarily driven by increased volume in the Sensors business and an estimated $1.3 million favorable impact from currency translation. Excluding the impact of currency translation, revenue for the Industrial segment for the First Half of Fiscal 2005 would have increased by an estimated $3.4 million compared to the First Half of Fiscal 2004.

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Gross profit for the First Half of Fiscal 2005 increased 22.0%, to $83.2 million, compared to gross profit of $68.2 million for the First Half of Fiscal 2004. Gross profit as a percentage of revenue was 41.7% for the First Half of Fiscal 2005, an increase of 2.3 percentage points from 39.4% for the First Half of Fiscal 2004. Gross profit as a percent of revenue for the Test segment was 41.6% for the First Half of Fiscal 2005 compared to 37.8% for the First Half of Fiscal 2004. This increase was primarily due to higher volume, favorable product mix and improved capacity utilization, partially offset by an unfavorable impact from currency translation of an estimated 0.6 percentage points. Excluding the impact of currency translation, gross profit for the Test segment as a percentage of revenue for the First Half of Fiscal 2005 would have been an estimated 42.2%. Gross profit as a percentage of revenue for the Industrial segment decreased to 42.6% for the First Half of Fiscal 2005, compared to 48.3% for the First Half of Fiscal 2004, primarily due to unfavorable product mix and charges associated with excess and obsolete inventory, partially offset by a favorable impact from currency translation of an estimated 0.2 percentage points. Excluding the impact of currency translation, gross profit for the Industrial segment as a percentage of revenue for the First Half of Fiscal 2005 would have been an estimated 42.4%.

Selling expense for the First Half of Fiscal 2005 increased to $33.4 million, or 17.2%, from $28.5 million for the First Half of Fiscal 2004, primarily due to increased investment in marketing initiatives in the Test segment and an estimated $0.9 million unfavorable impact of currency translation. Excluding the impact of currency translation, selling expense for the First Half of Fiscal 2005 would have increased by an estimated 14.0% compared to the First Half of Fiscal 2004. Selling expense as a percentage of revenue for the First Half of Fiscal 2005 increased to 16.8%, compared to 16.5% for the First Half of Fiscal 2004.

General and administrative expense totaled $15.6 million for the First Half of Fiscal 2005, an increase of 21.9% compared to $12.8 million for the First Half of Fiscal 2004. This increase was primarily due to a $2.4 million increase in legal, accounting and strategic consulting expenses and an estimated $0.2 million unfavorable impact of currency translation. Excluding the impact of currency translation, general and administrative expense for the First Half of Fiscal 2005 would have increased by an estimated 20.3% compared to the First Half of Fiscal 2004. General and administrative expense as a percentage of revenue increased to 7.8% for the First Half of Fiscal 2005, compared to 7.4% for the First Half of Fiscal 2004.

Research and development expense totaled $8.5 million for the First Half of Fiscal 2005, an increase of 30.8% compared to $6.5 million for the First Half of Fiscal 2004. This increase was primarily due to a planned increase in investments in new product development in the Test segment. Research and development expense as a percentage of revenue increased to 4.3% for the First Half of Fiscal 2005, compared to 3.8% for the First Half of Fiscal 2004. There was no significant impact on research and development expense from currency translation for the First Half of Fiscal 2005.

Income from operations increased 26.0% to $25.7 million for the First Half of Fiscal 2005, compared to $20.4 million for the First Half of Fiscal 2004. Income from operations in the Test segment increased $5.2 million, or 29.5%, to $22.8 million for the First Half of Fiscal 2005, compared to $17.6 million for the First Half of Fiscal 2004, primarily due to higher volume, favorable product mix, improved capacity utilization and an estimated $0.2 million favorable impact of currency translation, partially offset by $9.3 million increased operating expenses. Excluding the impact of currency translation, income from operations for the First Half of Fiscal 2005 would have increased by an estimated 28.4% compared to the First Half of Fiscal 2004. Income from operations in the Industrial segment increased by $0.1 million to $2.9 million for the First Half of Fiscal 2005, compared to $2.8 million for the First Half of Fiscal 2004, primarily due to an estimated $0.3 million favorable impact of currency translation, partially offset by charges associated with excess and obsolete inventory. Excluding the impact of currency translation, income from operations for the First Half of Fiscal 2005 would have decreased by an estimated 7.1% compared to the First Half of Fiscal 2004, primarily due to unfavorable product mix.

Interest expense decreased $0.3 million to $1.1 million for the First Half of Fiscal 2005, compared to $1.4 million for the First Half of Fiscal 2004, due to a reduction in the Company’s long-term debt obligations.

Interest income was $0.9 million for the First Half of Fiscal 2005, flat with the First Half of Fiscal 2004.

Other income, net decreased $0.9 million to income of $0.4 million for the First Half of Fiscal 2005, compared to $1.3 million for the First Half of Fiscal 2004, primarily due to reduced gains on foreign currency transactions in the First Half of Fiscal 2004.

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Provision for income taxes totaled $9.3 million for the First Half of Fiscal 2005, an increase of 32.9% compared to $7.0 million for the First Half of Fiscal 2004. The effective tax rate for the First Half of Fiscal 2005 was 35.7%, an increase of 2.4 percentage points compared to a tax rate of 33.3% for the First Half of Fiscal 2004. The projected effective tax rate for fiscal year 2005 reflects an expected increase in the total year proportion of foreign income versus domestic income, higher anticipated pre-tax income, and unfavorable implications associated with the American Jobs Creation Act of 2004. The unfavorable implications of the new law include the partial loss of the extraterritorial income exclusion and no offsetting benefit from the manufacturing deduction for fiscal year 2005. The tax rate for fiscal year 2005 is expected to be approximately 35.7%. The rate may differ due to the Company’s actual mix of foreign and domestic income, foreign exports, and other items. Additionally, the Company has not yet concluded its analysis of the impact of the American Jobs Creation Act of 2004.

Net income was $16.7 million for the First Half of Fiscal 2005, compared to $14.1 million for the First Half of Fiscal 2004. The increase was primarily due to improved income from operations, partially offset by an increase in the Company’s effective tax rate. The estimated favorable impact on net income from currency translation for the First Half of Fiscal 2005 was $0.3 million. Excluding the impact of currency translation, net income for the First Half of Fiscal 2005 would have been $16.4 million.

Capital Resources and Liquidity

Total cash and cash equivalents was flat in the First Half of Fiscal 2005 compared to an increase in total cash and cash equivalents in the First Half of Fiscal 2004 of $26.5 million, primarily due to increased net purchases of short-term investments and the repurchase of the Company’s common stock in the First Half of Fiscal 2005. The Company believes that its anticipated operating cash flow, funds available from cash and cash equivalents and short-term investments totaling $148.1 million at April 2, 2005, 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 $29.8 million for the First Half of Fiscal 2005, compared to cash provided of $28.0 million for the First Half of Fiscal 2004. Operating cash flow for the First Half of Fiscal 2005 primarily resulted from strong earnings and a decrease in working capital requirements of $12.6 million, partially offset by the payment of accrued compensation benefits of $6.7 million. Operating cash flow for the First Half of Fiscal 2004 was primarily due to strong earnings and a decrease in working capital requirements of $9.9 million, partially offset by payment of accrued compensation benefits of $3.6 million.

Cash flows from investing activities required the use of cash totaling $22.9 million for the First Half of Fiscal 2005, compared to the use of cash totaling $4.5 million for the First Half of Fiscal 2004. During the First Half of Fiscal 2005, the Company made net purchases of short-term investments of $18.9 million and invested $4.0 million in property and equipment. During the First Half of Fiscal 2004, the Company made net purchases of short-term investments of $1.8 million and invested $2.7 million in property and equipment.

Cash flows from financing activities required the use of cash totaling $9.7 million for the First Half of Fiscal 2005, compared to cash provided of $1.4 million for the First Half of Fiscal 2004. The cash usage for the First Half of 2005 was due to the repurchase of $13.9 million of the Company’s common stock, repayment of interest-bearing debt of $1.2 million, payment of cash dividends of $1.6 million, partially offset by $7.0 million received in connection with employees’ exercise of stock options and purchases under the Company’s employee stock purchase plan. Cash provided from financing activities for the First Half of Fiscal 2004 was due to net proceeds received on interest-bearing debt of $3.0 million and $7.4 million received in connection with employees’ exercise of stock options and purchases under the Company’s employee stock purchase plan, partially offset by the repurchase of $6.5 million of the Company’s common stock and payment of cash dividends of $2.5 million.

Under the terms of its credit agreements, the Company has agreed to certain financial covenants. At April 2, 2005, the Company was in compliance with the financial terms and conditions of its debt and credit facility agreements.

During the Second Quarter of Fiscal 2005, the Company purchased 269,200 shares of its common stock for $8.5 million.

During the Second Quarter of Fiscal 2005, the Company reclassified its investment in highly rated liquid municipal securities and corporate preferred stock from cash equivalents to short-term investments. Previous period balances have been reclassified for comparability. The reclassification was based upon the securities having a final maturity date in excess of three months beyond the date of acquisition.

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. The Company manages exposure to changes in foreign currency rates through its regular operating and financing activities and through the use of foreign currency 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.

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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:

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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

At April 2, 2005, the Company had an investment portfolio consisting of money market funds and bank deposits in addition to cash classified as cash equivalents of $66.9 million, and investments in highly rated liquid municipal securities and corporate preferred stock classified as short-term investments of $81.3 million. As the interest rate on these investments is frequently re-set, they are not subject to significant interest rate risk.

The Company operates internationally and is subject to foreign currency exchange rate fluctuations. 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 an estimated $8.7 million in revenue for the six months ended April 2, 2005. 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 an estimated $8.7 million in revenue for the six months ended April 2, 2005. 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 6 in the Condensed Notes to Consolidated Financial Statements.

At April 2, 2005, the Company’s long-term debt consisted of notes payable with fixed interest rates ranging from 6.6% 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 April 2, 2005. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There have been no changes in internal controls over financial reporting during the fiscal quarter ended April 2, 2005 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. Unregistered Sales of Equity Securities and Use of Proceeds

      Purchases of Company Equity Securities:

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        Abstentions and broker non-votes in the aggregate represented less than 100 shares.

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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.

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EXHIBIT INDEX TO FORM 10-Q