Shareholders' Message, Q1 FY05

We were pleased with our start to the year, recording a profit based on strong SCM licensing growth.

As was the case in our last quarter, although the overall results were good, the underlying factors were even better and reflected rapidly improving fundamentals in our business. And to a large degree, most of the most important trends seen this quarter are continuations of those noted last quarter. As Michael will report on in more detail, we saw more deals, more focus on our large strategic accounts and more new beachhead opportunities within our target customer base.

The focus of our marketing message over the past 3 years is that large organizations can achieve significant gains in software development productivity and regulatory compliance through the implementation of our technology. This message has found a receptive audience among large organizations who are trying to rationalize the massive investments they have made in their software infrastructure. Recently, however new compliance regulations worldwide have added significant urgency to our message. The most well known, Sarbanes Oxley, has mandated not just documentation of mission critical processes - which for most large organizations includes IT - but proof that they are being followed. Very few organizations can achieve this standard in their software development organizations. We have already seen a marked urgency to deal with software development compliance and we expect these regulations to be an increasingly important factor in our sales initiatives in the future. It will take years for most organizations to implement the controls needed to efficiently and effectively meet the challenge. We believe that we offer the most effective way to meet these new regulations at the same time as driving software productivity and efficiency.

Customers who have implemented MKS products to manage their software development processes are well positioned to meet Sarbanes Oxley requirements for IT process. MKS is working to develop scripts and templates to further assist them in meeting Sarbanes Oxley and a myriad of other compliance standards from COBIT to Basel II.

Sarbanes Oxley is not a new opportunity for MKS, just a reinforcement of why customers needed a solution like MKS in the first place and it highlights the strategic importance on enterprise SCM in the market today.

We are pleased to report that our SCM sales in Q1 finished as planned, due again to our continued and intense focus towards expanding our customer base within Global 1000 companies, through ensuring maximum deployment of our solutions sold. We take great pride in our record of understanding in detail, the challenges that our customers are facing, and being in a position to provide practical solutions. Our overall efficiency of delivery in the field continues to improve and more and more market opportunities are opening up for us.

Both our SCM and IO divisions delivered solid performance. In the SCM group, for the 3rd quarter in a row, we set a new record for completing transactions greater than $50,000 of 35, and for those greater than $100,000 of 11.

Among many others, some of our wins included follow on projects with NCR, Royal Bank of Canada, Wincor Nixdorf, Social Security Administration, Amadeus Global Travel and Deutche Telecom. We also claimed important Beachhead sales into Boeing, Fiserv and W&W Informatik. We are extremely pleased that our track record against the competition continues to be solid, especially with the larger account opportunities where the capabilities of our product offerings deliver even more value to our customers.

We have a very highly evolved system for tracking our progress among the growing base of enterprise customers. We are particularly interested in the rate at which our customers graduate from successive levels of commitment to our products and the proportion of our total revenue comprised by those large organizations. In the first quarter we saw continued progress in sales to target organizations. Of our total new licensing, 46% came from organizations with more than 1000 IT staff, up from 33% in the fourth quarter of last year, which was in turn up from 12% in the quarter before that.

Our performance in the first quarter of Fiscal 2005 was excellent overall. But the most gratifying aspect of our progress this quarter was the improved productivity and focus of our North American sales and services organization. Since its major overhaul 18 months ago, we have seen steady improvements in organizational maturity and productivity.

In November 2004 MKS will ship major upgrades to its flagship enterprise SCM products. MKS already boasts the most highly scalable, end to end, integrated software development platform on the market. In the most feature rich upgrade we have shipped to date, we will soon significantly extend the breadth and depth of our already highly integrated product.

Included in upcoming release for the first time will be requirements management capability, a new management dashboard, a common interface for both our flagship products, enhanced charting and analytics and a myriad of customer requested improvements. These enhancements support MKS’s strategy to build the most highly integrated development system in the market for the largest and most demanding customers in the world.

In summary, we have made a very good start on the new fiscal year with our Q1 performance and strategic progress. We look forward to our upcoming product launch to reinforce the value proposition in which our growing customer base has invested. And we have reaffirmed our expectations for a profitable fiscal 2005.

We thank our shareholders for their continued confidence and look forward to seeing as many as possible at our annual meeting to be held September 28 at the Royal York Hotel in Toronto.

Philip C. Deck
Chairman & CEO, MKS Inc.