Q3 FY2005

We are pleased and encouraged by the continued growth in revenue and earnings in the third quarter but even more so with the increasingly exciting outlook for our business long term. The improvements in our sales and service model, the release of a substantial product upgrade and our increasing visibility within our industry all continue to contribute to our collective enthusiasm for the opportunities ahead.

Since the decision to enter the enterprise SCM market almost 4 years ago, we have developed a business that this quarter reached trailing US$29 million dollars in revenue and is growing at about 30% per year. This quarter we reached the particularly satisfying milestone of profitability in that segment. The achievement of this milestone is based partly on a very focused strategy, partly by the capital that we raised early on, but could not have been accomplished without the steady cash flow that we have enjoyed from our legacy businesses, chiefly our interoperability business. Without that capital we could have never funded the high growth strategy that from this point forward stands to provide increasingly attractive returns. Yet again this quarter, our Interoperability business beat its budget handily to generate over 600k in operating cash flow. And now our SCM business is contributing profits as well.

Guiding all improvements over the past two years has been our single minded focus on a strategy that we call the MKS1000 Strategy. In short, that strategy has been to focus all of our efforts on building products and marketing to organizations with over 1000 developers. And it has guided all of our field decisions, our product decisions and our marketing decisions.

As we enter the final quarter of fiscal 2005, I am pleased to report that MKS continues to achieve and exceed the goals that we set forth in our annual business plan. As in the previous two quarters, our sales of Enterprise SCM solutions improved substantially over the prior quarter, particularly to the Global 1000 companies that we have set as our primary focus. In Q3, we drove more than 50% of our sales to organizations with more than 1000 developers and claimed some very important beachheads wins where we can enjoy steady new license revenue for years to come, as we make these initial implementations a success.

Our performance in revenue and profitability was excellent across both SCM and IO. In the SCM group alone, we closed 35 transactions greater than $50,000 which totaled 4.6 million dollars in sales. Of these 35 deals, 16 were greater than $100,000, totaling 3.1 million dollars in sales. This compares favourably to the third quarter of fiscal year 2004 when we closed 3 transactions greater than $100,000 for total sales of this size of $768,000 Among many others, our wins included follow on projects with Abbott Labs, Autoliv, Boeing, Citigroup, Continental, Magna, Northrop Grumman, and Social Security Administration. In this past quarter, we also staked our ground with important Beachhead sales into Avon, BUPA, France Telecom, Maersk, Skandia Insurance and the TJX companies. The results demonstrate our well-balanced strategy of driving deployments in our key global accounts through the demonstration of ROI and high levels of service, while signing on new accounts to cultivate in the future.

The IO division performed well against plan again, with increases in overall sales across both North America and Europe, through both our direct and indirect channel. Quarter after quarter, the consistent profits delivered from the IO team continue to play an important role in fueling the growth of the SCM division.

One of the challenges we have faced over the course of our Enterprise initiative has been in getting the attention of our marketplace. Recently we have started making a bigger splash. While our products have been leading the market in the scalability, feature richness and integrated capabilities of our products for some time, it was only in our recent release that we were able to garner significant attention from press and analysts. We had a very successful press and analyst tour as part of our release in January, and we received much more coverage than ever before. Our integrated requirements management and customer dashboard showed the value of our one architecture, one product strategy and clearly showed that we covered a much larger space than the traditional SCM definition.

In addition to providing fantastic new features to our existing customers, the new release creates a vastly more compelling story for senior IT management that will allow us to sell higher in customer organizations and drive implementations faster. Those in turn drive better sales quotas and higher margins, key to our continued improvements in growth and profitability.

It will be a long time before we are the most obvious choice in Enterprise SCM, but we are making steady progress toward that goal and bolstering our sales and marketing efforts every day.

In summary, we are on track for a year of consistent growth and profitability and are enthusiastic about our prospects. We have re-affirmed our expectation for profitability as a whole in fiscal 2005 based on continued growth driven by SCM licensing.

We have not been providing specific guidance on revenue or earnings to investors to date. As our business is maturing and we are better able to anticipate business trends, we have decided to start providing more information. On the conference call for the fourth quarter we anticipate that we will be in a position to give guidance on full year revenue and profit per share for fiscal 2006.

We thank our shareholders for their continued confidence and look forward to reporting on our progress in the months ahead.

Philip C. Deck
Chairman & CEO, MKS Inc.