Q2 Message to Shareholders, November 26, 2003

Although in our recent Q2 results announcement MKS showed modest growth year over year, and although we showed better profitability than the prior year (particularly with respect to currency movements), and although the growth in license revenue we recorded exceeds the recent growth rates of most of our competitors, our performance did not meet the high growth rates that we have come to expect and that are necessary for MKS to achieve our long term market share and profitability expectations.

We do not however, believe that our second quarter licensing growth results support any new trend. As we indicated previously, they are at considerable odds with the significant progress we have made in virtually all other respects of our strategic plan in this and previous quarters. As a result, the MKS management team and board of directors remain completely committed to the execution of our strategic plan as set out over the past three years and believe that our continued focus on those objectives will result in a return to the outstanding growth rates and market share gains that we and our shareholders have come to expect.

Enthusiasm over our flagship SCM product release in the spring continued in this quarter, as large customers continue to upgrade. And we are now nearing the completion of the development phase for the next release of our Integrity Solution enterprise offering, scheduled for February 2004. In addition to some major architectural advancements, we have completed a major overhaul of our Integrity Manager graphical user interface and made dramatic performance and scalability advances. Over the past 2 years we have made major investments in advancing the performance, reliability and scalability of our products to ensure that we can claim leadership in enterprise architecture. Some of those investments were in server advancements, some were in client architecture and some were in the extent of our testing through a hardware test bed that can now simulate up to 1000 simultaneous clients. This investment has started to pay major dividends as we have now delivered performance analyses to major customers to support our ability to scale to the largest software development departments in the world.

MKS has outlined its enterprise SCM strategy in detail over the past quarters. In summary, it rests on 3 main initiatives – to develop the leading enterprise SCM platform worldwide, to create and maintain a high service and support relationship with our customers, and sell into Global 1000 customers where initial license deployments can be followed by a series of follow on deployments as customers standardize on MKS technology. In the first two parts of the strategy, MKS’s achievements are well established. We believe that our enterprise technology is unmatched worldwide in its breadth and depth of enterprise capability. Industry analysts have been highlighting it over time and more and more customers are recognizing the unique capabilities that we offer. In the second part of our strategy, our service and support staff have a longstanding tradition for the highest levels of service and our customers repeatedly highlight that strength to us and to each other. Over the past few years, we have been working to accelerate the third part of the strategy – the penetration of Global 1000 accounts to establish a long term stream of follow on license revenue.

Although our license sales in this quarter did not finish as originally anticipated, we are pleased to report that we successfully executed on our strategy of penetrating Global 1000 companies with project wins as way to create positive investment momentum. We continue to reap the rewards of software that is not only easy to deploy within any size organization, but is also quick to realize the enterprise values that supported the purchase in the first place. We are increasingly confident that our market strategy is not only the right one for MKS’s capabilities, but also the most appropriate for these ROI-driven economic times.

Although behind our expectations, the year on year, our new SCM licensing increased by 10%. During this quarter, we continued to spend a significant amount of time investing in our future by winning new customers and building up medium to longer-term pipeline. Similar to past quarters, four out of the top 5 sales this quarter were to customers new to the MKS Enterprise SCM solution. Although encouraging for our long-term growth prospects, these results again led us to overall lower current revenue, as new customer transactions tend to be smaller than follow on. Even more encouraging than sales to these new Enterprise SCM customers, was our growth in pipeline, particularly in North America where the current quarter potential is double that of this past quarter. Our tenacious focus with our customers and prospective customers around discovering their business challenges and generating value is paying off with a view of larger opportunities than we have ever seen before.

We have a very focused strategy to gain new Global 1000 customers and to assist in deployment of our technology within them. None of the challenges we faced in the second quarter have resulted in any changes to our strategy other than to deepen our determination to see it through.

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 also allow us to boost our investments in R&D and further sales force development.

We have re-affirmed our expectation that we will record a profit for the full fiscal 2004. Our profit shortfall is significantly less than our revenue shortfall and strength of our pipelines gives us confidence that we can get back on track over the next 6 months. Our balance sheet remains strong and cash generation is expected to benefit in the current quarter from seasonally high maintenance renewals.

We thank our shareholders for their continuing support and confidence in MKS. Our management, employees and directors are united in our commitment to and confidence in our business and strategy and look forward to delivering on the significant promise that MKS holds.

Philip C. Deck
Chairman & CEO