Q3 Message to Shareholders, February 24, 2004

In the third quarter we continued to make significant gains towards our long term strategy while at the same time falling short of our anticipated license revenue number.

As we indicated last quarter, MKS is moving through a critical transition in its business to build the customer base that can best offer stable long term revenue and earnings growth. The revenue slowdown that we have experienced in the last two quarters is a byproduct of this transition.

Our focus on the Global 1000 is not new. Eighteen months ago, we made a decision to significantly increase the focus on this key market segment. During that time, we largely replaced our field forces with personnel better suited to large enterprise accounts. That process was completed over the last three quarters and we have now reached the best level of stability and maturity in our sales organization that we have seen to date. Those sales and services personnel are devoting the majority of their efforts to develop large long term accounts for MKS.

Our competitiveness in large accounts has never been better. For organizations with more than 1000 people in IT, for which we are in close discussion with over 40, we have neither lost a sale nor had our progress materially slowed by competing offerings over the past 18 months. We believe that we offer technology that is simply unmatched in its ability to deliver enterprise values, adapt to large and complex IT environments and support the enterprise SCM capability that is being envisaged by very large IT organizations.

So the good news is that competition is not our chief obstacle in large accounts. The process of evaluation selection, negotiation and deployment however, is very lengthy, complex and subject to many unforeseeable delays. This has also been the case with our most successful customers, who took their time to plan and execute their deployments in order to ensure that they could be completed smoothly.

We had significant success during the fiscal 2003 in harvesting the fruits of several successful initiatives with large customers. Those customers accounted for most of the growth we enjoyed throughout that year. Since then we have been working to build a much larger and more diverse second wave of enterprise accounts. Only when these accounts are making regular purchases can we avoid the lack of follow on business from large customers that has plagued our results for most of this year. We believe that we will soon see tangible results from our efforts.

The benefits of a Global 1000 customer base cannot be overstated. These customers offer the potential for the greatest sales productivity, margins and long term revenue stability. And they are the key to establishing a market leadership position for MKS and in maximizing shareholder value.

The challenging part of this transition is that progress in very large accounts cannot be measured solely in terms of revenue. Along the way, MKS uses a variety of methods to track the increasing maturity and potential from these relationships.

In smaller organizations our success has been uneven. The market for SCM products is much more competitive in IT departments of 300 or fewer. More importantly, smaller organizations do not seem to value enterprise features as highly as their larger counterparts. Consequently, although our technology is well suited to those environments, we face much more competition and are faced with steep discounting from competitors. We continue to win our share of this business, but our sales cost relative to the opportunities is much higher.

Over the past three months, a significant amount of time and resources from the SCM team have been spent with Global 1000 customers where the MKS Enterprise SCM solution is currently installed, from an initial deployment of 50 to 100 users, right through to those which have standardized on our technology at an enterprise wide level. With all of these customers, the theme is consistent, that there is a great deal of future business available, the success of which will be mainly dependent on our ability to show continual progress in delivering enterprise value. This focus on our targeted accounts has paid off, with an improvement in the short-term pipeline for the top 25 accounts of more than 130%. In addition, the identified business in the medium term, defined as the three following quarters, is larger than ever.

The key to us continuing to execute on our strategy will remain two-fold. First, to ensure that we maintain our record of winning over new accounts against the competition, and secondly, that we maximize the value of our technology in each of these accounts where we have some level of implementation.

Supporting and extending our leadership position is the release of our most recent upgrade to our flagship enterprise SCM product line, comprised of Source Integrity Enterprise Edition, Integrity Manager and Implementer. Our new release advances our cause with our largest customers considerably with substantial new enterprise capabilities including integration with the mainframe to increase our multiplatform support, an open API to help our customers leverage their existing investments, a brand new interface to promote adoption and new process templates to demonstrate support for multiple development methodologies.

Our Interoperability division continued to deliver steady revenue and profitability in line with expectations and slightly ahead of Q2 in revenue. We continue to make significant technology advances in this market most recently with our support for 64-bit addressing in our Toolkit product, unique in the marketplace.

Looking ahead, we expect to be profitable in the fourth quarter but given the results of the third quarter, we have concluded that full year profitability for fiscal 2004 is unlikely. We are re-affirming our expectation of year over year quarterly revenue growth in our SCM segment for the fourth quarter of fiscal 2004.

We thank our shareholders for their continuing support through this challenging but critical period in our growth. We are optimistic about the future and look forward to updating you in the months ahead.

Philip C. Deck
Chairman & CEO