Q1 Message to Shareholders, September 4, 2003

MKS had a good first quarter for the fiscal year 2004 relative to our expectations. We were quite satisfied with our progress as we matched the expected lower level of licensing activity with even better cost control and were able to exceed our own internal profit expectations. At the same time, we launched a major new version of our enterprise SCM product line, made dramatic gains in our pipeline and signed several new major enterprise customers. All of this leads us to greater optimism about our results for fiscal 2004 as a whole.

This quarter we had consistent performance across the company. Both of our business segments showed lower licensing activity over the previous quarter, but significant gains over the 1st quarter of 2003.

In our SCM business this quarter, licensing growth of 35% over the first quarter of last year continued to show that MKS is the fastest growing company in the SCM sector. The lower level of license revenue over the 4th quarter showed the normal seasonal reduction.

In our Interoperability business, we saw another quarter of steady revenue and strong cash generation, showing substantial improvements over last year. The I/O business also had several significant new transactions with longterm customers.

Last quarter we highlighted the release of a major upgrade of our Source Integrity Enterprise and Integrity Manager products. Since then we have had excellent adoption through the customer base with a majority of our large customers already upgraded. The ease with which customers can get access to our new functionality continues to be a significant contributor to high return on investment, which is the most certain way we can ensure loyalty in our customer base.

On both the SCM and Interoperability fronts, we enjoyed many significant customer wins again this quarter. Among the impressive list of transaction with new and existing customers were sales to Boise Office Solutions, Continental Teves, Federated Investors, IBM, Toshiba Medical, United States Social Security and Administration, and the Union Bank of California.

We continue to make steady sales progress in a difficult software investment climate and evidently, at a much higher rate than our direct competitors. We account for our increasing market share by a demonstrated commitment to deliver high customer return on investment and enterprise values. This commitment in turn continues to reward us with stronger customer relationships, a growing sales pipeline and recurring maintenance revenue stream. With a continued focus on sales and services productivity, and a rapid and complete customer response, we can continue to deliver the operational improvements that we need to fuel our growth.

Since naming Charlie Janes to Vice President of North American Sales last quarter, we continued to further upgrade our field forces in North America with 8 new sales reps hired since May 1. Most of those hired have spent significant time at Rational Software and other direct competitors over the years, and have come to MKS with a wealth of industry knowledge and experience. Across the board, we continue to successfully attract extremely high calibre individuals who come to us for our technology leadership, our enterprise SCM strategy, our proven growth record and our desire to win. We feel that their experience, combined with the leading technology in the space, and backed by a company dedicated to delivering maximum customer value, is a winning formula.

While we have been steadily building our sales pipeline over the past 2 years, we saw more dramatic increases this past quarter with the highest ever percentage improvement across all of our operating regions. Part of this is due to the increasing sales capability, part is due to our sharpened focus on Global 1000 and part is due to a new market development team based in Waterloo. This team is tasked with profiling and researching our target customers to make faster progress in identifying and understanding specific SCM opportunities. Our increasing proactive approach in introducing our solutions to the Global 1000 is having a profound effect on our long-term ability to plan and execute on our enterprise sales strategy.

Elsewhere in the SCM industry we saw continued sluggishness in demand for SCM products. Evidence continues to indicate that the low end of the market is very challenging and that desktop product are facing continued price erosion and reduced demand. Based on published reports, it would appear that we continue to lead the industry in growth rate by a wide margin. We believe that this is a direct result of our focus on the enterprise sector and our process driven approach.

Looking forward, we will continue to work to deliver a high rate of new license growth as the leading indicator of our long term success. This, along with increasing sales and marketing productivity, should not only strengthen profitability but allow us to boost our investments in R&D and further sales force development.

The first quarter represents a strong start for the year and we have re-affirmed our expectation for full year profits that we discussed last quarter. We go into the fall with the strongest pipeline in our history and the most experienced field forces we have ever had.

We will be holding our Annual and Special Meeting of shareholders on September 23rd, at the Royal York Hotel, Alberta Room, at 4:00 PM. We hope to see many of our shareholders there and look forward to expanding on our progress so far and strategy for continued profitable growth.

Philip C. Deck
Chairman & CEO