Q4 FY05

Our financial performance in the quarter, driven by very strong licensing growth and services performance, was above our internal expectations and as we indicated in our press release was also above the long term trend of our revenue growth. For the most part, our success was based on the key factors that have driven our increasingly healthy results for some time – strong recurring sales to our customer base of large enterprise customers, exciting beachhead wins in new enterprise customers and steady performance from smaller accounts. The difference this quarter was that a few of those new customer wins came in at larger initial sizes than we typically expect, from customers planning to do larger initial rollouts.

As of the fourth quarter of 2005, we changed the name of our primary operating segment to the ALM segment from the SCM segment to reflect the significant increases in the scope of that business. Software Configuration Management is an industry term describing the discipline that manages changes to computer source code. Application Lifecycle Management describes a superset of SCM capabilities entailing a more complete set of capabilities used to manage all activities surrounding the delivery of software applications within large enterprises, from requirements management through to final deployment. Since we launched our enterprise scale SCM product in July 2001, we have enjoyed growing acceptance of that product line. At the same time we have been steadily adding to its capability with complete process management, process enforcement and more recently requirements management, server deployment, and data mining -- all fully integrated within a single product. This broadening has placed us firmly with in the definition of ALM.

Looking at the year as a whole, we were extremely pleased with our field performance. We grew our ALM licensing 62% in fiscal 2005. That in turn drove a 41% increase in overall ALM revenue once services and maintenance were rolled in. And that in turn drove a 29% increase in overall MKS revenue with Interoperability included. With such high revenue growth rates, our maintenance growth dilutes overall ALM growth and will continue to do so. But the increasing size of our ALM business should result in overall MKS growth converging towards the ALM growth rate.

The 62% ALM license growth is much more important than just in terms of today’s shareholder returns. It represents the rate at which our products are being accepted by the largest development departments in the world. Further more, it represents the rate at which we are taking market share relative to our competitors, none of whom appear to have any significant organic license growth. MKS strongly believes that the market for ALM products to be in its infancy, and that the company that can best acquire new enterprise market share now is in the best position to enjoy the recurring revenue from those new customer wins over the years to come as the market matures. In that regard, we believe that MKS is firmly in the driver’s seat.

As we have said in the past, our main challenge has been getting the additional visibility and brand recognition that will ensure that we are included on short lists in product selection processes. We have devoted a great deal of effort to greater awareness and we are beginning to see encouraging signs of success. This quarter we closed the first two major CIO driven deals since HSBC in 2001. We have seen a marked increase in RFP and RFI requests and we are garnering a much higher number of analysts referrals. It is too early to confirm a trend, but we are hopeful that our visibility is increasing and will help fuel our growth in quarters ahead. As we have reported in past quarters, compliance initiatives such as Sarbanes Oxley, Basel II and similar initiatives around the world have become a major factor in software development and IT investment decisions, as process control with IT has been found to be at a much less developed state than in other functional areas. This has created the prospect of significant positive benefits to ALM players including MKS, so much so that many have re-branded their products as compliance or governance tools. As the fastest growing company in the ALM space, MKS has no such intention. Although MKS’ one product, one architecture has significant process enforcement and compliance benefits over our competitors suites of linked point products, compliance does not drive product selection; it triggers the discussion and liberates the budget. At the end of the day, it is productivity benefits that drive the ultimate purchase decision and on that score MKS seems to be winning more than its share of the battles.

We expect that the trend of increasing annual revenue growth will continue in fiscal 2006 as we continue to grow ALM licensing opportunities through further development of existing customer relationships and the targeting of Global 1000 companies in our primary markets worldwide. We believe that anticipated growth in ALM revenue will lead to annual fiscal 2006 revenue in the range of $45 to $49 million and income from operations before tax in the range of $2 to $4 million. Factors to be considered in arriving at these ranges include the expectation that - our Interoperability business will decline 5 to 10 percent over the course of the year; our intention to expand our sales and services staff and increase in our marketing expenditures to drive growth in ALM business revenues, and finally our commitment to increase ALM research and development expenditures to ensure that we maintain its technical leadership in the ALM market.

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.