Mercury Systems

2012 ANNUAL REPORT

Where Challenges Drive Innovation

Mercury Computer Systems is a best-of-breed provider of commercially 
developed, open sensor and Big Data processing systems, software and 
services for critical commercial, defense and intelligence applications. 

www.mc.com 
NASDAQ:MRCY

This annual report contains certain forward-looking statements, as that term is defi ned in the 
Private Securities Litigation Reform Act of 1995, including those relating to the Company’s overall 
business and markets. You can identify these statements by the use of the words “may,” “will,” 
“would,” “should,” “could,” “plan,” “expect,” “anticipate,” “continue,” “estimate,” “project,” 
“intend,” “likely,” “forecast,“ “probable” and similar expressions. These forward-looking statements 
involve risks and uncertainties that could cause actual results to differ materially from those projected 
or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of 
defense programs and the timing of such funding, including the potential for a continuing resolution 
for the defense budget, the potential for defense budget sequestration, and the budget uncertainty 
related to the Presidential election, general economic and business conditions, including unforeseen 
weakness in the Company’s markets, effects of continued geopolitical unrest and regional confl icts, 
competition, changes in technology and methods of marketing, delays in completing engineering and 
manufacturing programs, changes in customer order patterns, changes in product mix, continued 
success in technological advances and delivering technological innovations, changes in the U.S. 
Government’s interpretation of federal procurement rules and regulations, market acceptance of the 
Company’s products, shortages in components, production delays due to performance quality issues 
with outsourced components, inability to fully realize the expected benefi ts from acquisitions and 
divestitures or delays in realizing such benefi ts, challenges in integrating acquired businesses and 
achieving anticipated synergies, changes to export regulations, increases in tax rates, changes to 
generally accepted accounting principles, diffi culties in retaining key employees and customers, 
unanticipated costs under fi xed-price service and system integration engagements, and various other 
factors beyond our control. These risks and uncertainties also include such additional risk factors as 
are discussed in the Company’s fi lings with the U.S. Securities and Exchange Commission, including 
its Annual Report on Form 10-K for the fi scal year ended June 30, 2012, accompanying this report. 
The Company cautions readers not to place undue reliance upon any such forward-looking statements, 
which speak only as of the date made. The Company undertakes no obligation to update any forward-
looking statement to refl ect events or circumstances after the date on which such statement is made.

To Our Shareholders:

Fiscal 2012 was another strong year for Mercury in an increasingly challenging defense industry
environment. Solid growth in our defense business more than offset the decline in our commercial business.
Total bookings and revenue were up 14 percent and 7 percent, respectively, from fiscal 2011.

Including KOR Electronics (KOR) and Paragon Dynamics (PDI), which we acquired during the second
quarter of fiscal 2012, we delivered record total defense revenues of $230m – a growth of 27 percent year-over-
year. On an organic basis, defense revenue grew 16 percent. Our total defense bookings and backlog increased
24 percent and 25 percent, respectively. GAAP operating income increased 21 percent, and adjusted EBITDA –
our key non-GAAP profitability measure – was up 20 percent, exceeding the top end of our fiscal 2012 target
business model.

Fiscal 2012 was also an excellent year for our Mercury Federal Systems (MFS) business, as revenue and
bookings grew 150 percent and 315 percent, respectively. This growth was primarily driven by demand for the
image processing capabilities we provide for the U.S. military’s Gorgon Stare surveillance program, as well as
the addition of PDI. Organically, MFS revenue and bookings were up 82 percent and 201 percent, respectively.
As we anticipated, MFS went from an operating loss in fiscal 2011 to a significant operating profit for
fiscal 2012.

Fiscal 2012 marked the completion of the first phase of our multi-year M&A strategy. Acquiring KOR and

PDI enabled us to build out our capabilities along the sensor processing chain, and helped establish a presence for
Mercury in the government’s intelligence community for the first time. In the fourth quarter of fiscal 2012, we
announced the signing of a definitive agreement to acquire Micronetics, a publicly traded designer and
manufacturer of high performance microwave and RF components and subsystems for the defense and
commercial aerospace markets.

Similar to the KOR/PDI transaction and the acquisition of LNX that we completed in fiscal 2011, acquiring

Micronetics should move us closer to building out a scalable RF and microwave business, complementing our
longstanding capabilities in signal processing. I am pleased to report that we successfully closed the Micronetics
transaction in early August, marking a great start to fiscal 2013.

Through the acquisitions of LNX, KOR, PDI and now Micronetics, we believe that we are evolving
Mercury into a unique asset in the non-prime, defense electronics industry. We are the only commercial item
defense electronics company with end-to-end capabilities along the entire sensor processing chain. With more
than two quarters of integration behind us, KOR and PDI are performing well and shaping up to be superb assets
that are fully aligned with our strategy, as we expected.

Fiscal 2012 was also another solid year for Mercury in terms of design wins, which totaled 50 – 47 of them
in defense with a five-year probable value currently estimated at approximately $293 million. As in recent years,
the majority of these wins focused on radar, electronic warfare (EW) and electro-optical/infrared (EO/IR). They
included a design with Raytheon for the U.S. Army Patriot; a next-generation radar processor for the F-16 fighter
with Northrop Grumman; and a win that could designate Mercury as the next-generation standard for radar
processing for a division of yet another major prime.

Mercury’s success in winning new designs is a testament, we believe, to three factors. First among them is
the successful product portfolio refresh we undertook several years ago, which is currently nearing completion.
We believe that we now have the industry’s leading Intel and GPU product line – one with significant advantages
with respect to processing density and embedded security. The second factor is our services-led business model,
which allows us to leverage our systems engineering and technical expertise across our portfolio. Thirdly, we
have successfully positioned ourselves as a systems-oriented company, building on our improved portfolio, deep
engineering skills and growing services capabilities. Together, these characteristics are proving to be major
competitive differentiators for us, as the primes outsource more of their sensor processing subsystem needs to
best-of-breed commercial item companies such as Mercury.

Looking forward, we believe that fiscal 2013 will be another challenging year for the defense industry and

for Mercury. The potential for major defense budget cuts and disruptions later in the year appears to be causing a
pronounced slowdown in the timing of funding and in program funding levels as political wrangling continues in
Washington. We responded to these industry challenges in fiscal 2012 by tightly constraining operating expenses
as well as completing a sizeable restructuring action in the fourth quarter that is expected to result in
approximately $5 million of annualized savings.

With all of that said, our plan for fiscal 2013 is to continue focusing on our strategy of being a best-of-breed

provider of commercially developed open sensor and big data processing systems, software and services for
critical commercial, defense and intelligence applications. We will continue to deliver rapid time-to-value and
world-class service and support to our commercial and prime contractor customers. Finally, we will remain
focused on executing well – maximizing our performance and results wherever we can, and remaining agile in
adapting to challenges that are outside of our control.

At the same time, we continue to be involved in discussions with numerous potential M&A candidates that,
like LNX, KOR, PDI and Micronetics, represent possible opportunities along the sensor processing chain. These
are companies that fit our previously stated acquisition parameters: proven technology and capabilities, strong
management, and participation on the right programs and platforms. On balance, however, fiscal 2013 will likely
be a year in which we will focus primarily on integrating Micronetics – our most recent acquisition.

We have also been talking with major banks to replace our existing revolving credit line with a larger
facility. We believe this will provide us with financial flexibility and support our future M&A activities, if and
when they occur. It is not our intent at this time, however, to burden Mercury’s balance sheet by adding undue
financial risk on top of the defense industry macro risks that we are currently experiencing and anticipate facing
as fiscal 2013 unfolds.

Over the longer term, we are confident in Mercury’s prospects and in our ability to continue to build
intrinsic value into our business. Mercury’s presence in ISR, EW and missile defense places us in the sweet spot
of the defense market. We have built or acquired capabilities that are aligned with the Defense Department’s new
roles and missions for the armed forces. Our services-led business model is aligned to the outsourcing needs of
the primes. And we have a contemporary, differentiated, industry-leading product portfolio.

As a result, we believe that Mercury is positioned on the right programs – some of which are expected to
transition to low rate initial production. We are winning a large number of high-value new designs. And at the
same time, we are successfully executing on our M&A strategy to build Mercury’s capabilities along the sensor
processing chain. These factors lead us to believe that Mercury will successfully navigate this challenging period
in the defense industry and ultimately emerge from it with the potential for accelerated growth and improved
profitability.

On behalf of the entire Mercury team, I extend my appreciation to you, our shareholders, for the confidence
you placed in us in fiscal 2012. We are committed to continuing to reward your confidence in Mercury in fiscal
2013 and in future years.

Sincerely,

Mark Aslett
President and Chief Executive Officer

August 31, 2012

2

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2012
OR

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934 FOR THE TRANSITION PERIOD FROM

TO

.

COMMISSION FILE NUMBER 0-23599

MERCURY COMPUTER SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

MASSACHUSETTS
(State or other jurisdiction of
incorporation or organization)

201 RIVERNECK ROAD
CHELMSFORD, MA
(Address of principal executive offices)

04-2741391
(I.R.S. Employer
Identification No.)

01824
(Zip Code)

978-256-1300
(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, Par Value $.01 Per Share
Preferred Stock Purchase Rights

NASDAQ Global Select Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934: NONE

Indicate by check mark if

Act. Yes ‘ No È

the registrant

is a well-known seasoned issuer, as defined in Rule 405 of

the Securities

Indicate by check mark if the registrant

Act. Yes ‘ No È

is not required to file reports pursuant

to Section 13 or Section 15(d) of the

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes È No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.

Large accelerated filer ‘ Accelerated filer È Non-accelerated filer ‘ Smaller reporting company ‘
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ‘ No È
The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $392.6 million based
upon the closing price of the Common Stock as reported on the Nasdaq Global Select Market on December 30, 2011, the last business day
of the registrant’s most recently completed second fiscal quarter.

Shares of Common Stock outstanding as of July 31, 2012: 31,018,894 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on October 17, 2012 (the

“Proxy Statement”) are incorporated by reference into Part III of this report.

Exhibit Index on Page 95

MERCURY COMPUTER SYSTEMS, INC.

INDEX

PAGE
NUMBER

PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Item 4.
Removed and Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.1. Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.

Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.

Stockholder Matters

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.

Item 15.

PART IV
Exhibits and Financial Statement Schedules
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3
15
30
30
31
31
31

33
33

34
52
56

89
89
90

91
91

91
91
91

92
94
95

2

PART I

This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Actual results could differ materially from those set forth in the forward-looking
statements. Certain factors that might cause such a difference are discussed in this annual report on
Form 10-K, including in the section entitled “Risk Factors.”

When used in this report, the terms “Mercury,” “we,” “our,” “us,” and “the Company” refer to Mercury
Computer Systems, Inc. and its consolidated subsidiaries, except where the context otherwise requires or as
otherwise indicated. The term “fiscal” with respect to a year refers to the period from July 1 to June 30. For
example, fiscal 2012 refers to the period from July 1, 2011 to June 30, 2012.

ITEM 1. BUSINESS

Our Company

We design, manufacture and market commercially-developed, high-performance embedded, real-time
digital signal and image processing sub-systems and software for specialized defense and commercial markets.
Our solutions play a critical role in a wide range of applications, processing and transforming sensor data to
information for storage, analysis and interpretation. Our goal is to grow and build on our position as a critical
component of the defense and intelligence industrial base and be the leading provider of open and affordable
sensor processing subsystems for intelligence, surveillance and reconnaissance (“ISR”), electronic warfare
(“EW”), and missile defense applications. In military reconnaissance and surveillance platforms, our sub-systems
receive, process, and store real-time radar, video, sonar and signals intelligence data. We provide radio frequency
(“RF”) and microwave products for enhanced signal acquisition and communications in military and commercial
applications. Additionally, Mercury Federal Systems, our wholly owned subsidiary, focuses on direct and
indirect contracts supporting the defense, intelligence, and homeland security agencies. We have growing
capabilities in the area of “Big Data” processing, analytics and analysis in support of both the U.S. Department of
Defense (“DoD”) and to the intelligence community as they enhance their ability to acquire, process and exploit
large amounts of data for both real-time analytics and “forensic” analysis.

Our products and solutions address mission-critical requirements within the defense industry for C4ISR
(command, control, communications, computers, intelligence, surveillance and reconnaissance) and electronic
warfare, systems and services, and target several markets including maritime defense, airborne reconnaissance,
ballistic missile defense, ground mobile and force protection systems and tactical communications and network
systems. Our products or solutions have been deployed in more than 300 different programs with over
25 different prime defense contractors. We deliver commercially developed technology and solutions that are
based on open system architectures and widely adopted industry standards, and support all of this with services
and support capabilities.

Our revenue, income from continuing operations and adjusted EBITDA for fiscal 2012 were $244.9 million,
$22.6 million and $48.9 million, respectively. Our revenue, income from continuing operations and adjusted
EBITDA for fiscal 2011 were $228.7 million, $18.5 million and $40.9 million, respectively. Our revenue,
income from continuing operations and adjusted EBITDA for fiscal 2010 were $199.8 million, $28.1 million and
$29.9 million, respectively. See the Non-GAAP Financial Measures section of this annual report for a
reconciliation of our adjusted EBITDA to income from continuing operations.

Our operations are presently organized in the following two business segments:

Advanced Computing Solutions, or ACS. This business segment is focused on specialized, high-performance
embedded, real-time digital signal and image processing solutions that encompass signal acquisition, including
microwave front-end, digitization, digital signal processing, exploitation processing, high capacity digital storage

3

and communications, targeted to key market segments, including defense, communications and other commercial
applications. ACS’s open system architecture solutions span the full range of embedded technologies from board
level products to fully integrated sub-systems. Our products utilize leading-edge processor and other technologies
architected to address highly data-intensive applications that include signal, sensor and image processing within
environmentally challenging and size, weight and power constrained military and commercial applications. In
addition, ACS has a portfolio of RF and microwave sub-assemblies to address needs in EW, signal intelligence
(“SIGINT”), electronic intelligence (“ELINT”), and high bandwidth communications subsystems.

These products are highly optimized for size, weight and power, as well as for the performance and
ruggedization requirements of our customers. Customized design and sub-systems integration services extend our
capabilities to tailor solutions to meet the specialized requirements of our customers. We continue to innovate
our technologies around challenging requirements and have technologies available today and planned for the
future to address them as they evolve and become increasingly demanding.

With the addition of KOR Electronics (“KOR”) in December 2011, we added a focus on the exploitation of
RF signals. Leveraging our analog-to-digital and digital-to-analog technologies and expertise, KOR delivers
innovative high end solutions and services to the defense communities:

• DRFM (Digital Radio Frequency Memory) products which offer state of the art performance at low

cost, for EW applications; and

•

radar and EW environment test and simulator products that are DRFM based and use modular and
scalable building blocks including commercial-off-the-shelf hardware.

In fiscal 2012, ACS accounted for 88% of our total net revenues.

Mercury Federal Systems, or MFS. This business segment is focused on services and support work with the
DoD and federal intelligence and homeland security agencies, including designing, engineering, and deploying
new ISR capabilities to address present and emerging threats to U.S. forces. With the addition of Paragon
Dynamics, Inc. (“PDI”), our MFS segment also provides sophisticated analysis and exploitation, multi-sensor
data fusion and enrichment, and data processing services for the U.S. intelligence community. MFS is part of our
long-term strategy to expand our software and services presence and pursue growth within the intelligence
community. MFS offers a wide range of engineering architecture and design services that enable clients to
deploy leading edge computing capabilities for ISR applications on an accelerated time cycle. This business
segment enables us to combine classified intellectual property with the commercially developed application-
ready sub-systems being developed by ACS, providing customers with platform-ready,
affordable
ISR sub-systems. In fiscal 2012, MFS accounted for 12% of our total net revenues, which include six months of
PDI revenues of $7.9 million.

Recent Developments

Subsequent to the end of fiscal 2012, on August 8, 2012, we acquired Micronetics, Inc. Based in Hudson,
New Hampshire, Micronetics is a leading designer and manufacturer of microwave and RF subsystems and
components for defense and commercial customers. Adding Micronetics is the next logical next step in our
journey to provide end-to-end sensor processing capabilities to our customers. Specifically, Micronetics further
expands our technology and subsystems integration capabilities for the acquire, digitize and disseminate stages of
the sensor processing chain. From a product perspective, Micronetics brings us a portfolio of high-value
components and subsystems. At the same time, Micronetics’ engineering and manufacturing capabilities provide
the RF side of our business with the scalability we need not only to continue to deliver on some of our own
higher volume programs, but to support growth in the business as we expand our customer base and program
access.

During the fourth quarter of fiscal 2012, we announced a restructuring plan (“2012 Plan”) affecting both the
ACS and MFS business segments. The 2012 Plan primarily consisted of involuntary separation costs related to

4

the reduction in force which eliminated 41 positions largely in the engineering and manufacturing functions; and
facility costs related to outsourcing of certain manufacturing activities at our Huntsville, Alabama site. The 2012
Plan for which expense of $2.8 million was recorded in fiscal 2012 was implemented to cope with the near-term
uncertainties in the defense industry and improve our overall business scalability. Future restructuring expenses
of approximately $0.7 million associated with the 2012 Plan are expected in fiscal 2013 as we start transitioning
the manufacturing activities formerly conducted at the Huntsville, Alabama facility to our contract manufacturing
partner. We expect to realize approximately $5.3 million in annual savings from these activities.

On December 30, 2011, we acquired both KOR and its wholly-owned subsidiary, PDI. Based in Cypress,
California, KOR designs and develops DRFM units for a variety of modern EW applications, as well as radar
environment simulation and test systems for defense applications. Based in Aurora, Colorado, PDI provides
sophisticated analytic exploitation services and customized multi-intelligence data fusion solutions for the
U.S. intelligence community. We are working to ensure that capabilities of KOR and PDI are integrated into a
framework whereby we can deliver agile, affordable solutions to the markets we collectively serve. We are
working to rapidly integrate these new capabilities into our overall organization.

Our History

Since 1981, we have operated as a provider of advanced embedded computing products primarily for end
markets in the defense industry. Over time, we expanded our business to focus on a number of commercial end
markets, including the biotechnology, embedded systems and professional services, visual imaging software and
life sciences markets. While this strategy was designed to expand our target market, in the mid-2000’s many of
these new businesses required large investments, which significantly reduced our profitability, and we found
ourselves spread across several disparate, unprofitable end-user segments.

In November 2007, we embarked on a strategy to refocus the business and return to growth and profitability.
Since then, we have successfully sold or shut down five non-core business units, returned the Company to
profitability and growth and transformed the Company into a best-of-breed provider of affordable, open
architecture, commercially-developed, application-ready and multi-intelligence sub-systems for our primary
defense embedded computing end markets. Our refocused business combined with improved operations has led
to improved overall financial performance, including:

•

•

•

•

•

increasing defense sales from $131.9 million in fiscal 2008 to $229.9 million in fiscal 2012
representing approximately 74% growth, and increasing defense sales as percentage of revenue from
69% in fiscal 2008 to 94% in fiscal 2012;

increasing income from continuing operations from a loss of $4.4 million in fiscal 2008 to income of
$22.6 million in fiscal 2012 and increasing income from continuing operations as a percentage of net
revenues from negative 2% for fiscal 2008 to 9% for fiscal 2012;

increasing adjusted EBITDA from $22.5 million in fiscal 2008 to adjusted EBITDA of $48.9 million in
fiscal 2012;

improving our cash flow from operations of $13.7 million in fiscal 2008 to $31.9 million in fiscal
2012; and

improving our balance sheet by reducing total indebtedness from $125.0 million at June 30, 2008 to
zero at June 30, 2010, 2011 and 2012.

During this period of improving financial performance, we continued to have success on programs such as
Aegis, Global Hawk, Predator and Reaper and have reinvested in our business. We improved our position as a
best-of-breed provider in our target markets, with major design wins including the Patriot missile program, the
JCREW I1B1 program, which is the DoD’s principal program to counter improvised explosive devices, or IEDs,
and the Surface Electronic Warfare Improvement Program, or SEWIP, the EW improvement program for surface

5

vessels to counteract a variety of emerging threats. In fiscal 2010, we grew organically, improved our working
capital position and profitability metrics, continued to refresh our product portfolio, and grew our services and
systems integration business. We strengthened our position in our core ISR, EW and ballistic missile defense
markets and believe our position in these markets will continue to grow. In fiscal 2011 and 2012, we continued to
strengthen and grow our core business by enhancing our product portfolio and increasing our ISR, EW, and
missile defense system domain expertise and capabilities. We continue to be successful on our existing programs
and to pursue new design wins on high growth, high priority programs. In response to new and emerging threats,
and the need for better intelligence in shorter time frames, we have developed new products and capabilities that,
in conjunction with our customers, seek to address those areas of concern. We have also grown and anticipate
growing further through acquisitions of performing companies that will complement, strengthen and grow our
core business. As a result of these efforts, we believe we are well-positioned to capture existing and future
growth opportunities in our end markets. We also continually look at our organizational, product development
and go-to-market capabilities to ensure we maintain an orientation towards “time to value” for our customers.
This approach will help us reach our goal of providing the best solutions as we apply our commercially
developed technologies to solve complex customer problems.

Our Market Opportunity

Our market opportunity is defined by the growing demand for advanced sensor processing capabilities
within the defense industry, as well as the burgeoning needs of the intelligence community to handle big data
processing, analytics and analysis challenges. Our primary market has historically been the defense sector,
specifically C4ISR, EW, and ballistic missile defense; and commercial markets, which include commercial
communications and other commercial computing markets. We believe we are well-positioned in growing,
sustainable market segments of the defense sector that leverage advanced technology to improve warfighter
capability and provide enhanced force protection capabilities.

We believe there are a number of evolving trends that are reshaping our target market and accordingly

provide us with attractive growth opportunities, including:

The U.S. defense electronics market is large. We have expanded our target market and are well-positioned
from a DoD budget, program and platform perspective. Despite expected DoD defense budget cuts, the portion
most relevant to our business is projected to remain stronger than the defense budget as a whole. DoD defense
electronics spending was approximately $39.5 billion in government fiscal year 2012, and is projected to
increase to $40.4 billion in government fiscal year 2013. Defense electronic spending represents approximately
6% of the total DoD spending annually. We believe ISR, EW and ballistic missile defense have a high priority
for future DoD spending. We have positioned ourselves well in these important areas and have won a position on
many programs and platforms. We are a best-of-breed provider in the design and development of performance
optimized electronic sub-systems for the ISR and EW markets. As a leader in these markets, we often contract
with multiple prime defense contractors as they bid for a particular project, thereby increasing our chance of a
successful outcome.

The rapidly expanding demand for tactical ISR is leading to significant growth in sensor data, causing even
greater demand for the capability of our products to process data onboard the platform. An increase in the
prevalence and resolution of ISR sensors is generating significant growth in the associated data that needs to be
turned into information for the warfighter in a timely manner. In addition, several factors are driving the defense
and intelligence industries to demand greater capability to collect and process data onboard the aircraft,
unmanned aerial vehicles, or UAVs, ships and other vehicles, which we refer to collectively as platforms. Each
platform has limited communications bandwidth and cannot realistically transmit all the data that is collected
onboard the platform, and this problem will increase over time as sensor generated data will continue to outstrip
data communication capabilities. Looking forward, we believe our armed forces will need platforms that operate
more autonomously and possibly in denied communication environments. In addition, the platforms themselves
require increased persistence, and reducing the need to communicate data off the platform can help increase the

6

ability of the platform to remain on or fly above the battlefield for extended periods. Finally, the scarcity and cost
of human analysts, the demand for timely and relevant quality information and the increasing need to fuse data
not only from multiple onboard sensors but also with intelligence generated from other platforms is causing even
greater demand for the onboard processing capabilities our products provide.

IEDs, rogue nations’ missile programs and threats from peer nations are causing greater investment in new
EW and ballistic missile defense capabilities. Existing threats, such as IEDs in the form of roadside bombs,
continue to be effective weapons of choice for insurgents. We have developed responses for these existing
threats, including providing the core radio frequency and signal processing for the JCREW I1B1 counter-IED
program. Our acquisition of LNX significantly increased our content on the JCREW I1B1 program.
JCREW I1B1 is the program of record for counter-IED. While we believe that the program will remain in
development longer than the previously planned Milestone C highlighted in the government fiscal year 2013
budget request, the U.S. Marine Corps has requested significant funding for JCREW in the government fiscal
year 2013 budget.

There are also new and emerging threats, such as peer nations developing stealth technologies, including
stealth aircraft and new anti-ship ballistic missiles that potentially threaten the U.S. naval fleet. Finally,
U.S. armed forces require enhanced signals intelligence and jamming capabilities. In response to these emerging
threats, we have engaged in the following:

• we provide the core radar processing on both the Aegis ballistic missile defense systems as well as the

Patriot missile system, a ground-based missile defense platform;

•

in the fall of 2010, we were selected by Lockheed Martin to work on SEWIP,
the surface
EW improvement program designed to upgrade the Naval Surface Fleet EW capability and counteract
a range of new peer threats;

• we provide radar processing capabilities for the F-22 Raptor and F-35 Joint Strike Fighter, the latest

generation of U.S. stealth-enabled fighters; and

•

to respond to the need for enhanced signals intelligence and jamming capabilities, we recently achieved
a new design win for the next generation of the airborne signals intelligence payload, or ASIP,
program.

The long-term DoD budget pressure is pushing more dollars toward upgrades of the electronic sub-systems
on existing platforms, which may increase demand for our products. The DoD is moving from major new
weapons systems developments to upgrades of the electronic sub-systems on existing platforms. These upgrades
are expected to include more sensors, signal processing, ISR algorithms, multi-INT fusion exploitation,
computing and communications. We believe that upgrades to provide new urgent war fighting capability, driven
by combatant commanders, are occurring more rapidly than traditional prime defense contractors can easily react
to. We believe these trends will cause prime defense contractors to increasingly seek out our high performance,
cost-effective open architecture products.

Defense procurement reform is causing the prime defense contractors to outsource more work to
best-of-breed companies. The U.S. government is intensely focused on making systems more affordable and
shortening their development time. As a company that provides commercial items to the defense industry, we
believe our products are often more affordable than products with the same functionality developed by a prime
defense contractor. Prime defense contractors are increasingly being asked to work under firm fixed price
contract awards, which can pressure profit margins and increase program risk. Prime defense contractors are also
being asked to produce systems much more rapidly than they have in the past. In addition, the U.S. government is
demanding more use of commercial items and open system architectures. In this budget environment, there are
fewer research and development dollars available with which prime defense contractors can invest early-on to
differentiate their offerings while competing for new program awards or re-competes. As a result, prime defense
contractors are generally trying to adjust their cost model from a high fixed cost model to a variable cost model.

7

All of these factors are forcing the prime defense contractors to outsource more work to best-of-breed
subcontractors, and we have transformed our business model over the last several years to address these long-
term outsourcing needs and other trends.

A Growing Role in Big Data. In a world of increasing information flow, the intelligence community and
DoD are faced with the problem of processing extremely large volumes of data, and transforming that data into
actionable intelligence. We have technologies and solutions that are currently being used, and will be seeing
increased usage moving forward, for these types of applications. We will continue to invest in technologies and
service capabilities that enhance our value in this important area. We leverage both traditional computing models
and increasingly leverage cloud-based applications and analytic process to allow us to efficiently process and
analyze Big Data on shared application platforms.

Our Business Strategy

Our long-term strategy is to become a mission critical supplier to the prime defense contractors and
intelligence community and a leading provider of more affordable, open architecture, commercially-developed,
application-ready and multi-intelligence sub-systems.

We intend to achieve this objective through continued investment in advanced new products and solutions
development in the fields of radio frequency, analog-to-digital and digital to analog conversion, advanced multi-
and many-core sensor processing systems including GPUs, digital storage, and DRFM solutions as well as
software defined communications capabilities. In fiscal 2008, we established our services and systems
integration, or SSI, business to become a commercial outsourcing partner to the large prime defense contractors
as they seek the more rapid design, development and delivery of affordable, best-of-breed, application-ready
ISR sub-system solutions. We believe that services-led engagements in SSI may lead to long-term production
sub-system annuity revenues that will continue long after the initial services are delivered. This business model
positions us to be paid for work we would have previously expensed through our own income statement, to team
concurrently with multiple prime defense contractors as they pursue new business with the government, and to
engage with our customers much earlier in the design cycle and ahead of our competition. In fiscal 2008, we also
established MFS—the ISR systems and technology services arm of Mercury. Our goal in MFS is to enhance the
application-ready sub-systems from ACS with classified, domain-specific intellectual property that results in the
delivery of platform-ready ISR sub-system solutions to our prime customers.

Key elements of our strategy to accomplish our continued growth objectives include:

Achieve Design Wins on High Growth, High Priority Defense Programs. We believe that the most
significant long-term, leading indicator in our business is the number and probable value of design wins awarded.
We believe our advanced embedded signal processing solutions position us well going forward to capture design
wins on key high growth, high priority defense programs within our targeted segments of the C4ISR market. We
have won designs in persistent ISR related signals intelligence payloads on UAVs and other aerial platforms. As
a result of these successes, we now have significant content on all major UAV platforms, including Global
Hawk, Predator, Broad Area Maritime Surveillance (BAMS), Reaper and a wide area airborne surveillance
platform. Our ballistic missile defense wins include additional designs on the Aegis program, as well as
continued foreign military sales for the Patriot missile program, including the just announced U.S. Army Patriot
design win. In EW, we won key designs related to the Navy’s SEWIP program, including the next generation
SSEE Navy program. Together, these wins represent a substantial opportunity for us in the years ahead.

Continue to Provide Excellent Performance on Our Existing Programs. The foundation for our growth
remains our continued involvement with existing programs that are in late-stage development or currently in
production, such as Aegis, the F-35 Joint Strike Fighter, Patriot missile, the F-16 aircraft and the Global Hawk,
Predator and Reaper UAV programs. As part of a long-term reprioritization, the DoD is shifting its emphasis
from major new weapons systems development to upgrades of existing programs and platforms. The upgrades on

8

these programs focus on four key areas: improved sensors; more advanced on-board embedded computing;
enhanced ISR algorithms; and better communications on and off the platform. A key element of our strategy is to
continue to provide high performance, cost-effective solutions on these programs and for these customers as a
best-of-breed provider.

Pursue Strategic, Capability-Enhancing Acquisitions. We will continue to pursue selective strategic
acquisitions of profitable growing businesses to augment our businesses using the following strategies: adding
technologies or products that expand ACS’ core business by competing more effectively in the ISR, EW, and
missile defense markets; adding content and services to the defense and intelligence programs and platforms in
which we currently participate or could participate in the future; enhancing key customer relationships and
forming relationships with potential new customers; and adding a platform company that we can build around in
our intelligence business. Our acquisitions of LNX, KOR, and PDI in fiscal 2011 and 2012 support all three of
these objectives. Adding LNX to our business significantly strengthened our product portfolio in radio frequency
and our capabilities in signals intelligence and EW. LNX’s position as a key supplier to the prime defense
contractor under the JCREW I1B1 program significantly increases our content on that platform. Similarly,
adding KOR has brought capabilities with DRFM technologies that combine well with the RF domain expertise
of LNX and the embedded computing and packaging design expertise developed organically at Mercury. Our
recent acquisition of Micronetics expands our technology and subsystems integration capabilities and provides
our RF business with scalability. Our acquisition strategy also focuses on broadening our customer base.

Rapidly Scale MFS to Provide Fully Integrated Sub-systems for ISR Applications in Classified Programs.
Through MFS, we have sought to become a services-led, best-of-breed ISR sub-systems provider to our prime
defense contractors for classified programs. Through the addition of key personnel, high-level security clearances
and new defense and intelligence community customers, MFS provides us access to critical classified
government intellectual property that we can integrate with our existing ACS embedded computing solutions in
order to provide fully integrated, platform ready ISR sub-systems. We believe MFS differentiates us from our
competitors and places us in a stronger position to serve as the sub-systems architect for next-generation ISR
programs and platforms. As an example, the multi-phase Gorgon Stare program has encompassed concept of
operation, system architecture, processor design, algorithm optimization, airborne platform-hosted mechanical/
environmental design, and integration and test expertise. The first program phase yielded a successfully deployed
system that has provided significant operational capabilities to the warfighter. The second program phase
combines state of the art hardware and software infrastructure developed by ACS with advanced image
processing techniques implemented by MFS that leverage ultra-high resolution cameras to enable the world’s
leading airborne wide-area EO/IR surveillance system. We expect to build upon these successes in the future.

Capitalize on Outsourcing and Other Dynamics in the Defense and Intelligence Industries. We are well-
positioned to take advantage of several changing dynamics in the defense industry. Prime defense contractors are
increasingly being awarded firm fixed price contracts. These contracts shift risk to the prime contractors, and as a
result they are beginning to outsource increasing levels of sub-system development and production and other
higher value program content. In addition, the U.S. government is shifting toward shorter program timelines,
which require increased flexibility and responsiveness from prime contractors. Finally, more programs are
moving to open systems architectures encompassing best-of-breed capabilities. We believe that these dynamics
will result in prime contractors outsourcing increasing levels of program content to us as a best-of-breed provider
of differentiated products, sub-systems engineering services and system integration.

Leverage Our Research and Development Efforts to Anticipate Market Needs and Maintain our Technology
Leadership. Our high performance, quick reaction sub-systems and capabilities require increasingly more
sophisticated hardware, software and middleware technology. In addition, as the defense and intelligence
industries shift to products with open systems architectures, we believe that our software expertise will become
increasingly important and differentiates us from many of our competitors as we have the ability to map complex
algorithms onto size, weight, and power-constrained on-board embedded sensor processing solutions. We have
substantially and will continue to refresh both our sensor processing and multicomputer product lines while

9

increasing our product development velocity. Faster product development velocity aligns us with the
U.S. government’s demands on the prime defense contractors for quick reaction capabilities. By shortening our
product development times, we have been able to quickly launch the products we need to win new designs from
the prime contractor community that will ultimately generate bookings and revenue for us. We intend to continue
to utilize company and customer-funded research and development, as well as our acquisition strategy, to
develop technologies, products and solutions that have significant potential for near-term and long-term value
creation in both the defense and intelligence markets. We devote significant resources in order to anticipate the
future requirements in our target defense and intelligence markets, including monitoring and pioneering advances
in advanced embedded computing hardware and software, anticipating changes in U.S. government spending and
procurement practices and leveraging insight from direct interaction with our customers.

Our Competitive Strengths

We believe the following competitive strengths will allow us to take advantage of the evolving trends in our

industry and successfully pursue our business strategy:

Best-of-Breed Sub-System Solutions Provider for the C4ISR Market. Through our commercially-developed,
high-performance embedded signal processing solutions, we address the challenges associated with the collection
and processing of massive, continuous streams of data and dramatically shorten the time that it takes to give
information to U.S. armed forces at the tactical edge. Our solutions are specifically designed for flexibility and
interoperability, allowing our products to be easily integrated into larger system-level solutions. Our ability to
integrate sub-system-level capabilities allows us to provide solutions that most effectively address the mission-
critical challenges within the C4ISR market, including multi-intelligence data fusion and intelligence processing
onboard the platform.

Diverse Mix of Stable, High Growth Programs Aligned with DoD Funding Priorities. Our products have
been deployed in approximately 300 different programs with over 25 different prime contractors. We serve high
priority markets for the DoD and foreign militaries, such as UAVs, ballistic missile defense, airborne
reconnaissance, EW and jamming of IEDs, and have secured positions on mission-critical programs including
Aegis, Predator and Reaper UAVs, F-35 Joint Strike Fighter, Patriot missile, JCREW I1B1 and SEWIP. In
addition, we consistently leverage our technology and capability across 15 to 20 programs on an annual basis,
providing significant operating leverage and cost savings.

Value-Added Sub-System Solution Provider for Prime Defense Contractors. Because of the DoD’s shift
towards a firm fixed price contract procurement model, an increasingly uncertain budgetary and procurement
environment, and increased budget pressures from both the U.S. and allied governments, prime defense
contractors are accelerating their move towards outsourcing opportunities to help mitigate the increased program
and financial risk. Our differentiated advanced signal processing solutions offer meaningful capabilities upgrades
for our customers and enable the rapid, cost-effective deployment of systems to the end customer. We believe
our open architecture sub-systems offer differentiated signal processing and data analytics capabilities that
cannot be easily replicated. Our solutions minimize program risk, maximize application portability, and
accelerate customers’ time to market.

MFS Enables the Delivery of Platform-Ready Solutions for Classified Programs. MFS was created in fiscal
2008 to enable us to directly pursue systems integration opportunities within the DoD and U.S. intelligence
community. We believe the development work through MFS will provide us leverage and implement key
classified government intellectual property, including critical intelligence and signal processing algorithms. We
believe that MFS also provides us the opportunity to directly integrate this intellectual property onto our existing
advanced computing solutions, enabling us to deliver platform-ready integrated ISR sub-systems that leverage
our open architecture solutions and address key government technology and procurement concerns. MFS
operations in this environment will also influence future product development so that critical future needs can be
met in a timely manner.

10

Long-Standing Industry Relationships. We have established long-standing relationships with prime defense
contractors, the U.S. government and other key organizations in the defense and intelligence industries over our
30 years in the defense electronics industry. Our customers include The Boeing Company, Lockheed Martin
Corporation, Northrop Grumman Corporation, and Raytheon Company, many of whom have been valued and
loyal customers for more than a decade. Over this period, we have become recognized for our ability to develop
new technologies and meet stringent program requirements. Our demonstrated track record of delivering high-
performance embedded signal processing solutions helped us to acquire new customers, such as Exelis Electronic
Systems, for whom we are providing the processing content on the JCREW I1B1 counter-IED program. We
believe we are well-positioned to maintain these high-level customer engagements.

Proven Management Team. Over the past several years, our senior management team has refocused the
Company on its economic core, developed a long-term compelling strategy for the defense market and restored
profitability to the business. Having completed these critical steps to rebuild the Company and with a senior
management
team with significant experience in growing and scaling businesses, both through operating
execution and acquisitions, we believe that we have demonstrated our operational capabilities and we are well-
positioned for the next phase to transform, grow and scale our business.

Our Solutions and Products

Services and Systems Integration (“SSI”)

As part of our strategy, we are continuing to invest in our SSI capability. Our SSI group is tasked with
partnering with prime defense contractors to deliver sub-system level engineering expertise as well as ongoing
systems integration services. Our SSI capability addresses our strategy to capitalize on the $2.7 billion
sub-system market within the defense embedded electronics market segment.

As the U.S. government mandates more outsourcing and open standards, a major shift is occurring within
the prime defense contractors toward procurement of integrated sub-systems that enable quick application level
porting through standards-based methodologies. We believe that our core expertise in this area is well aligned to
capitalize on this trend. By leveraging our open architecture and high performance modular product set, we
provide prime defense contractors with rapid deployment and quick reaction capabilities through our professional
services and systems integration offerings. This results in less risk for the prime defense contractors, shortened
development cycles, quicker solution deployment and reduced lifecycle costs.

Software Products

We actively design, market and sell complete software and middleware environments to accelerate
development and execution of complex signal and image processing applications on a broad range of
heterogeneous, multi-computing platforms. Our software suite is based on open standards and includes
heterogeneous processor support with extensive high performance math libraries, multi-computing fabric
support, net-centric and system management enabling services, extended operating system services, board
support packages and development tools.

Our software is developed using some of the most advanced integrated development environments (IDE’s),
such as Eclipse, and our work is done on multiple platforms including open source platforms such as Linux. Our
software development teams are schooled in the most up-to-date software development methodologies.

Our software and middleware provides customer application-level algorithm portability across rapidly
evolving hardware processor types with math and input/output, or I/O, interfaces running at industry leading
performance rates. In order to develop, test and integrate software ahead of hardware availability, we have
invested in the notion of a Virtual Multi-Computer which we have branded Virtual ARS (Application Ready
Sub-system™). The Virtual ARS model allows for concurrent engineering internally and with customers to
accelerate time to deployment, improve quality and reduce development costs. In most cases, these software
products are bundled together with broader solutions including hardware and/or services, while in other cases
they are licensed separately.

11

Our multi-computer software packages are marketed and licensed under the MultiCore Plus® registered
trademark. These software products are a key differentiator for our systems business and represent only a modest
amount of stand-alone revenue. We generally charge a user-based development license fee and bundle software
run-time licenses with our hardware. We offer a standards-based software value proposition to our customers and
provide this offer through several integrated software packages and service offerings.

Hardware Products

We offer a broad family of products designed to meet the full range of requirements in compute-intensive,
signal processing and image processing applications, multi-computer interconnect fabrics, sensor interfaces and
command and control functions. To maintain a competitive advantage, we seek to leverage technology
investments across multiple product
in the industry-standard organizations
lines. We are also influential
associated with our market segments. For example, we started the OpenVPX™ initiative with the goal of
providing customers with multi-vendor interoperable hardware built to well-defined system standards.

Our hardware products are typically compute-intensive and require extremely high inter-processor
bandwidth and high I/O capacity. These systems often must also meet significant size, weight and power
constraints for use in aircraft, UAVs, ships and other vehicles, and be ruggedized for use in highly demanding
use environments. They are used in both commercial industrial applications, such as ground radar air traffic
control, and advanced defense applications, including space-time adaptive processing, synthetic aperture radar,
airborne early warning, command control communication and information systems, mission planning, image
intelligence and signal intelligence systems. Our products transform the massive streams of digital data created in
these applications into usable information in real time. The systems can scale from a few processors to thousands
of processors.

To address the current challenges facing the war fighter, our government and prime defense contractors, we
have developed a new product architecture that supports a more dynamic, iterative, spiral development process
by leveraging open architecture standards and leading-edge commercial technologies and products. Configured
and productized as integrated sub-systems, customers can rapidly and cost-effectively port and adapt their
applications to changing threats.

Our open architecture is carried throughout our entire Ensemble product line from the very small form-
factor sub-systems to the high-end, where ultimate processing power and reliability is of paramount importance
to the mission. Our commercially-developed hardware and software product capabilities cover the entire ISR
spectrum from acquisition and digitization of the signal, to processing of the signal, through the exploitation and
dissemination of the information. We work continuously to improve our hardware technology with an eye toward
optimization of size, weight and power (“SWaP”) demands.

Research and Product Development

Our research and development efforts are focused on developing new products and systems as well as
enhancing existing hardware and software products in signal and image processing. Our research and
development goal is to fully exploit and maintain our technological lead in the high-performance, real-time signal
processing industry. Expenditures for research and development amounted to $46.0 million in fiscal 2012,
$44.5 million in fiscal 2011 and $41.5 million in fiscal 2010. As of June 30, 2012, we had 277 employees,
including hardware and software architects and design engineers, primarily engaged in engineering and research
and product development activities. These individuals, in conjunction with our sales team, also devote a portion
of their time to assisting customers in utilizing our products, developing new uses for these products and
anticipating customer requirements for new products.

12

Manufacturing

Advanced Computing Solutions

The majority of our sales are produced in International Organization for Standardization, or ISO, 9001:2000
quality system certified facilities. The current scope of delivered hardware products includes commercial and
industrial class printed circuit board assemblies (modules) and complex chassis systems. Our manufacturing
operations consist primarily of materials planning and procurement, final assembly and test and logistics
(inventory and traffic management). We subcontract the assembly and testing of most modules to contract
to build to our specifications. We currently rely primarily on one contract
manufacturers in the U.S.
manufacturer. We have a comprehensive quality and process control plan for each of our products, which include
an effective supply chain management program and the use of automated inspection and test equipment to assure
the quality and reliability of our products. We perform most post sales service obligations (both warranty and
other lifecycle support) in-house through a dedicated service and repair operation. We periodically review our
contract manufacturing capabilities to ensure we are optimized for the right mix of quality, affordability,
performance and on-time delivery.

Although we generally use standard parts and components for our products, certain components, including
custom designed ASICs, static random access memory, FPGAs, microprocessors and other third-party chassis
peripherals (single board computers, power supplies, blowers, etc.), are currently available only from a single
source or from limited sources. With the exception of certain components that have gone “end of life,” we strive
to maintain minimal supply commitments from our vendors and generally purchase components on a purchase
order basis as opposed to entering into long-term procurement agreements with vendors. We have generally been
able to obtain adequate supplies of components in a timely manner from current vendors or, when necessary to
meet production needs, from alternate vendors. We believe that, in most cases, alternate vendors can be identified
if current vendors are unable to fulfill needs.

Mercury Federal Systems

As of June 30, 2012, MFS did not manufacture hardware. All hardware (e.g. computers and computer

peripherals) is generally procured from our other subsidiaries or third-party suppliers.

Competition

Advanced Computing Solutions

The markets for our products are highly competitive and are characterized by rapidly changing technology,
frequent product performance improvements, increasing speed of deployment to align with warfighters’ needs,
and evolving industry standards and requirements coming from our customers or the DoD. Competition typically
occurs at the design stage of a prospective customer’s product, where the customer evaluates alternative
technologies and design approaches.

The principal competitive factors in our market are price/performance value proposition, available new
products at the time of design win engagement, services and systems integration capability, effective marketing
and sales efforts, and reputation in the market. Our competitive strengths include innovative engineering in both
hardware and software products, sub-system design expertise, advanced packaging capability to deliver the most
optimized size, weight and power solution possible, our ability to rapidly respond to varied customer
requirements, and a track record of successfully supporting many high profile programs in both the commercial
and defense markets. There are a limited number of competitors across the market segments and application
types in which we compete. Some of these competitors are larger and have greater resources than us. Some of
these competitors compete against us at purely a board-level, others at a sub-system level. We also compete with
in-house design teams at our customers. The DoD as well as the prime defense contractors are pushing for more
outsourcing of sub-system designs to mitigate risk and to enable concurrent design of the platform which
ultimately leads to faster time to deployment. We are aligning our strategy to capitalize on that trend and
leveraging our long standing sub-system expertise to provide this value to our customers.

13

A design win usually ensures, but does not always guarantee, that a customer will purchase our product until
the next-generation system is developed. In addition, a design win also needs to be funded by the government
and the program needs to move to production. We believe that our future ability to compete effectively will
depend, in part, upon our ability to improve product and process technologies, to develop new technologies, to
maintain the performance advantages of products and processes relative to competitors, to adapt products and
processes to technological changes, to identify and adopt emerging industry standards and to adapt to customer
needs.

Mercury Federal Systems

The markets for our products and services are highly competitive and primarily focus on providing services
to the federal contracting markets. MFS is focused on developing advanced solutions for emerging ISR system
processing challenges in the federal space. With the addition of PDI, MFS also provides sophisticated analytic
exploitation, multi-sensor fusion, and data processing services for the U.S. intelligence community. Our targets
are existing programs that are confronting modernization challenges and planned programs yet to be fielded. Our
goal is to produce open, commercial item-based processing solutions that are platform agnostic.

Due to the competitive environment in which MFS operates, price and past performance are becoming as
important as technical quality in most awards. Our primary competitors for our federal services are other small to
large service-based companies that have long-standing customer relationships and program insights. We also face
additional competition from platform and sensor developers that will continue to offer the government custom
solutions packaged to support individual platform designs and point solution concepts. These companies, large
and small, will want to maintain configuration control of compute processing architectures across their platforms
in order to control systems upgrade and out-year modernization efforts. To win business, we will continue to
offer program managers an alternative path to achieving interoperability and advanced SWaP efficient processing
solutions for ISR applications.

Intellectual Property and Proprietary Rights

As of June 30, 2012, we held 39 patents of varying duration issued in the United States. We regularly file
U.S. patent applications and, where appropriate, foreign patent applications. We also file continuations to cover
both new and improved designs and products. At present, we have several U.S. and foreign patent applications in
process.

We also rely on a combination of trade secret, copyright, and trademark laws, as well as contractual
agreements, to safeguard our proprietary rights in technology and products. In seeking to limit access to sensitive
information to the greatest practical extent, we routinely enter into confidentiality and assignment of invention
agreements with each of our employees and consultants and nondisclosure agreements with our key customers
and vendors.

Backlog

As of June 30, 2012, we had a backlog of orders aggregating approximately $104.6 million, of which $91.9
twelve months. As of June 30, 2011, backlog was
million is expected to be delivered within the next
approximately $86.9 million. The defense backlog at June 30, 2012 was $101.5 million, a $20.0 million increase
from June 30, 2011. We include in our backlog customer orders for products and services for which we have
accepted signed purchase orders, as long as that order is scheduled to ship or invoice in whole, or in part, within
the next 24 months. Orders included in backlog may be canceled or rescheduled by customers, although the
customer may incur cancellation penalties depending on the timing of the cancellation. A variety of conditions,
both specific to the individual customer and generally affecting the customer’s industry, may cause customers to
cancel, reduce or delay orders that were previously made or anticipated. We cannot assure the timely replacement
of canceled, delayed or reduced orders. Significant or numerous cancellations, reductions or delays in orders by a
customer or group of customers could materially and adversely affect our results of operations or our ability to
predict future revenues. Backlog should not be relied upon as indicative of our revenues for any future period.

14

Employees

At June 30, 2012, we employed a total of 713 people excluding contractors, including 277 in research and
development, 83 in sales and marketing, 223 in manufacturing and customer support and 130 in general and
administrative functions. We have seven employees located in Europe, four located in Japan, and 702 located in
the United States. We do not have any employees represented by a labor organization, and we believe that our
relations with our employees are good.

WEBSITE

We maintain a website at www.mc.com. We make available on our website, free of charge, our annual report
on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, including exhibits and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the
Securities and Exchange Commission (“SEC”). Our code of business conduct and ethics is also available on our
website. We intend to disclose any future amendments to, or waivers from, our code of business conduct and
ethics within four business days of the waiver or amendment through a website posting or by filing a current
report on Form 8-K with the SEC. Information contained on our website does not constitute part of this report.
Our reports filed with, or furnished to, the SEC are also available on the SEC’s website at www.sec.gov.

OTHER INFORMATION

Challenges Drive Innovation, Echocore, Echotek, Ensemble2, Powerstream, RACE++ and MultiCore Plus
are registered trademarks, and Ensemble, Application Ready Subsystem, ARS, POET, Converged Sensor
Network, CSN, Embedded Smart Processing and ESP are trademarks of Mercury Computer Systems, Inc.
OpenVPX™ is a trademark of the VMEbus International Trade Association. IBM and PowerPC are registered
trademarks of International Business Machine Corporation. All other trademarks and registered trademarks are
the property of their respective holders, and are hereby acknowledged.

Item 1A. Risk Factors:

We depend heavily on defense electronics programs that incorporate our products, which may be only
partially funded and are subject to potential termination and reductions and delays in government
spending.

Sales of our embedded computer systems and related services, primarily as an indirect subcontractor or team
member with prime defense contractors, and in some cases directly, to the U.S. government and its agencies, as
well as foreign governments and agencies, accounted for approximately 94%, 78%, and 79% of our total net
revenues in fiscal 2012, 2011, and 2010, respectively. Our computer systems are included in many different
domestic and international programs. Over the lifetime of a program, the award of many different individual
contracts and subcontracts may impact our products’ requirements. The funding of U.S. government programs is
subject to Congressional appropriations. Although multiple-year contracts may be planned in connection with
major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may
continue for many years. Consequently, programs are often only partially funded initially, and additional funds
are committed only as Congress makes further appropriations and prime contracts receive such funding. The
reduction or delay in funding or termination of a government program in which we are involved would result in a
loss of or delay in receiving anticipated future revenues attributable to that program and contracts or orders
received. The U.S. government could reduce or terminate a prime contract under which we are a subcontractor or
team member irrespective of the quality of our products or services. The termination of a program or the
reduction in or failure to commit additional funds to a program in which we are involved could negatively impact
our revenues and have a material adverse effect on our financial condition and results of operations. The U.S.
defense budget frequently operates under a continuing budget resolution, which increases revenue uncertainty
and volatility. For fiscal 2013, the Presidential election and the potential for defense budget sequestration may

15

reduce or delay revenues and increase uncertainty in our business and financial planning. In addition, delays in
funding of a program, or of the defense appropriation generally, could negatively impact our revenues and have a
material adverse effect on our financial condition and results of operations for the period in which such revenues
were originally anticipated.

Economic conditions could adversely affect our business, results of operations and financial condition.

The world’s financial markets have experienced turmoil, characterized by reductions in available credit,
volatility in security prices, rating downgrades of investments, and reduced valuations of securities. These events
have materially and adversely impacted the availability of financing to a wide variety of businesses, including
small businesses, and the resulting uncertainty has led to reductions in capital investments, overall spending
levels, future product plans, and sales projections across many industries and markets. These trends could have a
material adverse impact on our business. These trends could also impact our financial condition and our ability to
achieve targeted results of operations due to:

•

•

•

•

•

reduced and delayed demand for our products;

increased risk of order cancellations or delays;

downward pressure on the prices of our products;

greater difficulty in collecting accounts receivable; and

risks to our liquidity, including the possibility that we might not have access to our cash and short-term
investments or to our line of credit when needed.

Further, the funding of the defense programs that incorporate our products and services is subject to the
overall U.S. government budget and appropriation decisions and processes, which are driven by numerous factors
beyond our control, including geo-political, macroeconomic, and political conditions. Increased federal budget
deficits could result
in reduced Congressional appropriations, such as the potential for defense budget
sequestration, for the defense programs that use our defense electronics products and services. In addition,
Congress could fund U.S. government operations through a continuing budget resolution without approving a
formal budget for the government fiscal year, thereby potentially reducing or delaying the demand for our
products. We are unable to predict the likely duration and severity of adverse economic conditions in the United
States and other countries, but the longer the duration or the greater the severity, the greater the risks we face in
operating our business.

We face other risks and uncertainties associated with defense-related contracts, which may have a
material adverse effect on our business.

Whether our contracts are directly with the U.S. government, a foreign government, or one of their
respective agencies, or indirectly as a subcontractor or team member, our contracts and subcontracts are subject
to special risks. For example:

• Changes

in government

including
impact on national or
developments in the geo-political environment, could have a significant
international defense spending priorities and the efficient handling of routine contractual matters.
These changes could have a negative impact on our business in the future.

administration and national

and international priorities,

• Our contracts with the U.S. and foreign governments and their prime defense contractors and
subcontractors are subject to termination either upon default by us or at the convenience of the
government or contractor if, among other reasons, the program itself has been terminated. Termination
for convenience provisions generally entitle us to recover costs incurred, settlement expenses and profit
on work completed prior to termination, but there can be no assurance in this regard.

• Because we contract to supply goods and services to the U.S. and foreign governments and their prime
and subcontractors, we compete for contracts in a competitive bidding process and, in the event we are

16

awarded a contract, we are subject to protests by disappointed bidders of contract awards that can result
in the reopening of the bidding process and changes in governmental policies or regulations and other
political factors. In addition, we may be subject to multiple rebid requirements over the life of a
defense program in order to continue to participate on such program, which can result in the loss of the
program or significantly reduce our revenue or margin from the program. The government’s
requirements for more frequent technology refreshes on defense programs may lead to increased costs
and lower long term revenues.

• Consolidation among defense industry contractors has resulted in a few large contractors with
increased bargaining power relative to us. The increased bargaining power of these contractors may
adversely affect our ability to compete for contracts and, as a result, may adversely affect our business
or results of operations in the future.

• Our customers include U.S. government contractors who must comply with and are affected by laws
and regulations relating to the formation, administration, and performance of U.S. government
contracts. In addition, when our business units, such as MFS, contract with the U.S. government, they
must comply with these laws and regulations,
including the organizational conflict-of-interest
regulations. A violation of these laws and regulations could result in the imposition of fines and
penalties to us or our customers or the termination of our or their contracts with the U.S. government.
As a result, there could be a delay in our receipt of orders from our customers, a termination of such
orders, or a termination of contracts between our business units and the U.S. government.

• We sell products to U.S. and international defense contractors and also directly to the U.S. government
as a commercial supplier such that cost data is not supplied. To the extent that there are interpretations
or changes in the Federal Acquisition Regulations regarding the qualifications necessary to be a
commercial supplier, there could be a material adverse effect on our business and operating results. For
example, there have been legislative proposals to narrow the definition of a “commercial item” (as
defined in the Federal Acquisition Regulations) that could limit our ability to contract as a commercial
supplier. In addition, growth in our defense sales relative to our commercial sales could adversely
impact our status as a commercial supplier, which could adversely affect our business and operating
results. Changes in federal regulations, or the interpretation of federal regulations, may subject us to
audit by the Defense Contract Audit Agency for certain of our products or services.

• We qualify as a “small business” for government contracts purposes under the definition of that term in
an applicable NAICS code because we have fewer than 1,000 employees. As we grow and potentially
have over 1,000 employees in the future, we would no longer qualify as a small business. Loss of our
small business status could negatively impact us, including our customers purchases from us would not
qualify as purchases from a small business, customers may flow down additional Federal Acquisition
Regulation, or FAR, clauses in their contracts with us that are less favorable than our existing contract
terms and conditions, and the flow down of certain FAR clauses may require us to implement a
Defense Contract Audit Agency cost-accounting system.

• We are subject to the Defense Federal Acquisition Regulations Supplement, referred to as DFARS, in
connection with our defense work for
the U.S. government and prime defense contractors.
Amendments to the DFARS, such as the 2009 amendment to the DFARS specialty metals clause
requiring that the specialty metals in specified items be melted or produced in the U.S. or other
qualifying countries, may increase our costs for certain materials or result in supply-chain difficulties
or production delays due to the limited availability of compliant materials.

• The U.S. government or a prime defense contractor customer could require us to relinquish data rights
to a product in connection with performing work on a defense contract, which could lead to a loss of
valuable technology and intellectual property in order to participate in a government program.

• We are subject to various U.S. federal export-control statutes and regulations which affect our business
with, among others, international defense customers. In certain cases the export of our products and
technical data to foreign persons, and the provision of technical services to foreign persons related to

17

such products and technical data, may require licenses from the U.S. Department of Commerce or the
U.S. Department of State. The time required to obtain these licenses, and the restrictions that may be
contained in these licenses, may put us at a competitive disadvantage with respect to competing with
international suppliers who are not subject to U.S. federal export control statutes and regulations. In
addition, violations of
in civil and, under certain
circumstances, criminal liability as well as administrative penalties which could have a material
adverse effect on our business and operating results.

these statutes and regulations can result

• Certain of our employees with appropriate security clearance may require access to classified
information in connection with the performance of a U.S. government contract. We must comply with
security requirements pursuant to the National Industrial Security Program Operating Manual, or
NISPOM, and other U.S. government security protocols when accessing sensitive information. Failure
to comply with the NISPOM or other security requirements may subject us to civil or criminal
penalties, loss of access to sensitive information, loss of a U.S. government contract, or potentially
debarment as a government contractor.

The loss of one or more of our largest customers, programs, or applications could adversely affect our
results of operations.

We are dependent on a small number of customers for a large portion of our revenues. A significant
decrease in the sales to or loss of any of our major customers would have a material adverse effect on our
business and results of operations. In fiscal 2012, Raytheon Company accounted for 22% of our total net
revenues, Northrop Grumman Corporation accounted for 17% of our total net revenues and Lockheed Martin
Corporation accounted for 15% of our total net revenues. In fiscal 2011, Northrop Grumman Corporation
accounted for 21% of our total net revenues, Raytheon Company accounted for 17% of our total net revenues and
Lockheed Martin Corporation accounted for 13% of our total net revenues. In fiscal 2010, Raytheon Company
accounted for 20% of our total net revenues and Lockheed Martin Corporation accounted for 17% of our total net
revenues. The defense market is highly acquisitive, which could lead to further concentration in our largest
customers. Customers in the defense market generally purchase our products in connection with government
programs that have a limited duration, leading to fluctuating sales to any particular customer in this market from
year to year. In addition, our revenues are largely dependent upon the ability of customers to develop and sell
products that incorporate our products. No assurance can be given that our customers will not experience
financial, technical or other difficulties that could adversely affect their operations and, in turn, our results of
operations. Additionally, on a limited number of programs the customer has co-manufacturing rights which could
lead to a shift of production on such a program away from us which in turn could lead to lower revenues.

We are dependent on sales for radar applications for a large portion of our revenues. Sales related to radar
applications accounted for 55%, 53%, and 49% of our total net revenues for fiscal 2012, 2011, and 2010,
respectively. While our radar sales relate to multiple different platforms and defense programs, our revenues are
largely dependent upon our customers incorporating our products into radar applications. In fiscal 2012 and fiscal
2010, the Aegis program accounted for 11% and 15% of our total net revenues, respectively. Loss of a significant
radar program could adversely affect our results of operations. For the year ended June 30, 2011, no single
program comprised 10% or more of the Company’s revenue.

Going forward, we believe the JCREW I1B1 counter-IED and SEWIP programs could be a large portion of
our future revenues in the coming years, and the loss or cancellation of these programs could adversely affect our
future results. In addition, as we shift our business mix toward more services-led engagements with legacy
product revenues becoming a lesser amount of our total revenues, we could experience downward pressure on
margins and reduced profitability. Further, new programs may yield lower margins than legacy programs, which
could result in an overall reduction in gross margins.

18

If we are unable to respond adequately to our competition or to changing technology, we may lose existing
customers and fail to win future business opportunities.

The markets for our products are highly competitive and are characterized by rapidly changing technology,
frequent product performance improvements and evolving industry standards. Competitors may be able to offer
more attractive pricing or develop products that could offer performance features that are superior to our
products, resulting in reduced demand for our products. Due to the rapidly changing nature of technology, we
may not become aware in advance of the emergence of new competitors into our markets. The emergence of new
competitors into markets targeted by us could result in the loss of existing customers and may have a negative
impact on our ability to win future business opportunities. In addition to adapting to rapidly changing technology,
we must also develop a reputation as a best-of-breed technology provider. Competitors may be perceived in the
market as being providers of open-source architectures versus Mercury as a closed-architecture company.
Perceptions of Mercury as a high-cost provider, or as having stale technology could cause us to lose existing
customers or fail to win new business.

With continued microprocessor evolution,

low-end systems could become adequate to meet

the
target markets.
requirements of an increased number of
Workstation or blade center computer manufacturers and other low-end single-board computer, or new
competitors, may attempt to penetrate the high-performance market for defense electronics systems, which could
have a material adverse effect on our business. In addition, our customers provide products to markets that are
subject to technological cycles. Any change in the demand for our products due to technological cycles in our
customers’ end markets could result in a decrease in our revenues.

the lesser-demanding applications within our

Competition from existing or new companies could cause us to experience downward pressure on prices,
fewer customer orders, reduced margins, the inability to take advantage of new business opportunities,
and the loss of market share.

We compete in highly competitive industries, and our OEM customers generally extend the competitive
pressures they face throughout their respective supply chains. Additionally, our markets are facing increasing
industry consolidation, resulting in larger competitors who have more market share to put more downward
pressure on prices and offer a more robust portfolio of products and services. We are subject to competition
based upon product design, performance, pricing, quality and services. Our product performance, embedded
systems’ engineering expertise, and product quality have been important factors in our growth. While we try to
maintain competitive pricing on those products that are directly comparable to products manufactured by others,
in many instances our products will conform to more exacting specifications and carry a higher price than
analogous products. Many of our OEM customers and potential customers have the capacity to design and
internally manufacture products that are similar to our products. We face competition from research and product
development groups and the manufacturing operations of current and potential customers, who continually
evaluate the benefits of internal research, product development, and manufacturing versus outsourcing. This
competition could result in fewer customer orders and a loss of market share.

Our sales in the defense market could be adversely affected by the emergence of commodity-type products
as acceptable substitutes for certain of our products and by uncertainty created by emerging changes in
standards that may cause customers to delay purchases or seek alternative solutions.

Our computing products for the defense market are designed for operating under physical constraints such
as limited space, weight, and electrical power. Furthermore, these products are often designed to be “rugged,”
that is, to withstand enhanced environmental stress such as extended temperature range, shock, vibration, and
exposure to sand or salt spray. Historically these requirements have often precluded the use of less expensive,
readily available commodity-type systems typically found in more benign non-military settings. Factors that may
increase the acceptability of commodity-type products in some defense platforms that we serve include
improvements in the physical properties and durability of such alternative products, combined with the relaxation

19

of physical and ruggedness requirements by the military due to either a reevaluation of those requirements or the
installation of computing products in a more highly environmentally isolated setting. These developments could
negatively impact our revenues and have a material adverse effect on our business and operating results.

If we fail to respond to commercial industry cycles in terms of our cost structure, manufacturing capacity
and/or personnel need, our business could be seriously harmed.

The timing, length and severity of the up-and-down cycles in the telecommunications and other commercial
industries are difficult to predict. This cyclical nature of the industries in which we operate affects our ability to
accurately predict future revenue, and in some cases, future expense levels. In the current environment, our
ability to accurately predict our future operating results is particularly low. During down cycles in our industry,
the financial results of our customers may be negatively impacted, which could result not only in a decrease in
orders but also a weakening of their financial condition that could impair our ability to recognize revenue or to
collect on outstanding receivables. Furthermore, in the current credit environment, it may be more difficult for
our customers to raise capital, whether debt or equity, to finance their purchases of capital equipment, including
the products we sell. If our customers experience persistent difficulties in raising capital for equipment financing,
we could experience a decrease in orders for our products. When cyclical fluctuations result in lower than
expected revenue levels, operating results may be adversely affected and cost reduction measures may be
necessary in order for us to remain competitive and financially sound. During periods of declining revenues, such
as in the current environment, we must be in a position to adjust our cost and expense structure to reflect
prevailing market conditions and to continue to motivate and retain our key employees. If we fail to respond,
then our business could be seriously harmed. In addition, during periods of rapid growth, we must be able to
increase manufacturing capacity and personnel to meet customer demand. We can provide no assurance that
these objectives can be met in a timely manner in response to industry cycles. Each of these factors could
adversely impact our operating results and financial condition.

Implementation of our growth strategy may not be successful, which could affect our ability to increase
revenues.

Our growth strategy includes developing new products, adding new customers within our existing markets,
and entering new markets, as well as identifying and integrating acquisitions. Our ability to compete in new
markets will depend upon a number of factors including, among others:

•

•

•

•

•

•

•

our ability to create demand for products in new markets;

our ability to manage growth effectively;

our ability to respond to changes in our customers’ businesses by updating existing products and
introducing, in a timely fashion, new products which meet the needs of our customers;

our ability to develop a reputation as a best-of-breed technology provider;

the quality of our new products;

our ability to respond rapidly to technological change; and

our ability to successfully integrate any acquisitions that we make.

The failure to do any of the foregoing could have a material adverse effect on our business, financial
condition and results of operations. In addition, we may face competition in these new markets from various
companies that may have substantially greater research and development resources, marketing and financial
resources, manufacturing capability and customer support organizations.

Growing our business,

in particular through providing services and products such as sophisticated
application ready subsystems for major defense programs like JCREW I1B1, SEWIP and Aegis, could strain our

20

operational capacity and working capital demands if not properly anticipated and managed. Pursuing such growth
could result in our operational and infrastructure resources being spread too thin, which could negatively impact
our ability to deliver quality product on schedule and on budget. Providing quality services for systems level
products is a key driver of our growth strategy and the failure to properly scale our capabilities to support our
customers at a systems level could result lost opportunities and revenues.

Future acquisitions or divestitures may adversely affect our financial condition.

As part of our strategy for growth, we may continue to explore acquisitions, divestitures, or strategic

alliances, which may not be completed or may not be ultimately beneficial to us.

Acquisitions or divestitures may pose risks to our operations, including:

•

•

•

•

•

•

•

•

•

•

problems and increased costs in connection with the integration or divestiture of the personnel,
operations, technologies, or products of the acquired or divested businesses;

unanticipated costs;

failure to achieve anticipated increases in revenues and profitability;

diversion of management’s attention from our core business;

inability to make planned divestitures of businesses on favorable terms in a timely manner or at all;

adverse effects on business relationships with suppliers and customers and those of the acquired
company;

acquired assets becoming impaired as a result of technical advancements or worse-than-expected
performance by the acquired company;

volatility associated with accounting for earn-outs in a given transaction;

entering markets in which we have no, or limited, prior experience; and

potential loss of key employees.

In addition, in connection with any acquisitions or investments we could:

•

•

•

•

•

•

issue stock that would dilute our existing shareholders’ ownership percentages;

incur debt and assume liabilities;

obtain financing on unfavorable terms, or not be able to obtain financing on any terms at all;

incur amortization expenses related to acquired intangible assets or incur large and immediate write-
offs;

incur large expenditures related to office closures of the acquired companies, including costs relating to
the termination of employees and facility and leasehold improvement charges resulting from our
having to vacate the acquired companies’ premises; and

reduce the cash that would otherwise be available to fund operations or for other purposes.

The failure to successfully integrate any acquisitions or to make planned divestitures in an efficient or
timely manner may negatively impact our financial condition and operating results, or we may not be able to
fully realize anticipated savings.

We may be unable to obtain critical components from suppliers, which could disrupt or delay our ability
to deliver products to our customers.

Several components used in our products are currently obtained from sole-source suppliers. We are
dependent on key vendors like LSI Logic Corporation, Xilinx, Inc., and IBM Corporation for custom-designed

21

application-specific integrated circuits (“ASICs”) and field programmable gate arrays (“FPGAs”), Freescale
Semiconductor, Inc. and IBM Corporation for PowerPC microprocessors, Intel Corporation for our next
generation processors, IBM Corporation for a specific SRAM, Curtiss Wright Corporation and Motorola, Inc. for
chassis and chassis components and Benchmark Electronics, Inc. for board assembly, test and integration. The
semiconductor industry is experiencing a significant year over year increase in demand amid an uncertain macro
economy which is limiting any investment in additional capacity. We believe this dynamic will result in
increased lead-time for most classes of semiconductors and passive components and will continue to put pressure
on component pricing where supply becomes constrained. Generally, suppliers may terminate their contracts
with us without cause upon 30 days’ notice and may cease offering their products upon 180 days’ notice. If any
of our sole-source suppliers limits or reduces the sale of these components, we may be unable to fulfill customer
orders in a timely manner or at all. In addition, if these or other component suppliers, some of which are small
companies, experienced financial difficulties or other problems that prevented them from supplying us with the
necessary components, we could experience a loss of revenues due to our inability to fulfill orders. These sole-
source and other suppliers are each subject to quality and performance issues, materials shortages, excess
demand, reduction in capacity and other factors that may disrupt the flow of goods to us or to our customers,
which would adversely affect our business and customer relationships. We have no guaranteed supply
arrangements with our suppliers and there can be no assurance that these suppliers will continue to meet our
requirements. If supply arrangements are interrupted, we may not be able to find another supplier on a timely or
satisfactory basis. We may incur significant set-up costs and delays in manufacturing should it become necessary
to replace any key vendors due to work stoppages, shipping delays, financial difficulties, natural or manmade
disasters or other factors.

We may not be able to effectively manage our relationships with contract manufacturers.

We may not be able to effectively manage our relationship with contract manufacturers, and the contract
manufacturers may not meet future requirements for timely delivery. We rely on contract manufacturers to build
hardware sub-assemblies for our products in accordance with our specifications. During the normal course of
business, we may provide demand forecasts to contract manufacturers up to five months prior to scheduled
delivery of our products to customers. If we overestimate requirements, the contract manufacturers may assess
cancellation penalties or we may be left with excess inventory, which may negatively impact our earnings. If we
underestimate requirements, the contract manufacturers may have inadequate inventory, which could interrupt
manufacturing of our products and result in delays in shipment to customers and revenue recognition. Contract
manufacturers also build products for other companies, and they may not have sufficient quantities of inventory
available or sufficient internal resources to fill our orders on a timely basis or at all.

In addition, there have been a number of major acquisitions within the contract manufacturing industry in
recent periods. While there has been no significant impact on our contract manufacturers to date, future
acquisitions could potentially have an adverse effect on our working relationships with contract manufacturers.
Moreover, we currently rely primarily on one contract manufacturer. The failure of this contract manufacturer to
fill our orders on a timely basis or in accordance with our customers’ specifications could result in a loss of
revenues and damage to our reputation. We may not be able to replace this contract manufacturer in a timely
manner or without significantly increasing our costs if such contract manufacturer were to experience financial
difficulties or other problems that prevented it from fulfilling our order requirements.

We are exposed to risks associated with international operations and markets.

We market and sell products in international markets, and have established offices and subsidiaries in
Europe and Japan. Revenues from international operations accounted for 4% of our total net revenues in fiscal
2012 and 2011, and 10% of our total net revenues in fiscal 2010. We also ship directly from our U.S. operations
to international customers. There are inherent risks in transacting business internationally, including:

•

•

changes in applicable laws and regulatory requirements;

export and import restrictions;

22

•

•

•

•

•

•

•

•

•

•

•

export controls relating to technology;

tariffs and other trade barriers;

less favorable intellectual property laws;

difficulties in staffing and managing foreign operations;

longer payment cycles;

problems in collecting accounts receivable;

adverse economic conditions in foreign markets;

political instability;

fluctuations in currency exchange rates;

expatriation controls; and

potential adverse tax consequences.

There can be no assurance that one or more of these factors will not have a material adverse effect on our

future international activities and, consequently, on our business and results of operations.

We may be exposed to unfavorable currency exchange rate fluctuations, which may lead to lower
operating margins, or may cause us to raise prices which could result in reduced revenues.

Currency exchange rate fluctuations could have an adverse effect on our net revenues and results of
operations. Unfavorable currency fluctuations could require us to increase prices to foreign customers, which
could result in lower net revenues from such customers. Alternatively, if we do not adjust the prices for our
products in response to unfavorable currency fluctuations, our results of operations could be adversely affected.
In addition, most sales made by our foreign subsidiaries are denominated in the currency of the country in which
these products are sold, and the currency they receive in payment for such sales could be less valuable at the time
of receipt as a result of exchange rate fluctuations. We do not currently hedge our foreign currency exchange rate
exposure.

If we are unable to respond to technological developments and changing customer needs on a timely and
cost-effective basis, our results of operations may be adversely affected.

Our future success will depend in part on our ability to enhance current products and to develop new
products on a timely and cost-effective basis in order to respond to technological developments and changing
customer needs. Defense customers, in particular, demand frequent technological improvements as a means of
gaining military advantage. Military planners have historically funded significantly more design projects than
actual deployments of new equipment, and those systems that are deployed tend to contain the components of the
subcontractors selected to participate in the design process. In order to participate in the design of new defense
electronics systems, we must demonstrate the ability to deliver superior technological performance on a timely
and cost-effective basis. There can be no assurance that we will secure an adequate number of defense design
wins in the future, that the equipment in which our products are intended to function will eventually be deployed
in the field, or that our products will be included in such equipment if it eventually is deployed.

Customers in our commercial markets,

including the semiconductor market, also seek technological
improvements through product enhancements and new generations of products. OEMs historically have selected
certain suppliers whose products have been included in the OEMs’ machines for a significant portion of the
products’ life cycles. We may not be selected to participate in the future design of any semiconductor equipment,
or if selected, we may not generate any revenues for such design work.

The design-in process is typically lengthy and expensive, and there can be no assurance that we will be able
to continue to meet the product specifications of OEM customers in a timely and adequate manner. In addition,

23

any failure to anticipate or respond adequately to changes in technology, customer preferences and future order
demands, or any significant delay in product developments, product introductions or order volume, could
negatively impact our financial condition and results of operations, including the risk of inventory obsolescence.
Because of the complexity of our products, we have experienced delays from time to time in completing products
on a timely basis. If we are unable to design, develop or introduce competitive new products on a timely basis,
our future operating results may be adversely affected.

Our products are complex, and undetected defects may increase our costs, harm our reputation with
customers or lead to costly litigation.

Our products are extremely complex and must operate successfully with complex products of other vendors.
Our products may contain undetected errors when first introduced or as we introduce product upgrades. The
pressures we face to be the first to market new products or functionality increases the possibility that we will
offer products in which we or our customers later discover problems. We have experienced new product and
product upgrade errors in the past and expect similar problems in the future. These problems may cause us to
incur significant costs to support our service contracts and other costs and divert the attention of personnel from
our product development efforts. Undetected errors may adversely affect our product’s ease of use and may
create customer satisfaction issues. If we are unable to repair these problems in a timely manner, we may
experience a loss of or delay in revenue and significant damage to our reputation and business prospects. Many
of our customers rely upon our products for mission-critical applications. Because of this reliance, errors, defects
or other performance problems in our products could result in significant financial and other damage to our
customers. Our customers could attempt to recover those losses by pursuing products liability claims against us
which, even if unsuccessful, would likely be time-consuming and costly to defend and could adversely affect our
reputation.

We may be unsuccessful in protecting our intellectual property rights which could result in the loss of a
competitive advantage.

Our ability to compete effectively against other companies in our industry depends, in part, on our ability to
protect our current and future proprietary technology under patent, copyright, trademark, trade secret and unfair
competition laws. We cannot assure that our means of protecting our proprietary rights in the United States or
abroad will be adequate, or that others will not develop technologies similar or superior to our technology or
design around our proprietary rights. In addition, we may incur substantial costs in attempting to protect our
proprietary rights.

Also, despite the steps taken by us to protect our proprietary rights, it may be possible for unauthorized third
parties to copy or reverse-engineer aspects of our products, develop similar technology independently or
otherwise obtain and use information that we regard as proprietary and we may be unable to successfully identify
or prosecute unauthorized uses of our technology. Furthermore, with respect to our issued patents and patent
applications, we cannot assure you that any patents from any pending patent applications (or from any future
patent applications) will be issued, that the scope of any patent protection will exclude competitors or provide
competitive advantages to us, that any of our patents will be held valid if subsequently challenged or that others
will not claim rights in or ownership of the patents (and patent applications) and other proprietary rights held by
us.

If we become subject to intellectual property infringement claims, we could incur significant expenses and
could be prevented from selling specific products.

We may become subject to claims that we infringe the intellectual property rights of others in the future. We
cannot assure that, if made, these claims will not be successful. Any claim of infringement could cause us to
incur substantial costs defending against the claim even if the claim is invalid, and could distract management
from other business. Any judgment against us could require substantial payment in damages and could also
include an injunction or other court order that could prevent us from offering certain products.

24

Our need for continued investment in research and development may increase expenses and reduce our
profitability.

Our industry is characterized by the need for continued investment in research and development. If we fail
to invest sufficiently in research and development, our products could become less attractive to potential
customers and our business and financial condition could be materially and adversely affected. As a result of the
need to maintain or increase spending levels in this area and the difficulty in reducing costs associated with
research and development, our operating results could be materially harmed if our research and development
efforts fail to result in new products or if revenues fall below expectations. In addition, as a result of our
commitment to invest in research and development, spending levels of research and development expenses as a
percentage of revenues may fluctuate in the future.

Our results of operations are subject to fluctuation from period to period and may not be an accurate
indication of future performance.

We have experienced fluctuations in operating results in large part due to the sale of computer systems in
relatively large dollar amounts to a relatively small number of customers. Customers specify delivery date
requirements that coincide with their need for our products. Because these customers may use our products in
connection with a variety of defense programs or other projects with different sizes and durations, a customer’s
orders for one quarter generally do not indicate a trend for future orders by that customer. As such, we have not
been able in the past to consistently predict when our customers will place orders and request shipments so that
we cannot always accurately plan our manufacturing requirements. As a result, if orders and shipments differ
from what we predict, we may incur additional expenses and build excess inventory, which may require
additional reserves and allowances. Any significant change in our customers’ purchasing patterns could have a
material adverse effect on our operating results and reported earnings per share for a particular quarter. Thus,
results of operations in any period should not be considered indicative of the results to be expected for any future
period.

Our quarterly results may be subject to fluctuations resulting from a number of other factors, including:

•

•

•

•

•

•

•

•

•

•

•

delays in completion of internal product development projects;

delays in shipping computer systems and software programs;

delays in acceptance testing by customers;

a change in the mix of products sold to our served markets;

production delays due to quality problems with outsourced components;

inability to scale quick reaction capability products due to low product volume;

shortages and costs of components;

the timing of product line transitions;

declines in quarterly revenues from previous generations of products following announcement of
replacement products containing more advanced technology;

potential impairment or restructuring charges; and

changes in estimates of completion on fixed price service engagements.

In addition, from time to time, we have entered into contracts, referred to as development contracts, to
engineer a specific solution based on modifications to standard products. Gross margins from development
contract revenues are typically lower than gross margins from standard product revenues. We intend to continue
to enter into development contracts and anticipate that the gross margins associated with development contract
revenues will continue to be lower than gross margins from standard product sales.

Another factor contributing to fluctuations in our quarterly results is the fixed nature of expenditures on
personnel, facilities and marketing programs. Expense levels for these programs are based, in significant part, on
expectations of future revenues. If actual quarterly revenues are below management’s expectations, our results of
operations will likely be adversely affected.

25

Further, the preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates, and changes in estimates in subsequent periods could cause our results of operations to fluctuate.

Changes in regulations could materially adversely affect us.

Our business, results of operations, or financial condition could be materially adversely affected if laws,
regulations, or standards relating to us or our products are newly implemented or changed. In addition, our
compliance with existing regulations may have a material adverse impact on us. Under applicable federal
securities laws, we are required to evaluate and determine the effectiveness of our internal control structure and
procedures for financial reporting. Should we or our independent registered public accounting firm determine
that we have material weaknesses in our internal controls, our results of operations or financial condition may be
materially adversely affected or our stock price may decline.

Changes in generally accepted accounting principles may adversely affect us.

From time to time, the Financial Accounting Standards Board, or FASB, promulgates new accounting

principles that could have a material adverse impact on our results of operations or financial condition.

We rely on the significant experience and specialized expertise of our senior management and engineering
staff and must retain and attract qualified engineers and other highly skilled personnel in order to grow
our business successfully.

Our performance is substantially dependent on the continued services and performance of our senior
management and our highly qualified team of engineers, many of whom have numerous years of experience,
specialized expertise in our business, and security clearances required for certain defense projects. If we are not
successful in hiring and retaining highly qualified engineers, we may not be able to extend or maintain our
engineering expertise, and our future product development efforts could be adversely affected. Competition for
hiring these employees is intense, especially with regard to engineers with specialized skills and security
clearances required for our business, and we may be unable to hire and retain enough engineers to implement our
growth strategy.

Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly
skilled managerial, operations, sales, marketing and customer service personnel. If we fail to attract, integrate and
retain the necessary personnel, our ability to maintain and grow our business could suffer significantly. Further,
stock price volatility and improvements in the economy could impact our ability to retain key personnel.

If we experience a disaster or other business continuity problem, we may not be able to recover
loss of human capital, regulatory actions,
successfully, which could cause material financial
reputational harm, or legal liability.

loss,

If we experience a local or regional disaster or other business continuity problem, such as an earthquake,
terrorist attack, pandemic or other natural or man-made disaster, our continued success will depend, in part, on
functioning of our computer,
the availability of our personnel, our office facilities, and the proper
telecommunication and other related systems and operations. As we attempt to grow our operations, the potential
for particular types of natural or man-made disasters, political, economic or infrastructure instabilities, or other
country- or region-specific business continuity risks increases.

26

If we are unable to continue to obtain U.S. federal government authorization regarding the export of our
products, or if current or future export laws limit or otherwise restrict our business, we could be
prohibited from shipping our products to certain countries, which would harm our ability to generate
revenue.

We must comply with U.S. laws regulating the export of our products and technology. In addition, we are
required to obtain a license from the U.S. federal government to export certain of our products and technical data
as well as to provide technical services to foreign persons related to such products and technical data. We cannot
be sure of our ability to obtain any licenses required to export our products or to receive authorization from the
U.S. federal government for international sales or domestic sales to foreign persons including transfers of
technical data or the provision of technical services. Moreover, the export regimes and the governing policies
applicable to our business are subject
that such export
authorizations will be available to us, if at all, in the future. If we cannot obtain required government approvals
under applicable regulations in a timely manner or at all, we would be delayed or prevented from selling our
products in international jurisdictions, which could adversely affect our business and financial results.

to change. We cannot assure you of the extent

In addition, we must comply with the Foreign Corrupt Practices Act, or the FCPA. The FCPA generally
prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the
purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to
maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the
company. Under the FCPA, U.S. companies may be held liable for actions taken by strategic or local partners or
representatives. If we or our intermediaries fail to comply with the requirements of the FCPA, governmental
authorities in the United States could seek to impose civil and criminal penalties, which could have a material
adverse effect on our business, results of operations, financial conditions and cash flows.

If we suffer any data breaches involving the designs, schematics or source code for our products or other
sensitive information, our business and financial results could be adversely affected.

We securely store our designs, schematics and source code for our products as they are created. A breach,
whether physical, electronic or otherwise, of the systems on which this sensitive data is stored could lead to
damage or piracy of our products. If we are subject to data security breaches, we may have a loss in sales or
increased costs arising from the restoration or implementation of additional security measures, either of which
could adversely affect our business and financial results. In addition, a security breach that involved classified
information could subject us to civil or criminal penalties, loss of a government contract, loss of access to
classified information, or debarment as a government contractor.

Our income tax provision and other tax liabilities may be insufficient if taxing authorities are successful in
asserting tax positions that are contrary to our position. Increases in tax rates could impact our financial
performance.

From time to time, we are audited by various federal, state and local authorities regarding income tax
matters. Significant judgment is required to determine our provision for income taxes and our liabilities for
federal, state, local and other taxes. Although we believe our approach to determining the appropriate tax
treatment is supportable and in accordance with relevant authoritative guidance it is possible that the final tax
authority will take a tax position that is materially different than that which is reflected in our income tax
provision. Such differences could have an adverse effect on our income tax provision or benefit, in the reporting
period in which such determination is made and, consequently, on our results of operations, financial position
and/or cash flows for such period. Further, future increases in tax rates may adversely affect our financial results.

27

Provisions in our organizational documents and Massachusetts law and other actions we have taken could
make it more difficult for a third party to acquire us.

Provisions of our charter and by-laws could have the effect of discouraging a third party from making a
proposal to acquire our company and could prevent certain changes in control, even if some shareholders might
consider the proposal to be in their best interest. These provisions include a classified board of directors, advance
notice to our board of directors of shareholder proposals and director nominations, and limitations on the ability
of shareholders to remove directors and to call shareholder meetings. In addition, we may issue shares of any
class or series of preferred stock in the future without shareholder approval upon such terms as our board of
directors may determine. The rights of holders of common stock will be subject to, and may be adversely
affected by, the rights of the holders of any such class or series of preferred stock that may be issued.

We also are subject to the Massachusetts General Laws which, subject to certain exceptions, prohibit a
Massachusetts corporation from engaging in a broad range of business combinations with any “interested
shareholder” for a period of three years following the date that such shareholder becomes an interested
shareholder. These provisions could discourage a third party from pursuing an acquisition of our company at a
price considered attractive by many shareholders.

We have adopted a Shareholder Rights Plan that could make it more difficult for a third party to acquire, or
could discourage a third party from acquiring, our company or a large block of our common stock. A third party
that acquires 15% or more of our common stock (an “acquiring person”) could suffer substantial dilution of its
ownership interest under the terms of the Shareholder Rights Plan through the issuance of common stock or
common stock equivalents to all shareholders other than the acquiring person.

Our profits may decrease and/or we may incur significant unanticipated costs if we do not accurately
estimate the costs of fixed-price engagements.

A significant number of our system integration projects are based on fixed-price contracts, rather than
contracts in which payment to us is determined on a time and materials or other basis. Our failure to estimate
accurately the resources and schedule required for a project, or our failure to complete our contractual obligations
in a manner consistent with the project plan upon which our fixed-price contract was based, could adversely
affect our overall profitability and could have a material adverse effect on our business, financial condition and
results of operations. We are consistently entering into contracts for large projects that magnify this risk. We
have been required to commit unanticipated additional resources to complete projects in the past, which has
occasionally resulted in losses on those contracts. We will likely experience similar situations in the future. In
addition, we may fix the price for some projects at an early stage of the project engagement, which could result in
a fixed price that is too low. Therefore, any changes from our original estimates could adversely affect our
business, financial condition and results of operations.

The trading price of our common stock may continue to be volatile, which may adversely affect our
business, and investors in our common stock may experience substantial losses.

Our stock price, like that of other technology companies, has been volatile. The stock market in general and
technology companies in particular may continue to experience volatility. This volatility may or may not be
related to our operating performance. Our operating results, from time to time, may be below the expectations of
public market analysts and investors, which could have a material adverse effect on the market price of our
common stock. Our low stock trading volume and microcap status could hamper existing and new shareholders
from gaining a meaningful position in our stock. In addition, the limited availability of credit in the financial
markets and the continued threat of terrorism in the United States and abroad and the resulting military action
and heightened security measures undertaken in response to threats may cause continued volatility in securities
markets. When the market price of a stock has been volatile, holders of that stock will sometimes issue securities
class action litigation against the company that issued the stock. If any shareholders were to issue a lawsuit, we
could incur substantial costs defending the lawsuit. Also, the lawsuit could divert the time and attention of
management.

28

We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the
foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on
whether the price of our common stock increases.

We have not declared or paid cash dividends on any of our classes of capital stock to date and we currently
intend to retain our future earnings, if any, to fund the development and growth of our business. As a result,
capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the
payment of dividends. Consequently, in the foreseeable future, you will likely only experience a gain from your
investment in our common stock if the price of our common stock increases. There is no guarantee that our
common stock will appreciate in value or even maintain the price at which you purchased your shares, and you
may not realize a return on your investment in our common stock.

If our internal controls over financial reporting are not considered effective, our business and stock price
could be adversely affected.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal
controls over financial reporting as of the end of each fiscal year, and to include a management report assessing
the effectiveness of our internal controls over financial reporting in our annual report on Form 10-K for that
fiscal year. Section 404 also requires our independent registered public accounting firm to attest to, and report on,
management’s assessment of our internal controls over financial reporting.

Our management, including our chief executive officer and principal financial officer, does not expect that
our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud involving a company have been, or will be, detected. The design of any system of controls
is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any
design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may
become ineffective because of changes in conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. We cannot assure you that we or our independent registered public
accounting firm will not identify a material weakness in our internal controls in the future. A material weakness
in our internal controls over financial reporting would require management and our independent registered public
accounting firm to consider our internal controls as ineffective. If our internal controls over financial reporting
are not considered effective, we may experience a loss of public confidence, which could have an adverse effect
on our business and on the market price of our common stock.

If equity research analysts do not publish research or reports about our business or if they issue
unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock relies in part on the research and reports that equity research
analysts publish about us and our business. We do not control these analysts. The price of our common stock
could decline if one or more equity analysts downgrade our common stock or if analysts issue other unfavorable
commentary or cease publishing reports about us or our business.

29

We may need additional capital and may not be able to raise funds on acceptable terms, if at all. In addition,
any funding through the sale of additional common stock or other equity securities could result in additional
dilution to our stockholders and any funding through indebtedness could restrict our operations.

We may require additional cash resources to finance our continued growth or other future developments,
including any investments or acquisitions we may decide to pursue. The amount and timing of such additional
financing needs will vary principally depending on the timing of new product and service launches, investments
and/or acquisitions, and the amount of cash flow from our operations. If our resources are insufficient to satisfy our
cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of
additional equity securities or securities convertible into our ordinary shares could result in additional dilution to our
stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in
operating and financing covenants that would restrict our operations.

Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

•

•

•

investors’ perception of, and demand for, securities of embedded computing systems and software
providers;

conditions of the United States and other capital markets in which we may seek to raise funds; and

our future results of operations, financial condition and cash flows.

We cannot assure that financing will be available in amounts or on terms acceptable to us, if at all. If we fail to
raise additional funds, we may need to sell debt or additional equity securities or to reduce our growth to a level that
can be supported by our cash flow. Without additional capital, we may not be able to:

•

•

•

•

further develop or enhance our customer base;

acquire necessary technologies, products or businesses;

expand operations in the United States and elsewhere;

hire, train and retain employees;

• market our software solutions, services and products; or

•

respond to competitive pressures or unanticipated capital requirements.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

The following table sets forth our significant properties as of June 30, 2012:

Location

Segment(s) served

Size in
Sq. Feet

Commitment

Chelmsford, MA . . . . . . . . . . . . . . . . . . . All (Corporate HQ) 185,327 Leased, expiring 2017

Cypress, CA . . . . . . . . . . . . . . . . . . . . . . . ACS Business Unit
Huntsville, AL . . . . . . . . . . . . . . . . . . . . . ACS Business Unit
Aurora, CO . . . . . . . . . . . . . . . . . . . . . . . . MFS Business Unit
Salem, NH . . . . . . . . . . . . . . . . . . . . . . . . ACS Business Unit
Reston, VA . . . . . . . . . . . . . . . . . . . . . . . . ACS Business Unit
Crystal City, VA . . . . . . . . . . . . . . . . . . . . MFS Business Unit
Silchester, Reading, United Kingdom . . . ACS Business Unit
Rome, NY . . . . . . . . . . . . . . . . . . . . . . . . ACS Business Unit
Tokyo, Japan . . . . . . . . . . . . . . . . . . . . . . ACS Business Unit

2 buildings
42,770 Leased, expiring 2014
25,137 Leased, expiring 2014
16,775 Leased, expiring 2017
16,290 Leased, expiring 2013
5,375 Leased, expiring 2017
3,931 Leased, expiring 2013
3,453 Leased, expiring 2015
3,000 Leased, expiring 2013
2,401 Leased, expiring 2012

In addition, we lease a number of smaller offices around the world primarily for sales. For financial

information regarding obligations under our leases, see Note L to the consolidated financial statements.

30

ITEM 3. LEGAL PROCEEDINGS

The U.S. Department of Justice (“DOJ”) is conducting an investigation into the conduct of certain former
employees of PDI in the 2008-2009 time frame and has asserted that such conduct may have constituted a
violation of the Procurement Integrity Act and that civil penalties would apply to any such violations. PDI and its
parent company, KOR, have been cooperating in the investigation. While the parties have engaged in discussions
and correspondence regarding this matter, no resolution has been reached and no litigation has commenced. We
are entitled to indemnity with respect to this matter pursuant to the terms of the Merger Agreement, and based on
this indemnity and the associated escrow arrangements, the matter is not expected to have a material impact on
our cash flows, results of operations, or financial condition.

In addition to the foregoing, we are subject to litigation, claims, investigations and audits arising from time
to time in the ordinary course of our business. Although legal proceedings are inherently unpredictable, we
believe that we have valid defenses with respect to those matters currently pending against us and intend to
defend our self vigorously. The outcome of these matters, individually and in the aggregate, is not expected to
have a material impact on our cash flows, results of operations, or financial position.

ITEM 4.

(REMOVED AND RESERVED)

ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers are appointed to office by the Board of Directors at the first board meeting following
the Annual Meeting of Shareholders or at other board meetings as appropriate, and hold office until the first
board meeting following the next Annual Meeting of Shareholders and until a successor is chosen, subject to
prior death, resignation or removal. Information regarding our executive officers as of the date of filing of this
Annual Report on Form 10-K is presented below.

Mark Aslett, age 44, joined Mercury in 2007 and has served as the President and Chief Executive Officer
since that date, and served as a member of the Board since 2007. Prior to joining Mercury, he was Chief
Operating Officer and Chief Executive Officer of Enterasys Networks from 2003 to 2006, and held various
positions with Marconi plc and its affiliated companies, including Executive Vice President of Marketing, Vice
President of Portfolio Management, and President of Marconi Communications—North America, from 1998 to
2002. Mr. Aslett has also held positions at GEC Plessey Telecommunications, as well as other
telecommunications-related technology firms.

Kevin M. Bisson, age 51, joined Mercury in January 2012 as Senior Vice President, Chief Financial Officer
and Treasurer. Prior to joining Mercury, Mr. Bisson had been Chief Financial Officer, Treasurer, Secretary, and
Senior Vice President, Finance and Administration, at SeaChange International, Inc., a publicly-traded global
multi-screen video software company. Mr. Bisson worked at SeaChange from March 2006 until January 2012.
Prior to joining SeaChange, Mr. Bisson served from May 2003 until March 2006 as the Senior Vice President
and Chief Financial Officer of American Superconductor Corporation, a publicly-traded energy technologies
company. Mr. Bisson served from 2000 to 2003 as Vice President, Controller, and Treasurer for Axcelis
Technologies, Inc., a publicly-traded semiconductor equipment manufacturing company. Prior to joining Axcelis
Technologies, Mr. Bisson served for ten years in a number of financial capacities with United Technologies
Corporation. Mr. Bisson is a CPA licensed in Massachusetts.

Gerald M. Haines II, age 49,

joined Mercury in July 2010 as Senior Vice President, Corporate
Development, Chief Legal Officer, and Secretary. Prior to joining Mercury, from January 2008 to June 2010,
Mr. Haines was Executive Vice President, Chief Legal Officer and Secretary at Verenium Corporation, a
publicly traded company engaged in the development and commercialization of cellulosic biofuels and high
performance specialty enzymes. From September 2006 to December 2007, he was an advisor to early-stage
companies on legal and business matters. From May 2001 to August 2006, Mr. Haines served as Executive Vice

31

President of Strategic Affairs, Chief Legal Officer and Secretary of Enterasys Networks, Inc., a public network
communications company that was taken private in March 2006 following a successful business restructuring
and turnaround. Prior to Enterasys Networks, Mr. Haines served as Senior Vice President and General Counsel of
Cabletron Systems, Inc., the predecessor of Enterasys Networks. Before Cabletron, he was Vice President and
General Counsel of the largest manufacturer of oriented polypropylene packaging and labeling films in North
America, and prior to that was in private practice as a corporate attorney in a large Boston law firm. Mr. Haines
is admitted to practice in Massachusetts, Maine, and the Federal District of Massachusetts.

Charles A. Speicher, age 53, joined Mercury in September 2010 as Vice President, Controller, and Chief
Accounting Officer. Prior to joining Mercury, Mr. Speicher held various positions at Virtusa Corporation, a
publicly-traded global IT services company, including Vice President of Global Accounting Operations and
Corporate Controller from 2001 to 2009. Mr. Speicher was Corporate Controller at Cerulean Technologies Inc., a
private software product company, from 1996 to 2000 prior to its sale to Aether Systems Inc. where he served as
Division Controller of Aether Mobile Government from 2000 to 2001. Prior to Cerulean Technology,
Mr. Speicher held positions with Wyman-Gordon Company, Wang Laboratories and Arthur Andersen &
Company, LLP. Mr. Speicher is a CPA licensed in Massachusetts.

Didier M.C. Thibaud, age 51, joined Mercury in 1995, and has served as President, Advanced Computing
Solutions since July 2007. Prior to that, he was Senior Vice President, Defense & Commercial Businesses from
2005 to June 2007 and Vice President and General Manager, Imaging and Visualization Solutions Group, from
2000 to 2005 and served in various capacities in sales and marketing from 1995 to 2000.

32

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed and traded on the Nasdaq Global Select Market under the symbol MRCY. The
following table sets forth, for the fiscal periods indicated, the high and low sale prices per share for our common
stock during such periods. Such market quotations reflect inter-dealer prices without retail markup, markdown or
commission.

2012 Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2011 Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

Low

$13.92
$14.98
$15.69
$19.27

$21.76
$21.16
$20.00
$13.31

$11.61
$13.01
$11.35
$11.49

$17.42
$17.84
$12.37
$10.72

As of July 26, 2012, we had approximately 5,055 shareholders including record and nominee holders.

Dividend Policy

We have never declared or paid cash dividends on shares of our common stock. We currently intend to
retain any earnings for future growth. Accordingly, we do not anticipate that any cash dividends will be declared
or paid on our common stock in the foreseeable future.

Net Share Settlement Plans

During fiscal 2012, we had no active net share settlement plans.

Share Repurchase Plans

During fiscal 2012, we had no active share repurchase programs.

ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain historical consolidated financial data, restated for discontinued
operations, which should be read in conjunction with the consolidated financial statements and related notes
included elsewhere in this report (in thousands, except per share data):

Statement of Operations Data:
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . .
Adjusted EBITDA(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings (loss) per share from continuing

operations:

For the Years Ended June 30,

2012

2011

2010

2009

2008

$244,929
$ 30,112
$ 22,619
$ 48,874

$228,710
$ 24,985
$ 18,507
$ 40,883

$199,830
$ 17,313
$ 28,069
$ 29,856

$188,939
7,747
$
$
7,909
$ 22,858

$190,208
$ (5,391)
$ (4,437)
$ 22,525

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

0.77
0.75

$
$

0.73
0.71

$
$

1.25
1.22

$
$

0.36
0.35

$
$

(0.21)
(0.21)

33

2012

2011

2010

2009

2008

As of June 30,

Balance Sheet Data:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . .

$170,761
$385,606
$ 15,560
$333,104

$203,978
$355,562
$ 17,920
$301,436

$111,249
$224,338
$ 10,621
$179,112

$ 80,716
$219,372
$
8,946
$145,037

6,085
$
$338,550
$ 12,280
$146,512

(1)

In our periodic communications, we discuss a key measure that is not calculated according to U.S. generally
accepted accounting principles (“GAAP”), adjusted EBITDA. Adjusted EBITDA is defined as earnings
from continuing operations before interest income and expense, income taxes, depreciation, amortization of
acquired intangible assets, restructuring, impairment of long-lived assets, acquisition costs and other related
expenses, fair value adjustments from purchase accounting and stock-based compensation costs. We use
adjusted EBITDA as an important indicator of the operating performance of our business. We use adjusted
EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the
financial results and forecasts reported to our board of directors, determining a component of bonus
compensation for executive officers and other key employees based on operating performance and
evaluating short-term and long-term operating trends in our operations. We believe the adjusted EBITDA
financial measure assists in providing a more complete understanding of our underlying operational
measures to manage our business,
to evaluate our performance compared to prior periods and the
marketplace, and to establish operational goals. We believe that these non-GAAP financial adjustments are
useful to investors because they allow investors to evaluate the effectiveness of the methodology and
information used by management in our financial and operational decision-making.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a
substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure
may not be computed in the same manner as similarly titled measures used by other companies. We expect
to continue to incur expenses similar to the adjusted EBITDA financial adjustments described above, and
investors should not infer from our presentation of this non-GAAP financial measure that these costs are
unusual, infrequent or non-recurring. See the Non-GAAP Financial Measures section of this annual report
for a reconciliation of our adjusted EBITDA to income from continuing operations.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

From time to time, information provided, statements made by our employees or information included in our
filings with the Securities and Exchange Commission may contain statements that are not historical facts but that
are “forward-looking statements,” which involve risks and uncertainties. The words “may,” “will,” “would,”
“should,” “could,” “plan,” “expect,” “believe,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “likely,”
“forecast,” “probable,” and similar expressions are intended to identify forward-looking statements regarding
events, conditions and financials trends that may affect our future plans of operations, business strategy, results
of operations and financial position. These forward-looking statements, which include those related to our
strategic plans, business outlook, and future business and financial performance, involve risks and uncertainties
that could cause actual results to differ materially from those projected or anticipated. Such risks and
uncertainties include, but are not limited to, continued funding of defense programs and the timing of such
funding, including the potential for a continuing resolution for the defense budget, the potential for defense
budget sequestration, and the budget uncertainty related to the Presidential election, general economic and
business conditions, including unforeseen economic weakness in our markets, effects of continued geo-political
unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in

34

completing various engineering and manufacturing programs, changes in customer order patterns, changes in
product mix, continued success in technological advances and delivering technological innovations, changes in
the U.S. Government’s interpretation of federal procurement rules and regulations, market acceptance of our
products, shortages in components, production delays due to performance quality issues with outsourced
components, inability to fully realize the expected benefits from acquisitions or divestitures or delays in realizing
such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, changes to
export regulations, increases in tax rates, changes to generally accepted accounting principles, difficulties in
retaining key employees and customers, unanticipated costs under fixed-price service and system integration
engagements, and various other factors beyond our control. These risks and uncertainties also include such
additional risk factors as set forth under Part I-Item 1A (Risk Factors) in this Annual Report on Form 10-K. We
caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of
the date made. We undertake no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made.

OVERVIEW

We design, manufacture and market commercially-developed, high-performance embedded, real-time
digital signal and image processing sub-systems and software for specialized defense and commercial markets.
Our solutions play a critical role in a wide range of applications, processing and transforming sensor data to
information for storage, analysis and interpretation. Our goal is to grow and build on our position as a critical
component of the defense and intelligence industrial base and be the leading provider of open and affordable
sensor processing subsystems for intelligence, surveillance and reconnaissance (“ISR”), electronic warfare
(“EW”), and missile defense applications. In military reconnaissance and surveillance platforms, our sub-systems
receive, process, and store real-time radar, video, sonar and signals intelligence data. We provide radio frequency
(“RF”) and microwave products for enhanced signal acquisition and communications in military and commercial
applications. Additionally, Mercury Federal Systems, our wholly owned subsidiary, focuses on direct and
indirect contracts supporting the defense, intelligence, and homeland security agencies. We have growing
capabilities in the area of “Big Data” processing, analytics and analysis in support of both the U.S. Department of
Defense (“DoD”) and to the intelligence community as they enhance their ability to acquire, process and exploit
large amounts of data for both real-time analytics and “forensic” analysis.

Our products and solutions address mission-critical requirements within the defense industry for C4ISR
(command, control, communications, computers, intelligence, surveillance and reconnaissance) and electronic
warfare, systems and services, and target several markets including maritime defense, airborne reconnaissance,
ballistic missile defense, ground mobile and force protection systems and tactical communications and network
systems. Our products or solutions have been deployed in more than 300 different programs with over 25
different prime defense contractors. We deliver commercially developed technology and solutions that are based
on open system architectures and widely adopted industry standards, and support all of this with services and
support capabilities.

Our revenue, income from continuing operations and adjusted EBITDA for fiscal 2012 were $244.9 million,
$22.6 million and $48.9 million, respectively. See the Non-GAAP Financial Measures section this annual report
for a reconciliation of our adjusted EBITDA to income from continuing operations.

Our operations are presently organized in the following two business segments:

Advanced Computing Solutions, or ACS. This business segment is focused on specialized, high-performance
embedded, real-time digital signal and image processing solutions that encompass signal acquisition, including
microwave front-end, digitization, digital signal processing, exploitation processing, high capacity digital storage
and communications, targeted to key market segments, including defense, communications and other commercial
applications. ACS’s open system architecture solutions span the full range of embedded technologies from board
level products to fully integrated sub-systems. Our products utilize leading-edge processor and other technologies

35

architected to address highly data-intensive applications that include signal, sensor and image processing within
environmentally challenging and size, weight and power constrained military and commercial applications. In
addition, ACS has a portfolio of RF and microwave sub-assemblies to address needs in EW, signal intelligence
(“SIGINT”), electronic intelligence (“ELINT”), and high bandwidth communications subsystems.

These products are highly optimized for size, weight and power, as well as for the performance and
ruggedization requirements of our customers. Customized design and sub-systems integration services extend our
capabilities to tailor solutions to meet the specialized requirements of our customers. We continue to innovate
our technologies around challenging requirements and have technologies available today and planned for the
future to address them as they evolve and become increasingly demanding.

With the addition of KOR Electronics (“KOR”) in December 2011, we added a focus on the exploitation of
RF signals. Leveraging our analog-to-digital and digital-to-analog technologies and expertise, KOR delivers
innovative high end solutions and services to the defense communities:

• DRFM (Digital Radio Frequency Memory) products which offer state of the art performance at low

cost, for EW applications; and

•

radar and EW environment test and simulator products that are DRFM based and use modular and
scalable building blocks including commercial-off-the-shelf hardware.

In fiscal 2012, ACS accounted for 88% of our total net revenues.

Mercury Federal Systems, or MFS. This business segment is focused on services and support work with the
DoD and federal intelligence and homeland security agencies, including designing, engineering, and deploying
new ISR capabilities to address present and emerging threats to U.S. forces. With the addition of Paragon
Dynamics, Inc. (“PDI”), our MFS segment also provides sophisticated analysis and exploitation, multi-sensor
data fusion and enrichment, and data processing services for the U.S. intelligence community. MFS is part of our
long-term strategy to expand our software and services presence and pursue growth within the intelligence
community. MFS offers a wide range of engineering architecture and design services that enable clients to
deploy leading edge computing capabilities for ISR applications on an accelerated time cycle. This business
segment enables us to combine classified intellectual property with the commercially developed application-
ready sub-systems being developed by ACS, providing customers with platform-ready, affordable ISR
sub-systems. In fiscal 2012, MFS accounted for 12% of our total net revenues, which include six months of PDI
revenues of $7.9 million.

Since we are an OEM supplier to our commercial markets and conduct business with our defense customers
via commercial items, requests by customers are a primary driver of revenue fluctuations from quarter to quarter.
Customers specify delivery date requirements that coincide with their need for our products. Because these
customers may use our products in connection with a variety of defense programs or other projects of different
sizes and durations, a customer’s orders for one quarter generally do not indicate a trend for future orders by that
customer. Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we
generally cannot identify sequential quarterly trends, even within our business units.

BUSINESS DEVELOPMENTS:

On June 8, 2012, we and Wildcat Merger Sub Inc., our newly formed, wholly-owned subsidiary (the
“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Micronetics, Inc.
(“Micronetics”). On August 8, 2012, the transaction closed with the Merger Sub merging with and into
Micronetics with Micronetics continuing as the surviving company and our wholly-owned subsidiary.

Headquartered in Hudson, NH, Micronetics is a leading designer and manufacturer of microwave and radio

frequency (RF) subsystems and components for defense and commercial customers.

36

Pursuant to the terms of the Merger Agreement, at the closing of the merger on August 8, 2012, each share
of common stock of Micronetics issued and outstanding immediately prior to the closing was converted into the
right to receive $14.80 in cash, without interest (the “Merger Consideration”). All outstanding options to acquire
shares of Micronetics common stock that were vested as of the closing were cancelled and the holders of such
options are entitled to receive an amount of cash equal to the product of the total number of shares previously
subject to such vested options and the excess of the Merger Consideration over the exercise price per share. All
outstanding Micronetics stock options that were unvested at the closing were assumed by us. We funded the
acquisition with cash on hand.

FISCAL 2012

On December 30, 2011, we acquired both KOR and its wholly-owned subsidiary, PDI. Based in Cypress,
California, KOR designs and develops DRFM units for a variety of modern EW applications, as well as radar
environment simulation and test systems for defense applications. Based in Aurora, Colorado, PDI provides
sophisticated analytic exploitation services and customized multi-intelligence data fusion solutions for the U.S.
intelligence community. For segment reporting, KOR is included in the ACS operating segment and PDI is
included in the MFS operating segment.

The amounts of revenue, income from continuing operations and adjusted EBITDA of KOR and PDI
included in our consolidated statements of operations for fiscal 2012 was $19.8 million, $2.7 million, and $3.8
million, respectively.

In fiscal 2012, we concluded the financial targets which underlie the $5.0 million earn-out related to the
LNX acquisition would not be achieved. During the fourth quarter of fiscal 2012, we did not receive a purchase
order for long lead-time materials. This timing issue, in itself, triggered a reversal of the earn-out (see Note C to
the consolidated financial statements). This reversal of the earn-out was recorded as an offset to operating
expenses.

In fiscal 2012, we announced a restructuring plan (“2012 Plan”) affecting both the ACS and MFS business
segments. The 2012 Plan primarily consisted of involuntary separation costs related to the reduction in force
which eliminated 41 positions largely in engineering and manufacturing functions; and facility costs related to
outsourcing of certain manufacturing activities at our Huntsville, Alabama site. The 2012 Plan for which expense
of $2.8 million was recorded in fiscal 2012 was implemented to cope with the near term uncertainties in the
defense industry and improve our overall business scalability. Future restructuring expenses of approximately
$0.7 million associated with the 2012 Plan are expected in fiscal 2013 as we start transitioning the manufacturing
activities formerly conducted at the Huntsville, Alabama facility to our contract manufacturing partner. We
expect to realize approximately $5.3 million in annual savings from these activities.

FISCAL 2011

On January 12, 2011, we acquired the outstanding equity interests in LNX Corporation. The cash purchase
price for the acquisition was approximately $31.0 million, subject to post-closing adjustments. We funded the
purchase price with cash on hand and assumed no debt. In addition to the $31.0 million cash purchase price, we
also committed to pay up to $5.0 million upon the achievement of financial targets in calendar years 2011 and
2012. During the fourth quarter of fiscal 2012, we concluded the financial targets which underlie the $5.0 million
payment of contingent consideration relating to the acquisition of LNX would not be met.

On February 16, 2011, we completed a follow-on public stock offering of 5,577,500 shares of common
stock, which were sold at a price to the public of $17.75. The follow-on public stock offering resulted in $93.6
million of net proceeds to us. The underwriting discount of $5.0 million and other expenses of $0.4 million
related to the follow-on public stock offering were recorded as an offset to additional paid-in-capital (see Note M
to the consolidated financial statements).

37

FISCAL 2010

On June 28, 2010, we repaid the remaining $11.3 million principal balance on our line of credit with UBS.

As of June 30, 2010, there were no borrowings against this line of credit.

On July 1, 2009, we had $50.1 million par value of auction rate securities (“ARS”). During fiscal 2010,
UBS called $32.1 million of our ARS at par, reducing our balance on June 30, 2010 to $18.0 million. On June 30,
2010, we exercised our right to sell the remaining $18.0 million ARS balance to UBS at par value. The
transaction settled on July 1, 2010 when we received $18.0 million in cash.

RESULTS OF OPERATIONS:

FISCAL 2012 VS. FISCAL 2011

The following tables set forth, for the periods indicated, financial data from the consolidated statement of

operations:

(In thousands)

Fiscal 2012

As a % of
Total Net
Revenue

Fiscal 2011

As a % of
Total Net
Revenue

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$244,929
108,773

100.0% $228,710
98,811
44.4

100.0%
43.2

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

136,156

55.6

129,899

56.8

Operating expenses:

Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . .
Research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs and other related expenses . . . . . . . . . . . . . .
Change in the fair value of the liability related to the LNX

57,159
45,984
3,799
2,821
—
1,219

23.3
18.8
1.6
1.1
—
0.5

57,868
44,500
1,984
—
150
412

earn-out

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4,938)

(2.0)

—

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . .

106,044

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net

Income from continuing operations before income taxes . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of income taxes . . . . . . . . .

30,112
1,659

31,771
9,152

22,619
—

43.3

12.3
0.7

13.0
3.8

9.2
—

104,914

24,985
1,582

26,567
8,060

18,507
(65)

25.3
19.4
0.9
—
0.1
0.2

—

45.9

10.9
0.7

11.6
3.5

8.1
—

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 22,619

9.2% $ 18,442

8.1%

REVENUES

(In thousands)

ACS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . .

Fiscal
2012

$215,899
28,670

As a % of
Total Net
Revenue

Fiscal
2011

As a % of
Total Net
Revenue

$ Change % Change

88% $217,423
11,415
12%

95% $ (1,524)
5% 17,255
488

360 —

(128) —

(1%)
151%
381%

7%

Total revenues . . . . . . . . . . . . . . . . . . . . . . . .

$244,929

100% $228,710

100% $16,219

38

Total revenues increased $16.2 million, or 7%, to $244.9 million during fiscal 2012 compared to $228.7

million during fiscal 2011.

Net ACS revenues decreased $1.5 million, or 1%, during fiscal 2012 compared to fiscal 2011. The decrease
in net ACS revenues was primarily due to lower commercial revenues of $33.3 million, partially offset by higher
defense revenues of $31.8 million, including revenues contributed by KOR. Defense revenue accounted for 93%
of net ACS revenues during fiscal 2012 compared to 78% in fiscal 2011.

Net MFS revenues increased $17.3 million, or 151%, during fiscal 2012 compared to fiscal 2011. This
increase was driven by revenues from a wide area persistent surveillance program and revenue contributed by
PDI.

International revenues increased slightly by $0.3 million to $9.6 million during fiscal 2012 compared to $9.3
million during fiscal 2011. The increase was primarily driven by higher defense revenues in the European region,
partially offset by lower commercial revenue from the Asia Pacific region. International revenues represented 4%
of total revenues during fiscal 2012 and 2011.

Eliminations revenue is attributable to development programs where the revenue is recognized in both

segments under contract accounting, and reflects the reconciliation to our consolidated results.

GROSS MARGIN

Gross margin was 55.6% for fiscal 2012, a decrease of 120 basis points from the 56.8% gross margin
achieved in fiscal 2011. The decrease in gross margin was driven by product mix and the inclusion of KOR and
PDI revenues. KOR and PDI are service based business models which typically carry lower margins than product
based models.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses decreased 1.2%, or $0.7 million, to $57.2 million during fiscal
2012 compared to $57.9 million during fiscal 2011. The overall decrease was primarily due to lower variable
compensation expense partially offset by headcount related expenses as a result of the KOR and LNX
acquisitions. Selling, general and administrative expenses decreased as a percentage of revenues to 23.3% during
fiscal 2012 from 25.3% during fiscal 2011 due to higher revenue and increased operating leverage.

RESEARCH AND DEVELOPMENT

Research and development expenses increased 3%, or $1.5 million, to $46.0 million during fiscal 2012
compared to $44.5 million for fiscal 2011. The increase was primarily due to a $2.0 million increase in
headcount related expenses as a result of the KOR and LNX acquisitions, a $0.9 million increase in allocated IT
and depreciation expenses and a $0.5 million increase in prototype and development expenses. These increases
were partially offset by $2.8 million in higher customer funded credits. Research and development continues to
be a focus of our business with 18.8% and 19.4% of our revenues dedicated to research and development
activities during fiscal 2012 and fiscal 2011, respectively. However, we continue to focus on improving the
leverage of our research and development investments and increased customer funded development resulting in
this percentage trending downward in future years.

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS

Amortization of acquired intangible assets increased $1.8 million to $3.8 million during fiscal 2012
compared to $2.0 million for fiscal 2011, primarily due to amortization of intangible assets from the KOR and
PDI acquisition completed in December 2011 and the LNX acquisition completed in January 2011.

39

RESTRUCTURING EXPENSE

There was $2.8 million of restructuring expense recorded in fiscal 2012 as compared to no expense in fiscal
2011. The restructuring plan implemented in 2012 primarily consisted of involuntary separation costs related to
the reduction in force which eliminated 41 positions largely in engineering and manufacturing functions; and
facility costs related to outsourcing of certain manufacturing activities at our Huntsville, Alabama site. We will
incur additional expenses of approximately $0.7 million associated with this plan in fiscal 2013. We expect to
realize approximately $5.3 million in annual savings from these activities.

IMPAIRMENT OF LONG-LIVED ASSETS

No impairment charges were recorded during fiscal 2012 compared to $0.2 million in fiscal 2011. The fiscal
2011 charge represents the impairment of the fair value of the shares we received as compensation in the sale of
our former Biotech business. There were no impairment charges for goodwill in either fiscal 2012 or 2011.

ACQUISITION COSTS AND OTHER RELATED EXPENSES

We incurred $1.2 million of acquisition costs and other related expenses during fiscal 2012, in connection
with the acquisitions of Micronetics, KOR and PDI, as compared to $0.4 million during fiscal 2011, in
connection with the LNX acquisition.

INTEREST INCOME

Interest income for fiscal years 2012 and 2011 were minimal due to the near zero percent yield on our U.S.

treasury bills and money market accounts.

INTEREST EXPENSE

We incurred a minimal amount of interest expense for fiscal 2012 and 2011, which primarily consisted of

finance charges related to capital lease obligations.

OTHER INCOME

Other income increased $0.1 million to $1.7 million during fiscal 2012 compared to fiscal 2011. Other
income primarily consists of $1.2 million in amortization of the gain on the sale leaseback of our corporate
headquarters located in Chelmsford, Massachusetts and foreign currency exchange gains and losses.

INCOME TAXES

We recorded a provision for income taxes of $9.2 million in fiscal 2012 compared to $8.1 million in fiscal
2011. The effective tax rate for fiscal 2012 and fiscal 2011 was 28.8% and 30.3%, respectively. The difference in
the rates is mainly driven by the change in the fair value of the liability related to the LNX earn-out of
$4.9 million offset by $1.2 million of acquisition costs, both of which are not subject to tax. This decrease in the
fiscal 2012 rate was partially offset by a higher tax provision as a result of having a full-year benefit for the
federal research and development tax credit in fiscal 2011 compared to only a six-month benefit in fiscal 2012.
Our effective tax rate for fiscal 2012 differed from the federal statutory rate primarily due to the change in the
fair value of the liability related to the LNX earn-out, the impact of research and development tax credits, the
impact of the Section 199 Manufacturing Deduction and acquisition costs,.

SEGMENT OPERATING RESULTS

Adjusted EBITDA for the ACS segment increased $1.5 million to $43.8 million during fiscal 2012, as
compared to $42.3 million during fiscal 2011. The increase in adjusted EBITDA was mostly driven by higher
revenues. ACS generated $228.1 million in revenues including intersegment revenues in fiscal 2012 compared to
$223.7 million in fiscal 2011. This improvement was partially offset by an increase in operating expenses as a
result of the KOR and LNX acquisitions. Overall, operating expenses declined as a percent of revenue.

40

Adjusted EBITDA for the MFS segment increased by $5.8 million during fiscal 2012 to $4.9 million, as
compared to a loss of $0.9 million in fiscal 2011. The increase in adjusted EBITDA was primarily due to higher
revenues from a wide area persistent surveillance contract and revenues contributed by PDI.

See Note O to our consolidated financial statements for more information regarding our operating segments.

FISCAL 2011 VS. FISCAL 2010

The following tables set forth, for the periods indicated, financial data from the consolidated statement of

operations:

(In thousands)

As a % of
Total Net
Revenue

Fiscal 2010

As a % of
Total Net
Revenue

Fiscal 2011

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$228,710
98,811

100.0% $199,830
87,298
43.2

100.0%
43.7

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

129,899

56.8

112,532

56.3

Operating expenses:

Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . .
Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs and other related expenses . . . . . . . . . . . . . . .

57,868
44,500
1,984
150
—
412

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . .

104,914

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from continuing operations before income taxes . . . . . . . . .
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of income

24,985
1,582

26,567
8,060

18,507

25.3
19.4
0.9
0.1
—
0.2

45.9

10.9
0.7

11.6
3.5

8.1

51,519
41,548
1,710
211
231
—

95,219

17,313
1,379

18,692
(9,377)

28,069

25.7
20.8
0.9
0.1
0.1
—

47.6

8.7
0.7

9.4
(4.7)

14.1

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(65) —

289

0.1

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 18,442

8.1% $ 28,358

14.2%

REVENUES

(In thousands)

Fiscal
2011

As a % of
Total Net
Revenue

Fiscal
2010

As a % of
Total Net
Revenue

$ Change % Change

ACS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,423
11,415
MFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . .

95% $188,967
10,735
5%

95% $28,456
680
5%
(256)

15%
6%
(200%)

(128) —

128 —

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . $228,710

100% $199,830

100% $28,880

14%

Total revenues increased $28.9 million, or 14%, to $228.7 million during fiscal 2011 compared to fiscal

2010.

Net ACS revenues increased $28.5 million, or 15%, to $217.4 million during fiscal 2011 compared to fiscal
2010. Revenue from sales to defense customers increased $21.1 million, from $146.6 million in fiscal 2010 to
$167.7 million in fiscal 2011. This growth was mostly driven by an increase in the radar market, slightly offset

41

by a decline in service revenues from $24.4 million to $12.9 million. Revenue from sales to commercial
customers increased $7.2 million, from $42.4 million in fiscal 2010 to $49.6 million in fiscal 2011. This growth
was mostly driven by an increase in the semiconductor market driven by end of life buys, slightly offset by a
decrease in sales in the commercial communications market.

Net MFS revenues increased $0.7 million, or 6% to $11.4 million, during fiscal 2011 as compared to fiscal
2010. This increase in revenue was primarily driven by an increase of $0.9 million in revenue relating to a
persistent ISR development program. This increase was slightly offset by the year over year completion of other
development programs.

International revenues decreased by $10.4 million to $9.3 million during fiscal 2011 as compared to
$19.7 million in fiscal 2010. The decrease in international revenues during fiscal 2011 was primarily driven by
both the sales to a commercial customer in the European region during the 2010 period whose sales were
serviced by the U.K. operations during the 2010 period versus our U.S. operations during the 2011 period, and
reduced sales to a commercial customer in the Asia Pacific region during 2011.

Eliminations revenue is attributable to development programs where the revenue is recognized in both

segments under contract accounting, and reflects the reconciliation to our consolidated results.

GROSS MARGIN

Gross margin was 56.8% for fiscal 2011, an increase of 50 basis points from the 56.3% gross margin
achieved in fiscal 2010. The increase in gross margin was primarily due to a favorable shift in product mix from
lower margin professional service revenues to higher margin product sales.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased 12.4%, or $6.4 million, to $57.9 million during fiscal
2011 compared to $51.5 million during fiscal 2010. The increase was primarily due to a $5.8 million increase in
employee compensation expense driven by an increase in headcount, primarily related to the LNX acquisition,
and variable compensation increases. Selling, general and administrative expenses decreased as a percentage of
revenues to 25.3% during fiscal 2011 from 25.7% during fiscal 2010. We realized improved operating leverage
by maintaining our selling, general and administrative expenses growth below our revenue growth rate as our
business scaled.

RESEARCH AND DEVELOPMENT

Research and development expenses increased 7%, or $3.0 million, to $44.5 million during fiscal 2011
compared to $41.5 million for fiscal 2010. The increase was primarily due to a $3.0 million increase in employee
compensation expense driven by increased variable compensation. Research and development expenses represent
19.4% and 20.8% of our revenues during fiscal 2011 and fiscal 2010, respectively.

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS

Amortization of acquired intangible assets increased 18% or $0.3 million to $2.0 million during fiscal 2011
compared to $1.7 million for fiscal 2010, primarily due to amortization of intangible assets from the LNX
acquisition completed during the third quarter of fiscal 2011.

IMPAIRMENT OF LONG-LIVED ASSETS

We recorded $0.2 million in impairment charges during fiscal 2011 compared to $0.2 million in impairment
charges recorded in fiscal 2010. The fiscal 2011 charge and $0.1 million of the fiscal 2010 charge represent the
impairment of the fair value of the shares we received as compensation in the sale of our former Biotech
business. The additional fiscal 2010 charge of $0.1 million was the result of impairment of the remaining value
of a terminated license agreement.

42

RESTRUCTURING EXPENSE

There was no restructuring expense recorded in fiscal 2011 as compared to $0.2 million in fiscal 2010.
Restructuring activities during fiscal 2010 were primarily due to the elimination of four positions under our
restructuring plan within the ACS business unit which was enacted in July 2009, following the completion of the
divestitures of our non-core businesses as part of the refocusing of our business operations.

ACQUISITION COSTS AND OTHER RELATED EXPENSES

We incurred $0.4 million of acquisition costs and other related expenses during fiscal 2011, which consisted
of transaction costs incurred in connection with the acquisition of LNX Corporation, which was completed on
January 12, 2011.

INTEREST INCOME

Interest income for fiscal 2011 decreased by $0.5 million to nil compared to fiscal 2010. Our marketable
securities held during fiscal 2010 yielded higher interest rates than the money market funds and short-term
government securities in which our cash was primarily invested during fiscal 2011. We held no marketable
securities during fiscal 2011.

INTEREST EXPENSE

Interest expense for fiscal 2011 decreased by $0.3 million to $0.1 million compared to the same period in
fiscal 2010. The decrease was the result of the repayment of our borrowings against our ARS at the end of fiscal
2010. We did not have any debt during fiscal 2011, other than capital lease obligations.

OTHER INCOME, NET

Other income, net for fiscal 2011 increased by $0.4 million to $1.6 million compared to $1.2 million in
fiscal 2010. Other income, net primarily consisted of $1.2 million in amortization of the gain on the sale
leaseback of our corporate headquarters located in Chelmsford, Massachusetts and foreign currency exchange
gains and losses. The $0.4 million increase is primarily associated with a $0.4 million foreign currency exchange
gain during fiscal 2011 as compared to a $0.2 million foreign currency exchange loss for fiscal 2010. The foreign
currency exchange gain was largely driven by strengthening of the British pound and the Japanese yen against
the U.S. dollar.

INCOME TAXES (BENEFIT)

We recorded a provision for income taxes of $8.1 million in fiscal 2011 reflecting a 30.3% effective tax
rate, as compared to a (50.2)% effective tax rate for fiscal 2010. Our provision for income taxes for fiscal year
2011 differed from the federal statutory tax rate of 35% primarily due to the impact of research and development
tax credits, the impact of a domestic manufacturing deduction, and favorable discrete items. Our provision for
income taxes for fiscal year 2010 differed from the federal statutory rate primarily due to the release of a portion
of our valuation allowance on U.S. deferred tax assets, and several favorable discrete items which included a
benefit from our 2009 tax return filing concerning our ability to utilize certain net operating losses, a decrease in
our valuation allowance for uncertain tax positions and a decrease due to the favorable settlement of audit issues
regarding certain of our 2006 through 2008 U.S. tax return filings.

DISCONTINUED OPERATIONS

In accordance with FASB ASC 360, VSG, VI and Biotech have been reflected as discontinued operations
for fiscal 2011 and 2010. Accordingly, the revenue, costs, expenses of VSG, VI and Biotech have been reported
separately in the consolidated statements of operations for all periods presented.

43

We incurred a loss from discontinued operations of $0.1 million during fiscal 2011 compared to income

from discontinued operations of $0.2 million in fiscal 2010.

SEGMENT OPERATING RESULTS

Adjusted EBITDA for ACS increased $11.8 million to $42.3 million during fiscal 2011, as compared to
$30.5 million during fiscal 2010. The increase in adjusted EBITDA was primarily due to increased revenues of
$28.5 million, which drove an improvement in gross margin dollars. This improvement was partially offset by
increases in operating expenses necessary to grow the business. However, operating expenses declined as a
percent of revenue as we continued to improve our operating leverage.

Adjusted EBITDA for MFS decreased by $0.3 million during fiscal 2011 to a loss of $0.9 million, as
compared to a loss of $0.6 million in fiscal 2010. The increased loss was primarily driven by increased operating
expenses related to additional headcount, partially offset by an increase in revenues from a persistent ISR
development program.

See Note O to our consolidated financial statements for more information regarding our operating segments.

LIQUIDITY AND CAPITAL RESOURCES

During fiscal 2012, our primary source of liquidity came from existing cash and cash generated from
operations. Our near-term fixed commitments for cash expenditures consist primarily of payment for the
Micronetics acquisition, payments under operating leases, and inventory purchase commitments with our
contract manufacturers. We do not currently have any material commitments for capital expenditures.

Shelf Registration Statement

On August 2, 2011, we filed a shelf registration statement on Form S-3 with the SEC. The shelf registration
statement, which has been declared effective by the SEC, registered up to $500 million of debt securities,
preferred stock, common stock, warrants and units. We intend to use the proceeds from a financing using the
shelf registration statement for general corporate purposes, which may include the following:

•

•

•

the acquisition of other companies or businesses;

the repayment and refinancing of debt;

capital expenditures;

• working capital; and

•

other purposes as described in the prospectus supplement.

Follow-On Public Stock Offering

On February 16, 2011, we completed a follow-on public stock offering of 5,577,500 shares of common
stock, which were sold at a price to the public of $17.75. The follow-on public stock offering resulted in
$93.6 million of net proceeds to us. The underwriting discount of $5.0 million and other expenses of $0.4 million
related to the follow-on public stock offering were recorded as an offset to additional paid-in-capital.

The February 2011 follow-on public stock offering generated gross proceeds (i.e. proceeds before
underwriting fees) of $99 million out of the $100 million available under our then existing shelf registration
statement.

44

Senior Secured Credit Facility

Original Loan Agreement

On February 12, 2010, we entered into a loan and security agreement (the “Loan Agreement”) with Silicon
Valley Bank (the “Lender”). The Loan Agreement provided for a $15.0 million revolving line of credit (the
“Revolver”) and a $20.0 million acquisition line (the “Term Loan”). The Revolver was available for borrowing
during a two-year period, with interest payable monthly and the principal due at the February 11, 2012 maturity
of the Revolver. The Term Loan was available for up to three separate borrowings, with total borrowings not to
exceed $20.0 million, until February 11, 2012. The Term Loan had monthly interest and principal payments
through the February 11, 2014 maturity of the Term Loan.

The interest rates include various rate options that are available to us. The rates are calculated using a
combination of conventional base rate measures plus a margin over those rates. The base rates consist of LIBOR
rates and prime rates. The actual rates will depend on the level of these underlying rates plus a margin based on
our leverage at the time of borrowing.

Borrowings are secured by a first-priority security interest

including
intellectual property, but limited to 65% of the voting stock of foreign subsidiaries. Our MFS subsidiary is a
guarantor and has granted a security interest in its assets in favor of the Lender. Following the acquisition of
LNX Corporation and KOR Electronics, LNX also became guarantor. The Lender may require Mercury
Computer Systems Limited, our United Kingdom subsidiary, or Nihon Mercury Computer Systems, K.K., our
Japanese subsidiary, to provide guarantees in the future if the cash or assets of such subsidiary exceed specified
levels.

in all of our domestic assets,

The Loan Agreement provided for conventional affirmative and negative covenants, including a minimum
quick ratio of 1.5 to 1.0. If we had less than $10.0 million of cash equivalents in accounts with the Lender in
excess of our borrowings, we must also satisfy a $15.0 million minimum trailing-four-quarter cash-flow
covenant. The minimum cash flow covenant is calculated as our trailing-four quarter adjusted EBITDA as
defined in the Loan Agreement. In addition, the Loan Agreement contains certain customary representations and
warranties and limits our and our subsidiaries’ ability to incur liens, dispose of assets, carry out certain mergers
and acquisitions, make investments and capital expenditures and defines events of default and limitations on us
and our subsidiaries to incur additional debt.

Amended Loan Agreement

On March 30, 2011, we entered into an amendment to the Loan Agreement (as amended, the “Amended
Loan Agreement”) with the Lender. We amended the Loan Agreement in order to extend the term during which
we may borrow, to make the entire $35 million available for revolving credit, and to obtain more favorable
financial covenants and relax mergers and acquisition restrictions. The amendment extended the term of the
Revolver for an additional two years, to February 11, 2014, terminated the $20.0 million Term Loan under the
original Loan Agreement, and increased the original $15.0 million Revolver to $35.0 million. The amendment
also included modifications to the financial covenants as summarized below.

The Amended Loan Agreement provides for conventional affirmative and negative covenants, including a
minimum quick ratio of 1.0 to 1.0 and a $15.0 million minimum trailing four quarter cash flow covenant through
and including June 30, 2012 (with $17.5 million of minimum cash flow required thereafter).

There are no other changes to the Loan Agreement other than the modification described above.

Following the acquisition of KOR Electronics, both KOR and PDI became guarantors.

We have had no borrowings under the credit facility since inception and were in compliance with all

covenants in the Amended Loan Agreement as of June 30, 2012.

45

Based on our current plans and business conditions, we believe that existing cash, cash equivalents,
available line of credit with Silicon Valley Bank, cash generated from operations, and financing capabilities will
be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.

CASH FLOWS

(In thousands)
As of and for the fiscal year ended

June 30,
2012

June 30,
2011

June 30,
2010

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 15,708
$ 31,474
$ 31,869
$ (80,802) $ (22,683) $ 23,615
$(30,594)
$
$ 97,800
$ 9,291
$ (46,911) $106,634
$ 56,241
$162,875
$115,964

1,975

Our cash and cash equivalents decreased by $46.9 million during fiscal 2012 primarily as a result of the
$71.0 million payment, net of cash acquired, for the KOR acquisition, $9.4 million in capital expenditures, and a
$0.5 million payment for other financing and investing activities, partially offset by $31.9 million generated by
operating activities and $2.2 million generated from stock related activities.

Operating Activities

During fiscal 2012, we generated $31.9 million in cash from operations, an increase of $0.4 million when
compared to $31.5 million generated in fiscal 2011. The increase was primarily due to the $1.2 million net
change in net working capital, partially offset by $0.8 million lower comparative net income excluding the
change in the fair value of the liability related to the LNX earn-out. Our ability to generate cash from operations
in future periods will depend in large part on profitability, the rate of collection of accounts receivable, our
inventory turns and our ability to manage other areas of working capital.

During fiscal 2011, we generated $31.5 million in cash from operations compared to $15.7 million
generated from operations during fiscal 2010. The $15.8 million increase in the amount of cash generated from
operations was driven by a $15.5 million improvement in accounts receivable primarily driven by collection of a
large receivable shipped at the end of fiscal 2010, an $11.6 million increase in provision for deferred income
taxes, a $4.0 million increase in cash generated from prepaid income taxes and income taxes payable, a
$3.4 million increase in inventory activities, a $1.6 million increase in stock-based compensation, a $1.5 million
increase in depreciation and amortization expense, and a $0.9 million reduction in other non-cash items. These
improvements were partially offset by lower comparative net income of $9.9 million, a $4.8 million increase in
cash used for accounts payable and accrued expenses, a $4.8 million increase in cash used for deferred revenue,
customer advances, and other non-current liabilities, and a $3.2 million increase in cash used for prepaid
expenses and other current and non-current assets.

Investing Activities

During fiscal 2012, we used cash of $80.8 million in investing activities compared to $22.7 million used
during fiscal 2011. The $58.1 million increase in cash used by investing activities was primarily driven by a
$71.0 million payment, net of cash acquired, for the KOR and PDI acquisition, compared to a $29.5 million
payment, net of cash acquired, for the LNX acquisition in fiscal 2011, a $0.6 million increase in capital
expenditures, and a $0.3 million increase in restricted cash. Additionally, we generated cash in fiscal 2011 by
exercising the put option to sell auction rate securities for $18.0 million in cash. These increases were partially
offset by a $2.4 million payment for intangible assets made during fiscal 2011.

During fiscal 2011, we used cash of $22.7 million in investing activities compared to $23.6 million
generated from investing activities during fiscal 2010. The $46.3 million increase in cash used by investing
activities was primarily driven by a $29.5 million payment, net of cash acquired, for the LNX acquisition, a $14.0

46

million decrease in net sales of marketable securities, a $2.1 million increase in cash used for purchases of
intangible assets and a $1.5 million increase in capital expenditures, offset by a $0.8 million decrease in cash
payments related to the sale of discontinued operations.

Financing Activities

During fiscal 2012, we generated $2.0 million in cash from financing activities compared to $97.8 million
generated from financing activities during fiscal 2011. The $95.8 million decrease in cash generated from
financing activities was primarily due to the decrease in net proceeds received from a follow-on public stock
offering in 2011 of $93.6 million and a decrease of $2.4 million in cash generated from stock related activities.
These decreases were slightly offset by $0.2 million of lower cash payments made for capital lease obligations,
deferred financing and offering costs.

During fiscal 2011, we generated $97.8 million in cash from financing activities compared to $30.6 million
used by financing activities during fiscal 2010. The $128.4 million increase in cash generated from financing
activities was primarily due to $93.6 million of net proceeds received from a follow-on public stock offering, the
absence of $33.3 million in payments under our line of credit with UBS, an increase of $1.7 million of cash
generated from stock related activities, and a $0.1 million decrease in payments of deferred financing and
offering costs. These increases were slightly offset by $0.3 million of cash used in payments of capital lease
obligations and other.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The following is a schedule of our commitments and contractual obligations outstanding at June 30, 2012:

(In thousands)

Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

$15,036
14,002
79

$ 3,905
14,002
79

$6,238
—
—

$4,893
—
—

Less Than
1 Year

2-3
Years

4-5
Years

More Than
5 Years

$29,117

$17,986

$6,238

$4,893

$—
—
—

$—

We have a liability at June 30, 2012 of $2.6 million for uncertain tax positions that have been taken or are
expected to be taken in various income tax returns. We do not know the ultimate resolution of these uncertain tax
positions and as such, do not know the ultimate timing of payments related to this liability. Accordingly, these
amounts are not included in the above table.

Purchase obligations

for certain inventory
components and services used in normal operations. The purchase commitments covered by these agreements are
for less than one year and aggregated $14.0 million at June 30, 2012.

represent open non-cancelable purchase commitments

Our standard product sales and license agreements entered into in the ordinary course of business typically
contain an indemnification provision pursuant to which we indemnify, hold harmless, and agree to reimburse the
indemnified party for losses suffered or incurred by the indemnified party in connection with certain intellectual
property infringement claims by any third party with respect to our products. Such provisions generally survive
termination or expiration of the agreements. The potential amount of future payments we could be required to
make under these indemnification provisions is, in some instances, unlimited.

OFF-BALANCE SHEET ARRANGEMENTS

Other than our lease commitments incurred in the normal course of business and certain indemnification
provisions, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts,
retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in

47

an unconsolidated entity. We do not have any majority-owned subsidiaries that are not consolidated in the
financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose
entities.

RELATED PARTY TRANSACTIONS

In July 2008, we and our former CEO, James Bertelli, entered into an agreement for consulting services
through June 30, 2010. The consideration for these services totaled $0.2 million and was paid out over the service
period. As of June 30, 2010, we had made payments of $0.2 million for consulting services under this agreement.
Additionally, in July 2008, we entered into a five year non-compete agreement with Mr. Bertelli. This agreement,
which is carried as an intangible asset on our balance sheet, was valued at $0.5 million and is being amortized
over the life of the agreement. As of December 31, 2010, we had made payments of $0.5 million under this
non-compete agreement.

During fiscal 2012 and 2011, we did not engage in any related party transactions.

NON-GAAP FINANCIAL MEASURES

In our periodic communications, we discuss two important measures that are not calculated according to

U.S. generally accepted accounting principles (“GAAP”), adjusted EBITDA and free cash flow.

Adjusted EBITDA is defined as earnings from continuing operations before interest income and expense,
income taxes, depreciation, amortization of acquired intangible assets, restructuring, impairment of long-lived
assets, acquisition costs and other related expenses, fair value adjustments from purchase accounting and stock-
based compensation costs. We use adjusted EBITDA as an important indicator of the operating performance of
our business. We use adjusted EBITDA in internal forecasts and models when establishing internal operating
budgets, supplementing the financial results and forecasts reported to our board of directors, determining a
component of bonus compensation for executive officers and other key employees based on operating
performance and evaluating short-term and long-term operating trends in our operations. We believe the adjusted
EBITDA financial measure assists in providing a more complete understanding of our underlying operational
measures to manage our business, to evaluate our performance compared to prior periods and the marketplace,
and to establish operational goals. We believe that these non-GAAP financial adjustments are useful to investors
because they allow investors to evaluate the effectiveness of the methodology and information used by
management in our financial and operational decision-making.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a
substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may
not be computed in the same manner as similarly titled measures used by other companies. We expect to
continue to incur expenses similar to the adjusted EBITDA financial adjustments described above, and investors
should not infer from our presentation of this non-GAAP financial measure that these costs are unusual,
infrequent or non-recurring.

48

The following table reconciles our net income, the most directly comparable GAAP financial measure, to

our adjusted EBITDA:

(In thousands)

Year Ended June 30,

2012

2011

2010

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of income taxes . . . . . . . . .

$22,619
—

$18,442
(65)

$28,358
289

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs and other related expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustments related to purchase accounting items . . . . . . . . . . . . .
Stock-based compensation cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22,619
27
9,152
7,859
3,799
2,821
—
1,219
(5,238)
6,616

18,507
45
8,060
6,364
1,984
—
150
412
(219)
5,580

28,069
(151)
(9,377)
5,147
1,710
231
211
—
—
4,016

Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$48,874

$40,883

$29,856

Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating
activities less capital expenditures for property and equipment, which includes capitalized software development
costs. We believe free cash flow provides investors with an important perspective on cash available for
investments and acquisitions after making capital investments required to support ongoing business operations
and long-term value creation. We believe that trends in our free cash flow are valuable indicators of our
operating performance and liquidity.

Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute
for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be
computed in the same manner as similarly titled measures used by other companies. We expect to continue to
incur expenditures similar to the free cash flow adjustment described above, and investors should not infer from
our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which
require cash.

The following table reconciles cash provided by operating activities, the most directly comparable GAAP

financial measure, to free cash flow:

(In thousands)

Year Ended June 30,

2012

2011

2010

Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .

Purchases of property and equipment

$31,869
(9,427)

$31,474
(8,825)

$15,708
(7,334)

Free cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$22,442

$22,649

$ 8,374

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

We have identified the policies discussed below as critical to understanding our business and our results of
operations. The impact and any associated risks related to these policies on our business operations are discussed
throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such
policies affect our reported and expected financial results. We believe the following critical accounting policies
to be those most important to the portrayal of our financial position and results of operations and those that
require the most subjective judgment.

49

REVENUE RECOGNITION

We generate our revenue mainly from two different types of contractual arrangements: fixed-price contracts
and time-and-material contracts. Revenue recognition methods on fixed-price contracts vary depending on the
nature of the work and contract terms. Revenue from system sales is recognized upon shipment provided that title
and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the sales price is
fixed or determinable, collection of the related receivable is reasonably assured, and customer acceptance
criteria, if any, have been successfully demonstrated. For multiple-deliverable revenue arrangements that may
include a combination of hardware components, related integration or other services, we allocate revenue to each
deliverable based on its relative selling price. We generally determine relative selling price using best estimate of
the selling price (“BESP”). Each deliverable within our multiple-deliverable revenue arrangement is accounted
for as a separate unit of accounting if the delivered item or items have value to the customer on a standalone
basis. We consider a deliverable to have standalone value if the item is sold separately by us or another vendor or
if the item could be resold by the customer. Of our multiple-deliverable revenue arrangements, approximately
50% typically ship complete within the same quarter.

We also have long term production type contracts that are fixed-price for which we apply the
percentage-of-completion method for revenue recognition. Application of the percentage-of-completion method
requires significant judgment relative to estimating total contract costs, including assumptions relative to the
length of time to complete the contract, the nature and complexity of the work to be performed, anticipated
increases in wages and prices for subcontractor services and materials, and the availability of subcontractor
services and materials. Our estimates are based upon the professional knowledge and experience of our
engineers, program managers and other personnel, who review each long-term contract monthly to assess the
contract’s schedule, performance, technical matters and estimated cost at completion. A cancellation, schedule
delay, or modification of a fixed-price contract which is accounted for using the percentage-of-completion
method may adversely affect our gross margins for the period in which the contract is modified or cancelled.
Changes in estimates are applied retrospectively and when adjustments in estimated contract costs are identified,
such revisions may result in current period adjustments to earnings applicable to performance in prior periods.

For time and materials contracts, revenue reflects the number of direct labor hours expended in the
performance of a contract multiplied by the contract billing rate, as well as reimbursement of other billable direct
costs. The risk inherent in time and materials contracts is that actual costs may differ materially from negotiated
billing rates in the contract, which would directly affect operating income.

For all types of contracts, we recognize anticipated contract losses as soon as they become known and
estimable. We do not provide our customers with rights of product return, other than those related to warranty
provisions that permit repair or replacement of defective goods. We accrue for anticipated warranty costs upon
product shipment. Our payment terms range from 30 to 180 days from invoice date based on the nature of the
contracts, customers’ geographic locations and customer type.

INVENTORY VALUATION

We value our inventory at the lower of cost (first-in, first-out) or its current estimated market value. We
write down inventory for excess and obsolescence based upon assumptions about future demand, product mix
and possible alternative uses. Actual demand, product mix and alternative usage may be lower than those that we
project and this difference could have a material adverse effect on our gross margin if inventory write-downs
beyond those initially recorded become necessary. Alternatively, if actual demand, product mix and alternative
usage are more favorable than those we estimated at the time of such a write-down, our gross margin could be
favorably impacted in future periods.

GOODWILL, ACQUIRED INTANGIBLE ASSETS AND LONG-LIVED ASSETS

We evaluate whether goodwill is impaired annually and when events occur or circumstances change. We
test goodwill for impairment at the reporting unit level, which presently is the same as our operating segments. In

50

2011, an amendment to the goodwill impairment guidance was issued that provides entities an option to perform
a qualitative assessment (commonly known as “step zero”) to determine whether further impairment testing is
necessary before performing the two-step test that was previously required. The qualitative assessment requires
judgments by management about macro-economic conditions including the entity’s operating
significant
environment, its industry and other market considerations, entity-specific events related to financial performance
or loss of key personnel, and other events that could impact the reporting unit. We elected to adopt the provisions
of this amendment for our annual test of impairment as of June 30, 2012 and concluded, based on our qualitative
assessment, that no further testing was required. In the future, if we conclude that further testing is required, the
impairment test involves a two-step process. Step one compares the fair value of the reporting unit with its
carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is
required to determine if there is an impairment of the goodwill. Step two compares the implied fair value of the
reporting unit’s goodwill to the carrying amount of the goodwill. The Company estimates the fair value of its
reporting units using the income approach based upon a discounted cash flow model. In addition, the Company
uses the market approach, which compares the reporting unit to publicly-traded companies and transactions
involving similar businesses, to support the conclusions of the income approach. The income approach requires
the use of many assumptions and estimates including future revenues, expenses, capital expenditures, and
working capital, as well as discount factors and income tax rates.

We also review finite-lived intangible assets and long-lived assets when indications of potential impairment
exist, such as a significant reduction in undiscounted cash flows associated with the assets. Should the fair value
of our long-lived assets decline because of reduced operating performance, market declines, or other indicators of
impairment, a charge to operations for impairment may be necessary.

INCOME TAXES

The determination of income tax expense requires us to make certain estimates and judgments concerning
the calculation of deferred tax assets and liabilities, as well as the deductions and credits that are available to
reduce taxable income. We recognize deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in our consolidated financial statements. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates for the year in which the differences are expected to reverse. We record a
valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. If it becomes more likely than not that a tax
asset will be used for which a reserve has been provided, we reverse the related valuation allowance. If our actual
future taxable income by tax jurisdiction differs from estimates, additional allowances or reversals of reserves
may be necessary.

We use a two-step approach to recognize and measure uncertain tax positions. First, the tax position must be
evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is
deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit
to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount
that has a greater than 50% likelihood of being realized upon ultimate settlement. We reevaluate our uncertain
tax positions on a quarterly basis and any changes to these positions as a result of tax audits, tax laws or other
facts and circumstances could result in additional charges to operations.

BUSINESS COMBINATIONS

Business combinations are accounted for under the acquisition method of accounting. Allocating the
purchase price requires us to estimate the fair value of various assets acquired and liabilities assumed.
Management is responsible for determining the appropriate valuation model and estimated fair values, and in
doing so, considers a number of factors, including information provided by an outside valuation advisor. We

51

primarily establish fair value using the income approach based upon a discounted cash flow model. The income
approach requires the use of many assumptions and estimates including future revenues and expenses, as well as
discount factors and income tax rates.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Effective July 1, 2011, we elected to adopt FASB ASU 2011-08, Intangibles—Goodwill and Other
(Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”): an amendment of the FASB Accounting
Standards Codification. The ASU permits an entity to make a qualitative assessment of whether it is more likely
than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill
impairment test. If an entity concludes it is more likely than not that the fair value of a reporting unit is greater
than its carrying amount, it does not need to perform the two-step impairment test. The ASU is effective for us on
July 1, 2012; however, we have elected to early adopt as permitted by the guidance. Upon adoption, we applied
ASU 2011-08 to our annual goodwill impairment test using a qualitative assessment before applying a two-step
goodwill impairment test. Such adoption did not have a material impact on our financial position or results of
operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities,
in conjunction with the International Accounting Standards Board (“IASB”)’s issuance of amendments to
Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). While the Boards
retained the existing offsetting models under U.S. GAAP and International Financial Reporting Standards
(“IFRS”), the new standards require disclosures to allow investors to better compare financial statements
prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for
annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective
application is required. This guidance is not expected to have a material impact to our consolidated financial
statements.

In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of
the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05. The ASU defers the new requirement to
present components of reclassifications of other comprehensive income on the face of the income statement.
Companies are still required to adopt the other requirements contained in the new standard on comprehensive
income, ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income
(“ASU 2011-05”). The new standard and this deferral are effective for public entities as of the beginning of a
fiscal year that begins after December 15, 2011 and interim and annual periods thereafter. Early adoption is
permitted but full retrospective application is required. Effective July 1, 2010, we adopted ASU 2011-05 and
have presented the components of net income and comprehensive income in one consecutive financial statement
on our annual and quarterly reports filed on Form 10-K and Form 10-Q respectively.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

Our exposure to interest rate risk is related primarily to our investment portfolio and our line of credit. Our
investment portfolio includes money market funds from high quality U.S. government issuers. A change in
prevailing interest rates may cause the fair value of our investments to fluctuate. For example, if we hold a
security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing rate rises, the fair
value of the principal amount of our investment will probably decline. To minimize this risk, investments are
generally available for sale and we generally limit the amount of credit exposure to any one issuer. Our line of
credit was unused at June 30, 2012.

52

FOREIGN CURRENCY RISK

We operate primarily in the United States; however, we conduct business outside the United States through
our foreign subsidiaries in Europe and Japan, where business is largely transacted in non-U.S. dollar currencies.
Accordingly, we are subject to exposure from adverse movements in the exchange rates of local currencies.
Local currencies are used as the functional currency for our subsidiaries in Europe and Japan. Consequently,
changes in the exchange rates of the currencies may impact the translation of the foreign subsidiaries’ statements
of operations into U.S. dollars, which may in turn affect our consolidated statement of operations.

We have not entered into any financial derivative instruments that expose us to material market risk,
including any instruments designed to hedge the impact of foreign currency exposures. We may, however, hedge
such exposure to foreign currency exchange rate fluctuations in the future.

53

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Mercury Computer Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Mercury Computer Systems, Inc. and
subsidiaries as of June 30, 2012 and 2011, and the related consolidated statements of operations and
comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended
June 30, 2012. In connection with our audits of the consolidated financial statements, we have also audited
financial statement Schedule II. We also have audited Mercury Computer Systems, Inc.’s internal control over
financial reporting as of June 30, 2012, based on criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Mercury
Computer Systems, Inc.’s management is responsible for these consolidated financial statements and financial
statement Schedule II, for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule and an opinion on the Company’s
internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Mercury Computer Systems, Inc. and subsidiaries as of June 30, 2012 and 2011, and the
results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2012,
in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,

54

presents fairly, in all material respects, the information set forth therein. Also in our opinion, Mercury Computer
Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30,
2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

Mercury Computer Systems, Inc. and subsidiaries acquired KOR Electronics and its wholly-owned
subsidiary, Paragon Dynamics, Inc. during fiscal year 2012, and management excluded from its assessment of the
effectiveness of Mercury Computer Systems, Inc.’s internal control over financial reporting as of June 30, 2012
KOR Electronics and its wholly-owned subsidiary, Paragon Dynamics, Inc.’s internal control over financial
reporting associated with total assets of 22 percent (of which 17 percent represented goodwill and intangible
assets included within the scope of the assessment) and total revenues of 8 percent included in the consolidated
financial statements of Mercury Computer Systems, Inc. and subsidiaries as of and for the year ended June 30,
2012. Our audit of internal control over financial reporting of Mercury Computer Systems, Inc. and subsidiaries
also excluded an evaluation of the internal control over financial reporting of KOR Electronics and its wholly-
owned subsidiary, Paragon Dynamics, Inc.

/s/ KPMG LLP

Boston, Massachusetts
August 22, 2012

55

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

Assets
Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $5 and $17 at June 30, 2012 and

2011, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled receivables and cost in excess of billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

June 30,

2012

2011

$115,964

$162,875

38,532
10,918
25,845
7,653
2,585
6,206

207,703
3,281
15,929
132,621
25,083
989

44,786
1,059
18,540
7,678
1,075
4,171

240,184
3,000
14,520
79,558
16,702
1,598

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$385,606

$355,562

Liabilities and Shareholders’ Equity
Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenues and customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred gain on sale-leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,002
9,895
13,190
4,855

36,942
4,399
7,197
2,597
1,367

52,502

$

7,972
5,808
16,288
6,138

36,206
5,556
3,877
1,777
6,710

54,126

Commitments and contingencies (Note L)
Shareholders’ equity:

Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding . . .
Common stock, $.01 par value; 85,000,000 shares authorized; 29,729,065 and 29,143,738 shares
issued and outstanding at June 30, 2012 and 2011 respectively . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

297
222,769
108,732
1,306

291
213,777
86,113
1,255

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

333,104

301,436

Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$385,606

$355,562

The accompanying notes are an integral part of the consolidated financial statements.

56

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)

For the Years Ended June 30,

2012

2011

2010

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$244,929
108,773

$228,710
98,811

$199,830
87,298

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

136,156

129,899

112,532

Operating expenses:

Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs and other related expenses . . . . . . . . . . . . . . . . . . . . . . .
. . . .
Change in the fair value of the liability related to the LNX earn-out

57,159
45,984
3,799
2,821
—
1,219
(4,938)

57,868
44,500
1,984
—
150
412
—

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

106,044

104,914

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from continuing operations before income taxes (benefit) . . . . . . . . . .
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of income taxes . . . . . . . . . .

30,112
13
(40)
1,686

31,771
9,152

22,619
—

24,985
34
(79)
1,627

26,567
8,060

18,507
(65)

51,519
41,548
1,710
231
211
—
—

95,219

17,313
532
(381)
1,228

18,692
(9,377)

28,069
289

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 22,619

$ 18,442

$ 28,358

Basic net earnings (loss) per share:

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of income taxes . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net earnings (loss) per share:

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of income taxes . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

$

0.77
—

0.77

0.75
—

0.75

$

$

$

$

0.73
—

0.73

0.71
(0.01)

0.70

$

$

$

$

1.25
0.01

1.26

1.22
0.01

1.23

Weighted-average shares outstanding:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,477

30,085

25,322

26,209

22,559

23,008

Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized (loss) gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 22,619
53
(2)

$ 18,442
311
2

$ 28,358
368
(83)

Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 22,670

$ 18,755

$ 28,643

The accompanying notes are an integral part of the consolidated financial statements.

57

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Years Ended June 30, 2012, 2011 and 2010
(In thousands)

Common Stock

Shares Amount

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Total
Shareholders’
Equity

Balance June 30, 2009 . . . . . . . . . . . . . . . . . . . 22,376
Issuance of common stock under employee

stock incentive plans . . . . . . . . . . . . . . . . . .

455

Issuance of common stock under employee

stock purchase plan . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized loss on securities . . . . . . . . . . .
Foreign currency translation adjustments . . . .

94
(42)

Balance June 30, 2010 . . . . . . . . . . . . . . . . . . . 22,883
Issuance of common stock under employee

stock incentive plans . . . . . . . . . . . . . . . . . .

594

Issuance of common stock under employee

stock purchase plan . . . . . . . . . . . . . . . . . . .
Follow-on public stock offering . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . .
Tax benefit from employee stock plan

awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gain on investments . . . . . . . . .
Foreign currency translation adjustments . . . .

89
5,578

Balance June 30, 2011 . . . . . . . . . . . . . . . . . . . 29,144
Issuance of common stock under employee

stock incentive plans . . . . . . . . . . . . . . . . . .

481

Issuance of common stock under employee

stock purchase plan . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . .
Tax benefit from employee stock plan

awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized loss on investments . . . . . . . . .
Foreign currency translation adjustments . . . .

104

$224

$104,843 $ 39,313

$ 657

$145,037

5

1
(1)

997

846
(432)
4,016

1,002

847
(433)
4,016
28,358
(83)
368

28,358

(83)
368

$229

$110,270 $ 67,671

$ 942

$179,112

6

1
55

2,590

1,093
93,550
5,580

694

18,442

2
311

2,596

1,094
93,605
5,580

694
18,442
2
311

$291

$213,777 $ 86,113

$1,255

$301,436

5

1

461

1,164
6,616

751

466

1,165
6,616

751
22,619
(2)
53

22,619

(2)
53

Balance June 30, 2012 . . . . . . . . . . . . . . . . . . . 29,729

$297

$222,769 $108,732

$1,306

$333,104

The accompanying notes are an integral part of the consolidated financial statements.

58

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

For The Years Ended June 30,

2012

2011

2010

Cash flows from operating activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:

$ 22,619

$ 18,442

$ 28,358

Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Benefit) provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in the fair value of the liability related to the LNX earn-out
. . . . . . . . . . . . . . . . . . . . . .
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in operating assets and liabilities, net of effects of businesses acquired and disposed of:

Accounts receivable, unbilled receivable, and cost in excess of billings . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenues and customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,658
6,616
(3,056)
—
(559)
(4,938)
(555)

6,755
(7,267)
3,514
(816)
646
(1,092)
(1,850)
820
(626)

8,348
5,580
1,888
150
(893)
—
(898)

257
2,514
1,567
(2,120)
(677)
931
(3,696)
21
60

6,857
4,016
(9,698)
211
(1,494)
—
(1,308)

(15,256)
(859)
(2,162)
505
(113)
5,708
234
(262)
971

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31,869

31,474

15,708

Cash flows from investing activities:

Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and maturities of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for sale of discontinued operations, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(71,044)
—
(9,427)
(50)
—
(281)

(29,508)
18,025
(8,825)
(2,375)
—
—

—
32,025
(7,334)
(250)
(826)
—

Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(80,802)

(22,683)

23,615

93,605
3,690
893
—
(31)
(59)
—
(298)

—
1,849
1,494
(33,364)
(170)
—
(433)
30

97,800

(30,594)

43

562

9,291
46,950

Cash flows from financing activities:

Proceeds from follow-on public stock offering, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments under line of credit
Payments of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of deferred offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Payments) proceeds of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
1,631
559
—
—
(30)
—
(185)

1,975

47

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(46,911)
162,875

106,634
56,241

Cash and cash equivalents at end of year

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$115,964

$162,875

$ 56,241

Cash paid during the period for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

40
8,686

$
$

45
4,397

$
150
$ 2,587

Supplemental disclosures—non-cash activities:

Issuance of restricted stock awards to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
8,367
$
$ — $
$
41
$

9,204
495
251

$ 6,219
$ —
168
$

The accompanying notes are an integral part of the consolidated financial statements.

59

MERCURY COMPUTER SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

A. Description of Business

signal

embedded,

real-time digital

Mercury Computer Systems, Inc. (the “Company” or “Mercury”) designs, manufactures and markets
and image processing
commercially-developed, high-performance
sub-systems and software for specialized defense and commercial markets. The Company’s solutions play a
critical role in a wide range of applications, processing and transforming sensor data to information for storage,
analysis and interpretation. The Company’s goal is to grow and build on its position as a critical component of
the defense and intelligence industrial base and be the leading provider of open and affordable sensor processing
subsystems for intelligence, surveillance and reconnaissance (“ISR”), electronic warfare (“EW”), and missile
defense applications. In military reconnaissance and surveillance platforms, the Company’s sub-systems receive,
process, and store real-time radar, video, sonar and signals intelligence data. The Company provides radio
frequency (“RF”) and microwave products for enhanced signal acquisitions and communications in military and
commercial applications. Additionally, Mercury Federal Systems, the Company’s wholly owned subsidiary,
focuses on direct and indirect contracts supporting the defense, intelligence, and homeland security agencies.

The Company’s products and solutions address mission-critical requirements within the defense industry for
C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) and
electronic warfare systems and services, and target several markets including maritime defense, airborne
reconnaissance, ballistic missile defense, ground mobile and force protection systems and tactical
communications and network systems. The Company delivers commercially developed technology and solutions
that are based on open system architectures and widely adopted industry standards, and supports all of this with
services and support capabilities.

B. Summary of Significant Accounting Policies

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its wholly-owned

subsidiaries. All intercompany transactions and balances have been eliminated.

BUSINESS COMBINATIONS

The Company utilizes the acquisition method of accounting under Financial Accounting Standard Boards
(“FASB”) Accounting Standard Codification (“ASC”) 805, Business Combinations, (“FASB ASC 805”), for all
transactions and events which it obtains control over one or more other businesses, to recognize the fair value of
all assets and liabilities acquired, even if less than one hundred percent ownership is acquired, and in establishing
the acquisition date fair value as measurement date for all assets and liabilities assumed. The Company also
utilizes FASB ASC 805 for the initial recognition and measurement, subsequent measurement and accounting,
and disclosure of assets and liabilities arising from contingencies in business combinations.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.

60

REVENUE RECOGNITION

The Company relies upon FASB ASC 605, Revenue Recognition to account for its revenue transactions.
Revenue from system sales is recognized upon shipment provided that title and risk of loss have passed to the
customer, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of
the related receivable is reasonably assured, and customer acceptance criteria, if any, have been successfully
demonstrated.

Certain contracts with customers require the Company to perform tests of its products prior to shipment to
ensure their performance complies with the Company’s published product specifications and, on occasion, with
additional customer-requested specifications. In these cases, the Company conducts such tests and, if they are
completed successfully, includes a written confirmation with each order shipped. As a result, at the time of each
product shipment, the Company believes that no further customer testing requirements exist and that there is no
uncertainty of acceptance by its customer.

The Company enters into multiple-deliverable arrangements that may include a combination of hardware
include any
related integration or other services. These arrangements generally do not
components,
performance-, cancellation-, termination- or refund-type provisions. Total revenue recognized under multiple-
deliverable revenue arrangements in fiscal 2012, 2011 and 2010 was 39%, 50% and 53% of total revenues,
respectively.

The Company uses FASB Accounting Standards Update (“ASU”) No. 2009-13 (“FASB ASU 2009-13”),
Multiple-Deliverable Revenue Arrangements. FASB ASU 2009-13 establishes a selling price hierarchy for
determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence (“VSOE”)
if available; (2) third-party evidence (“TPE”) if VSOE is not available; and (3) best estimated selling price
(“BESP”), if neither VSOE nor TPE is available. Additionally, FASB ASU 2009-13 expands the disclosure
requirements related to a vendor’s multiple-deliverable revenue arrangements. This guidance was required for the
Company beginning July 1, 2010; however, the Company elected to early adopt, as permitted by the guidance.
As such, the Company prospectively applied the provisions of FASB ASU 2009-13 to all revenue arrangements
entered into or materially modified after July 1, 2009.

Per the provisions of FASB ASU 2009-13, the Company allocates arrangement consideration to each
deliverable in an arrangement based on its relative selling price. The Company generally expects that it will not
be able to establish VSOE or TPE due to limited single element transactions and the nature of the markets in
which the Company competes, and, as such, the Company typically determines its relative selling price using
BESP.

The Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to
determine the price at which the Company would transact if the product or service were sold by the Company on
a standalone basis.

The Company’s determination of BESP involves the consideration of several factors based on the specific
facts and circumstances of each arrangement. Specifically, the Company considers the cost to produce the
deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts, the
Company’s ongoing pricing strategy and policies (as evident from the price list established and updated by
management on a regular basis), the value of any enhancements that have been built into the deliverable and the
characteristics of the varying markets in which the deliverable is sold.

The Company analyzes the selling prices used in its allocation of arrangement consideration at a minimum
on an annual basis. Selling prices will be analyzed on a more frequent basis if a significant change in the
Company’s business necessitates a more timely analysis or if the Company experiences significant variances in
its selling prices.

61

Each deliverable within the Company’s multiple-deliverable revenue arrangements is accounted for as a
separate unit of accounting under the guidance of FASB ASU 2009-13 if both of the following criteria are met:
the delivered item or items have value to the customer on a standalone basis; and for an arrangement that
includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered
item(s) is considered probable and substantially in the control of the Company. The Company considers a
deliverable to have standalone value if the item is sold separately by the Company or another vendor or if the
item could be resold by the customer. Further, the Company’s revenue arrangements generally do not include a
general right of return relative to delivered products.

Deliverables not meeting the criteria for being a separate unit of accounting are combined with a deliverable
that does meet that criterion. The appropriate allocation of arrangement consideration and recognition of revenue
is then determined for the combined unit of accounting.

For transactions involving the licensing of standalone software products and of software that is not
incidental to the product, the Company recognizes revenue when there is persuasive evidence of an arrangement,
delivery of the software has occurred, the price is fixed or determinable, and collection of the related receivable
is reasonably assured. The Company’s software products are generally not deemed essential to the functionality
of any hardware system and do not require installation by the Company or significant modification or
customization of the software. If fair value of maintenance agreements related to standalone software products is
obtained, the fair value of the maintenance agreement is recognized as revenue ratably over the term of each
maintenance agreement.

In electing to early adopt FASB ASU 2009-13, the Company also early adopted FASB ASU No. 2009-14,
Certain Revenue Arrangements That Include Software Elements (“FASB ASU 2009-14”). FASB ASU 2009-14
amends the FASB ASC 985-605, Software Revenue Recognition, to change the accounting model for revenue
arrangements that include both tangible products and software elements, such that tangible products containing
both software and non-software components that function together to deliver the tangible product’s essential
functionality are no longer within the scope of software revenue guidance. These arrangements are instead
subject to the guidance in FASB ASC 605-25. The Company monitors all multiple-element arrangements to
determine if they are in scope of FASB ASU 2009-14, and when applicable will apply all relevant criteria per
guidance. The adoption of FASB ASU 2009-14 has not had a material impact on the Company’s financial
position or results of operations.

For multiple-element arrangements entered into prior to July 1, 2009, in accordance with FASB ASC
605-25, the Company defers the greater of the fair value of any undelivered elements of the contract or the
portion of the sales price that is not payable until the undelivered elements are delivered.

The Company also engages in long-term contracts for development, production and services activities which
it accounts for consistent with FASB ASC 605-35, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, and other relevant revenue recognition accounting literature. The Company
considers the nature of these contracts and the types of products and services provided when determining the
proper accounting for a particular contract. Generally for fixed-price contracts, other than service-type contracts,
revenue is recognized primarily under the percentage of completion method or, for certain short-term contracts,
by the completed contract method. Revenue from service-type fixed-price contracts is recognized ratably over
the contract period or by other appropriate input or output methods to measure service provided, and contract
costs are expensed as incurred. The Company establishes billing terms at the time project deliverables and
milestones are agreed. Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled
receivables. The risk to the Company on a fixed-price contract is that if estimates to complete the contract change
from one period to the next, profit levels will vary from period to period. For time and materials contracts,
revenue reflects the number of direct labor hours expended in the performance of a contract multiplied by the
contract billing rate, as well as reimbursement of other billable direct costs. The risk inherent in time and
materials contracts is that actual costs may differ materially from negotiated billing rates in the contract, which

62

would directly affect operating income. For all types of contracts, the Company recognizes anticipated contract
losses as soon as they become known and estimable. Out-of-pocket expenses that are reimbursable by the
customer are included in revenue and cost of revenue.

The use of contract accounting requires significant judgment relative to estimating total contract revenues
and costs, including assumptions relative to the length of time to complete the contract, the nature and
complexity of the work to be performed, anticipated increases in wages and prices for subcontractor services and
materials, and the availability of subcontractor services and materials. The Company’s estimates are based upon
the professional knowledge and experience of its engineers, program managers and other personnel, who review
each long-term contract monthly to assess the contract’s schedule, performance, technical matters and estimated
cost at completion. Changes in estimates are applied retrospectively and when adjustments in estimated contract
costs are identified, such revisions may result in current period adjustments to earnings applicable to performance
in prior periods.

The Company does not provide its customers with rights of product return, other than those related to
warranty provisions that permit repair or replacement of defective goods. The Company accrues for anticipated
warranty costs upon product shipment. Revenues from product royalties are recognized upon invoice by the
Company. Additionally, all revenues are reported net of government assessed taxes (e.g. sales taxes or value-
added taxes).

CASH AND CASH EQUIVALENTS

Cash equivalents, consisting of highly liquid money market funds and U.S. government and U.S.
government agency issues with remaining maturities of 90 days or less at the date of purchase, are carried at fair
market value which approximates cost. The Company also has restricted cash which is classified as a non-current
asset due to the length of the restriction.

CONCENTRATION OF CREDIT RISK

Financial

instruments that potentially expose the Company to concentrations of credit risk consist
principally of cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents
with financial institutions that management believes are of high credit quality. At June 30, 2012 and 2011, the
Company had $115,958 and $162,869, respectively, of cash and cash equivalents on deposit or invested with its
financial and lending institutions.

The Company provides credit to customers in the normal course of business. The Company performs
ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when
deemed necessary but generally does not require collateral. At June 30, 2012, five customers accounted for 59%
of the Company’s receivables, unbilled receivables and cost in excess of billings. At June 30, 2011, five
customers accounted for 74% of the Company’s receivables, unbilled receivables and cost in excess of billings.

INVENTORY

Inventory is stated at the lower of cost (first-in, first-out) or market value, and consists of materials, labor
and overhead. On a quarterly basis, the Company uses consistent methodologies to evaluate inventory for net
realizable value. Once an item is written down, the value becomes the new inventory cost basis. The Company
reduces the value of inventory for excess and obsolete inventory, consisting of on-hand and non-cancelable
on-order inventory in excess of estimated usage. The excess and obsolete inventory evaluation is based upon
assumptions about future demand, product mix and possible alternative uses.

63

GOODWILL AND ACQUIRED INTANGIBLE ASSETS

Goodwill is the amount by which the cost of the acquired net assets in a business acquisition exceeded the
fair values of the net identifiable assets on the date of purchase. Goodwill is not amortized in accordance with the
requirements of FASB ASC 350, Intangibles-Goodwill and Other (“FASB ASC 350”). Goodwill is assessed for
impairment at least annually, on a reporting unit basis, or more frequently when events and circumstances occur
indicating that the recorded goodwill may be impaired. If the book value of a reporting unit exceeds its fair value,
the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of
goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess.

For the year ended June 30, 2012, the Company elected to adopt FASB ASU 2011-08, Intangibles—
Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). Under ASU 2011-08, the
Company has the option to assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less
than its carrying amount to determine whether further impairment testing is necessary. Based on the results of the
qualitative review of goodwill performed as of June 30, 2012, the Company did not identify any indicators of
impairment. As such, the two-phase process was not necessary.

Acquired intangible assets result from the Company’s various business acquisitions (see Note E) and certain
licensed technologies, and consist of identifiable intangible assets, including completed technology, licensing
agreements, customer relationships, backlog, and non-compete agreements. Acquired intangible assets are
reported at cost, net of accumulated amortization and are either amortized on a straight-line basis over their
estimated useful lives of up to seven years or over the period the economic benefits of the intangible asset are
consumed.

LONG-LIVED ASSETS

Long-lived assets primarily include property and equipment and acquired intangible assets. The Company
periodically evaluates its long-lived assets for events and circumstances that indicate a potential impairment in
accordance with FASB ASC 360, Property, Plant, and Equipment (“FASB ASC 360”). The Company reviews
long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer
appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows of the asset
as compared to the recorded value of the asset. If impairment is indicated, the asset is written down to its
estimated fair value.

PROPERTY AND EQUIPMENT

Property and equipment are the long-lived, physical assets of the Company acquired for use in the
Company’s normal business operations and are not intended for resale by the Company. These assets are
recorded at cost. Renewals and betterments that increase the useful lives of the assets are capitalized. Repair and
maintenance expenditures that increase the efficiency of the assets are expensed as incurred. Equipment under
capital lease is recorded at the present value of the minimum lease payments required during the lease period.
Depreciation is based on the estimated useful lives of the assets using the straight-line method (see Note I).

As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts

and any resulting gain or loss is included in the results of operations.

Expenditures for major software purchases and software developed for internal use are capitalized and
depreciated using the straight-line method over the estimated useful lives of the related assets, which are
generally three years. For software developed for internal use, all external direct costs for material and services
and certain payroll and related fringe benefit costs are capitalized in accordance with FASB ASC 350. During
fiscal 2012 and 2011, the Company capitalized $1,092 and $1,000 of software development costs. Software
development costs qualifying for capitalization were not material for the year ended June 30, 2010.

64

DEFERRED REVENUES AND CUSTOMER ADVANCES

Deferred revenues consist of deferred product revenue, billings in excess of revenues, and deferred service
revenue. Deferred product revenue represents amounts that have been invoiced to customers, but are not yet
recognizable as revenue because one or more of the conditions for revenue recognition have not been met.
Billings in excess of revenues represents milestone billing arrangements on percentage of completion projects
where the billings of the contract exceed recognized revenues. Deferred service revenue primarily represents
amounts invoiced to customers for annual maintenance contracts or extended warranty concessions, which are
recognized ratably over the term of the arrangements. Customer advances represent deposits received from
customers on an order.

INCOME TAXES

The Company accounts for income taxes under FASB ASC 740, Income Taxes (“FASB ASC 740”). The
Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that
have been included in the Company’s consolidated financial statements. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates for the year in which the differences are expected to reverse. The Company
records a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more
likely than not that some or all of the deferred tax assets will not be realized.

FASB ASC 740 requires a two-step approach to recognizing and measuring uncertain tax positions. First,
the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination.
If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine
the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized
is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.

The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of

income tax expense.

PRODUCT WARRANTY ACCRUAL

The Company’s product sales generally include a 12 month standard hardware warranty. At time of product
shipment, the Company accrues for the estimated cost to repair or replace potentially defective products.
Estimated warranty costs are based upon prior actual warranty costs for substantially similar transactions and any
specifically identified warranty requirements.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. Research and development costs are primarily

made up of labor charges and prototype material and development expenses.

STOCK-BASED COMPENSATION

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service period, which generally represents the
vesting period, and includes an estimate of the awards that will be forfeited. The Company uses the Black-
Scholes valuation model for estimating the fair value on the date of grant of stock options. The fair value of stock
option awards is affected by the Company’s stock price as well as valuation assumptions, including the volatility
of the Company’s stock price, expected term of the option, risk-free interest rate and expected dividends. The fair
value of restricted stock awards are based on the market price on the date of grant.

65

NET EARNINGS PER SHARE

Basic net earnings per share is calculated by dividing net income by the weighted-average number of
common shares outstanding during the period. Diluted net earnings per share computation includes the effect of
shares which would be issuable upon the exercise of outstanding stock options and the vesting of restricted stock,
reduced by the number of shares which are assumed to be purchased by the Company under the treasury stock
method.

Basic and diluted weighted average shares outstanding were as follows:

Basic weighted-average shares outstanding . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive equity instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,477
608

25,322
887

22,559
449

Diluted weighted-average shares outstanding . . . . . . . . . . . . . . . . . . . . .

30,085

26,209

23,008

Years Ended June 30,

2012

2011

2010

Weighted average equity instruments to purchase 1,244, 753 and 1,705 shares of common stock were not
included in the calculation of diluted net earnings per share for the fiscal years ended June 30, 2012, 2011 and
2010, respectively, because the equity instruments were anti-dilutive.

On February 16, 2011, the Company completed a follow-on public stock offering of 5,578 shares of the
Company’s common stock, at a price to the public of $17.75, generating net proceeds, after underwriting fees and
expenses, of $93,605. As a result, an additional 5,578 and 2,129 weighted average shares outstanding were
included in the calculation of basic and diluted net earnings per shares for fiscal 2012 and 2011.

COMPREHENSIVE INCOME

Comprehensive income consists of net income and other comprehensive income, which includes foreign

currency translation adjustments and unrealized gains on investments.

The components of accumulated other comprehensive income were as follows:

Accumulated foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . .
Accumulated net unrealized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,306
—

$1,253
2

Total accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,306

$1,255

June 30,

2012

2011

FOREIGN CURRENCY

Local currencies are used as the functional currency for the Company’s subsidiaries in Europe and Japan.
The accounts of foreign subsidiaries are translated using exchange rates in effect at period-end for assets and
liabilities and at average exchange rates during the period for results of operations. The related translation
adjustments are reported in accumulated other comprehensive income in shareholders’ equity. Gains (losses)
resulting from foreign currency transactions are included in other income (expense) and were immaterial for all
periods presented.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Effective July 1, 2011, the Company elected to adopted FASB ASU 2011-08, Intangibles—Goodwill and
Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”): an amendment of the FASB Accounting
Standards Codification. The ASU permits an entity to make a qualitative assessment of whether it is more likely

66

than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill
impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, it does not need to perform the two-step impairment test. The ASU is effective for the
Company on July 1, 2012; however, the Company has elected to early adopt as permitted by the guidance. Upon
adoption, the Company applied ASU 2011-08 to its annual goodwill impairment
test using a qualitative
assessment before applying a two-step goodwill impairment test. Such adoption did not have a material impact
on the Company’s financial position or results of operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities,
in conjunction with the International Accounting Standards Board (“IASB”)’s issuance of amendments to
Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). While the Boards
retained the existing offsetting models under U.S. GAAP and International Financial Reporting Standards
(“IFRS”), the new standards require disclosures to allow investors to better compare financial statements
prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for
annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective
application is required. This guidance is not expected to have a material impact to our consolidated financial
statements.

In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of
the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05. The ASU defers the new requirement to
present components of reclassifications of other comprehensive income on the face of the income statement.
Companies are still required to adopt the other requirements contained in the new standard on comprehensive
income, ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income
(“ASU 2011-05”). The new standard and this deferral are effective for public entities as of the beginning of a
fiscal year that begins after December 15, 2011 and interim and annual periods thereafter. Early adoption is
permitted but full retrospective application is required. Effective July 1, 2010, the Company adopted ASU
2011-05 and has presented the components of net income and comprehensive income in one consecutive
financial statement on the Company’s annual and quarterly reports filed on Form 10-K and Form 10-Q
respectively.

C. Acquisitions

KOR AND PDI ACQUISITION

(“KOR”), and Shareholder Representative Services LLC, as

On December 22, 2011, the Company and King Merger Inc., a newly formed, wholly-owned subsidiary of
the Company (the “Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
KOR Electronics
the securityholders’
representative. On December 30, 2011, the transaction closed with the Merger Sub being merged with and into
KOR with KOR continuing as the surviving company and wholly-owned subsidiary of the Company (the
“Merger”). By operation of the Merger, the Company acquired both KOR and its wholly-owned subsidiary,
Paragon Dynamics, Inc. (“PDI”). Based in Cypress, California, KOR designs and develops digital radio
frequency memory (“DRFM”) units for a variety of modern EW applications, as well as radar environment
simulation and test systems for defense applications. Based in Aurora, Colorado, PDI provides sophisticated
analytic exploitation services and customized multi-intelligence data fusion solutions for the U.S. intelligence
community. For segment reporting, KOR is included in the Advanced Computing Solutions (“ACS”) business
segment and PDI is included in the MFS business segment.

The Company acquired KOR and PDI for a purchase price of $70,000 paid in cash. The Company funded
the purchase price with cash on hand. The Company acquired KOR and PDI free of bank debt. The purchase
price was subject to post-closing adjustment based on a determination of KOR’s closing net working capital.

67

In accordance with the Merger Agreement, $10,650 of the purchase price was placed into escrow to support
the post-closing working capital adjustment and the sellers’ indemnification obligations. The escrow is available
for indemnification claims through December 30, 2013.

Following the acquisition,

the Company’s KOR and PDI subsidiaries became guarantors under the

Company’s Loan Agreement and granted a security interest in its assets in favor of the Lender (see Note K).

The following table presents the net purchase price and its preliminary allocation for the acquisition of

KOR:

Amounts

Consideration transferred

Cash paid at closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cash, cash equivalents and restricted cash acquired . . . . . . . . . . . . . . . . . . . . . . . .

$71,019
1,044
(1,019)

Net purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$71,044

Estimated fair value of tangible assets acquired and liabilities assumed

Cash, cash equivalents and restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable and cost in excess of billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Estimated fair value of net tangible assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value of identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value of goodwill

$ 1,019
10,367
4,063
(3,978)
(4,601)

6,870
12,130
53,063

Estimated fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cash, cash equivalents and restricted cash acquired . . . . . . . . . . . . . . . . . . . . . . . .

$72,063
(1,019)

Net purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$71,044

The amounts above represent the preliminary fair value estimates as of June 30, 2012 and are subject to
subsequent adjustment as the Company obtains additional information during the measurement period and
finalizes its fair value estimates. Any subsequent adjustments to these fair value estimates occurring during the
measurement period will result in an adjustment to goodwill or income, as applicable. As of June 30, 2012, there
have been no material adjustments to the initial fair value estimates.

The goodwill of $53,063 arising from the KOR acquisition largely reflects the potential synergies and
expansion of the Company’s service offerings across product segments and markets complementary to the
Company’s existing products and markets. The KOR acquisition provides the Company with additional
know-how and expertise related to radio frequency simulation and jamming technology and expansion into
technical services for the U.S. intelligence community.

The revenue and operating income of KOR and PDI included in the Company’s consolidated statements of

operations for the year ended June 30, 2012 was $19,779 and $2,586, respectively.

68

Pro Forma Financial Information

The following tables summarize the supplemental statements of operations information on an unaudited pro

forma basis as if the KOR acquisition had occurred on July 1, 2010:

June 30,

2012

2011

Pro forma net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic pro forma net earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted pro forma net earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$265,478
$ 23,149
0.79
$
0.77
$

$265,365
$ 21,982
0.87
$
0.84
$

The pro forma results presented above are for illustrative purposes only for the applicable periods and do
not purport to be indicative of the actual results which would have occurred had the transaction been completed
as of the beginning of the period, nor are they indicative of results of operations which may occur in the future.

On February 16, 2011, the Company completed a follow-on public stock offering of 5,578 shares of the
Company’s common stock. As a result, an additional 5,578 and 2,129 weighted average shares outstanding were
included in the calculation of basic and diluted net earnings per shares for the years ended June 30, 2012 and
2011 presented above, respectively.

LNX ACQUISITION

On January 12, 2011,

the Company entered into a stock purchase agreement (the “Stock Purchase
Agreement”) with LNX, the holders of the equity interests of LNX, and Lamberto Raffaelli, as the sellers’
representative (collectively, the “Sellers”). Pursuant to the Stock Purchase Agreement, the Company completed
its purchase of all of the outstanding equity interests in LNX, and LNX became a wholly-owned subsidiary of the
Company. Based in Salem, NH, LNX designs and builds next generation radio frequency receivers for signal
intelligence, communication intelligence as well as electronic attack applications. LNX is included in the ACS
business segment.

The Company acquired LNX for a purchase price of $31,000 paid in cash, plus an earn-out of up to $5,000
payable in cash, based upon achievement of financial targets during calendar years 2011 and 2012. The purchase
price was subject to post-closing adjustment based on a determination of LNX’s closing net working capital. The
Company funded the purchase price with cash on hand. The Company acquired LNX free of bank
debt. Immediately prior to the consummation of the acquisition, LNX divested its non-defense global
procurement business. The Company determined the fair value of the earn-out contingent consideration as part of
the LNX acquisition based on the probability of LNX attaining the specified financial targets and assigned a fair
value of $4,828 to the liability. In accordance with the Stock Purchase Agreement, $6,200 of the purchase price
was placed into escrow to support the post-closing working capital adjustment and the sellers’ indemnification
obligations, of which $1,523 was released to the Sellers and $27 was released to the Company in March 2011,
upon the final calculation of net working capital. The remaining escrow is available for indemnification claims
through August 31, 2012.

As of June 30, 2012, the Company determined that it is probable that the earn-out related to the LNX
acquisition would not be achieved. During the fourth quarter of fiscal 2012, the Company did not receive a
purchase order for long lead-time materials. Therefore, the Company no longer expected to meet the specified
revenue targets for the LNX earn-out due to the long-lead time necessary to generate these revenues and has
determined it does not expect to pay the earn-out. As a result, the Company adjusted the fair value of the earn-out
contingent consideration and recorded $4,938 as a change in fair value of the liability in June 2012. The
adjustment is separately classified in the consolidated statements of operations as an offset to operating expenses.

69

D. Goodwill

The following table sets forth the changes in the carrying amount of goodwill for the years ended June 30,

2012 and 2011:

Balance at June 30, 2010, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill arising from the LNX acquisition . . . . . . . . . . . . .

$ 57,653
21,905

$ —
—

$ 57,653
21,905

Balance at June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill arising from the KOR acquisition . . . . . . . . . . . . .

79,558
33,913

—
19,150

79,558
53,063

Balance at June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$113,471

$19,150

$132,621

ACS

MFS

Total

In fiscal 2012, there were no triggering events, as defined by FASB ASC 350, which required an interim
goodwill impairment test. The Company performs its annual goodwill impairment test in the fourth quarter of
each fiscal year.

The Company determines its reporting units in accordance with FASB ASC 350, by assessing whether
discrete financial information is available and if management regularly reviews the operating results of that
component. Following this assessment, the Company determined that its reporting units are the same as its
operating segments, ACS and MFS. As of June 30, 2012, both ACS and MFS had goodwill balances, as such; the
annual impairment analysis was performed for each reporting unit in the fourth quarter of fiscal year 2012.

The Company tests goodwill for impairment by evaluating the fair value of the reporting unit as compared
to the book value. If the book value of the reporting unit exceeds its fair value, the implied fair value of goodwill
is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair
value, an impairment loss is recorded in an amount equal to that excess.

For fiscal 2011, this evaluation was performed in the Company’s fourth quarter. The evaluation was
performed consistent with prior years and relied on a discounted cash flow analysis, which was corroborated by
two market-based analyses: one evaluated guideline companies and another
reviewed comparable
transactions. For each analysis performed, the fair value of the reporting unit was deemed to be in excess of the
book value. As such, no impairment charge was recorded.

that

For the year ended June 30, 2012, the Company elected to adopt ASU 2011-08. Under ASU 2011-08, the
Company has the option to assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less
than its carrying amount to determine whether further impairment testing is necessary. Based on the results of the
qualitative review of goodwill performed as of June 30, 2012, the Company did not identify any indicators of
impairment. As such, no impairment charge was recorded for fiscal 2012.

In fiscal 2012, 2011 and 2010, goodwill was determined to be appropriately valued and no impairment

charge was recorded.

70

E. Acquired Intangible Assets

Acquired intangible assets consisted of the following:

JUNE 30, 2012
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing agreements and patents . . . . . . . . . . . . . . . . . . . . . . . . .
Completed technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

JUNE 30, 2011
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing agreements and patents . . . . . . . . . . . . . . . . . . . . . . . . .
Completed technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross
Carrying
Amount

$26,770
4,095
5,570
990
800
500

Accumulated
Amortization

$ (9,217)
(2,365)
(1,007)
(95)
(588)
(370)

Net
Carrying
Amount

$17,553
1,730
4,563
895
212
130

Weighted
Average
Useful
Life

6.9 years
5.4 years
5.3 years
6.0 years
2.0 years
5.0 years

$38,725

$(13,642)

$25,083

$18,300
4,045
2,900
800
500

$ (7,530)
(1,622)
(227)
(188)
(276)

$10,770
2,423
2,673
612
224

6.7 years
5.5 years
6.0 years
2.0 years
5.0 years

$26,545

$ (9,843)

$16,702

Estimated future amortization expense for acquired intangible assets remaining at June 30, 2012 is as

follows:

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total future amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ending
June 30,

$ 4,826
4,811
4,669
4,185
2,703
3,889

$25,083

The following table summarizes the preliminary estimated fair value of acquired intangible assets arising as
a result of the KOR acquisition. These assets are included in the Company’s gross and net carrying amounts as of
June 30, 2012.

Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Completed technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross
Carrying
Amount

$ 8,470
2,670
990

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,130

Accumulated
Amortization

$(592)
(297)
(95)

$(984)

Net
Carrying
Amount

$ 7,878
2,373
895

Weighted
Average
Useful
Life

7.2 years
4.5 years
6.0 years

$11,146

6.5 years

71

F. Fair Value of Financial Instruments

The Company measures at fair value certain financial assets and liabilities, including cash equivalents,
restricted cash, ARS and contingent consideration. FASB ASC 820, Fair Value Measurement and Disclosures,
specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are
observable or unobservable. Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the
following fair-value hierarchy:

Level 1—Quoted prices for identical instruments in active markets;

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-derived valuations in which all significant inputs
and significant value drivers are observable in active markets; and

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis

at June 30, 2012:

Assets:

Fair Value Measurements

June 30,
2012

Level 1

Level 2 Level 3

U.S. Treasury bills and money market funds . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 97,049
3,281

$ 97,049

$— $—
—

3,281 —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$100,330

$100,330

$— $—

The carrying values of cash and cash equivalents, including U.S. Treasury bills and money market funds,
accounts receivable and payable, and accrued liabilities approximate fair value due to the short-term maturities of
these assets and liabilities.

The Company determines the fair value of the contingent consideration related to the LNX acquisition based
on the probability of LNX attaining specific financial targets using an appropriate discount rate to present value
the liability. As of June 30, 2012, the Company determined that it is probable that the earn-out related to the LNX
acquisition would not be achieved (see Note C). As a result, the Company adjusted the fair value of the LNX
earn-out contingent consideration and recorded $4,938 as a change in fair value in June 2012. The adjustment is
separately classified on the statement of operations and is reflected as an offset to operating expenses. The
following table provides a rollforward of the fair value of the contingent consideration, whose fair values were
determined by Level 3 inputs:

Balance at June 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent consideration from the LNX acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of accretion expense in operating expenses . . . . . . . . . . . . . . . . . . . . . . . .

Balance at June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of accretion expense in operating expenses . . . . . . . . . . . . . . . . . . . . . . . .
Change in the fair value of the liability related to the LNX earn-out . . . . . . . . . . . . . . .

Fair Value

$ —
4,828
26

$ 4,854
84
(4,938)

Balance at June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

72

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a

recurring basis at June 30, 2011:

Fair Value Measurements

June 30,
2011

Level 1

Level 2

Level 3

Assets:

U.S. Treasury bills and money market funds . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$153,038
3,000

$153,038

$— $ —
—

3,000 —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$156,038

$156,038

$— $ —

Liabilities:

Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

4,854

$ — $— $4,854

G. Inventory

Inventory was comprised of the following:

June 30,

2012

2011

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,246
8,979
5,620

$ 7,314
7,554
3,672

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$25,845

$18,540

There are no amounts in inventory relating to contracts having production cycles longer than one year.
During fiscal 2012, the Company has purchased inventories which were nearing the end of their production life
and hence executed last time buy purchases with its vendors to be able to support certain products and the related
customers into the foreseeable future.

H. Restricted Cash

The Company had restricted cash balance of $3,281 and $3,000 as of June 30, 2012 and 2011, respectively.
The balance consisted of the following: (1) the Company has deposited $3,000 with its bank as collateral for the
landlord pursuant to the sale-lease back transaction entered in April 2007 for the Company’s headquarters in
Chelmsford, Massachusetts (see Note I). The balance is classified as restricted cash on the accompanying
consolidated balance sheet at June 30, 2012 and 2011, and is reflected in non-current assets: (2) the terms of one
of the Company’s contracts with a foreign customer requires a certificate of deposit to be held at a commercial
bank until performance on the contract has been completed. This certificate of deposit represents restricted cash
of approximately $281. The balance is classified as restricted cash on the accompanying consolidated balance
sheet at June 30, 2012 and is reflected in non-current assets.

73

I. Property and Equipment

Property and equipment consisted of the following:

Computer equipment and software . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and leasehold improvements . . . . . . . . . . . . . . . . . . . .

Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: accumulated depreciation and amortization . . . . . . . . . . .

Estimated Useful Lives
(Years)

2-4
5
lesser of estimated useful
life or lease term
5
5

June 30,

2012

2011

$ 51,372
7,110

$ 47,675
6,967

2,313
7,838
88

1,837
5,213
119

68,721
(52,792)

61,811
(47,291)

$ 15,929

$ 14,520

In fiscal 2012 and 2011, the Company retired $2,058 and $10,143, respectively, of fully depreciated
computer equipment and software assets that were no longer in use by the Company. The retirement was part of
an on-going effort by the Company to review and identify all assets that are still in use by the Company, and to
retire those that are not.

Depreciation and amortization expense related to property and equipment for the fiscal years ended June 30,

2012, 2011 and 2010 was $7,859, $6,364 and $5,147, respectively.

On April 20, 2007, the Company entered into a sales agreement and a lease agreement in connection with a
sale-leaseback of the Company’s headquarters in Chelmsford, Massachusetts. Pursuant to the agreements, the
Company sold all land, land improvements, buildings and building improvements related to the facilities and
leased back those assets. The term of the lease is ten years and includes two five year options to renew. Under the
provisions of sale-leaseback accounting, the transaction was considered a normal leaseback; thus the realized
gain of $11,569 was deferred and will be amortized to other income on a straight-line basis over the initial lease
term.

The unamortized deferred gain consisted of the following of which the current portion is included in accrued

expenses and the non-current portion is separately classified in the accompanying consolidated balance sheets:

Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,157
4,399

$1,157
5,556

Total unamortized deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,556

$6,713

June 30,

2012

2011

J. Product Warranty Accrual

All of the Company’s product sales generally include a 12 month standard hardware warranty. At the time
of product shipment, the Company accrues the estimated cost to repair or replace potentially defective products.
Estimated warranty costs are based upon prior actual warranty costs for substantially similar transactions and
other specifically identified warranty matters. Product warranty accrual is included as part of accrued expenses in
the accompanying consolidated balance sheets. The following table presents the changes in the Company’s
product warranty accrual.

74

Beginning balance at July 1,

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruals for warranties issued during the period . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

894
2,445
(1,979)

$ 1,186
970
(1,262)

$ 1,750
997
(1,561)

Ending balance at June 30, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,360

$

894 $ 1,186

Fiscal
2012

Fiscal
2011

Fiscal
2010

K. Debt

SENIOR SECURED CREDIT FACILITY

Original Loan Agreement

On February 12, 2010, the Company entered into a loan and security agreement (the “Loan Agreement”)
with Silicon Valley Bank (the “Lender”). The Loan Agreement provided for a $15,000 revolving line of credit
(the “Revolver”) and a $20,000 acquisition line (the “Term Loan”). The Revolver was available for borrowing
during a two-year period, with interest payable monthly and the principal due at the February 11, 2012 maturity
of the Revolver. The Term Loan was available for up to three separate borrowings, with total borrowings not to
exceed $20,000, until February 11, 2012. The Term Loan had monthly interest and principal payments through
the February 11, 2014 maturity of the Term Loan.

The interest rates include various rate options that are available to the Company. The rates are calculated
using a combination of conventional base rate measures plus a margin over those rates. The base rates consist of
LIBOR rates and prime rates. The actual rates will depend on the level of these underlying rates plus a margin
based on the Company’s leverage at the time of borrowing.

Borrowings are secured by a first-priority security interest in all of the Company’s domestic assets,
including intellectual property, but limited to 65% of the voting stock of foreign subsidiaries. The Company’s
MFS subsidiary is a guarantor and has granted a security interest in its assets in favor of the Lender. Following
the acquisition of LNX Corporation, LNX also became a guarantor. The Lender may require Mercury Computer
Systems Limited, the Company’s United Kingdom subsidiary, or Nihon Mercury Computer Systems, K.K., the
Company’s Japanese subsidiary, to provide guarantees in the future if the cash or assets of such subsidiary
exceed specified levels.

The Loan Agreement provided for conventional affirmative and negative covenants, including a minimum
quick ratio of 1.5 to 1.0. If the Company had less than $10,000 of cash equivalents in accounts with the Lender in
excess of the Company’s borrowings, the Company must also satisfy a $15,000 minimum trailing-four-quarter
cash-flow covenant. The minimum cash flow covenant is calculated as the Company’s trailing-four quarter
the Loan Agreement contains certain
adjusted EBITDA as defined in the Loan Agreement. In addition,
customary representations and warranties and limits the Company’s and its subsidiaries’ ability to incur liens,
dispose of assets, carry out certain mergers and acquisitions, make investments and capital expenditures and
defines events of default and limitations on the Company and its subsidiaries to incur additional debt.

Amended Loan Agreement

On March 30, 2011, the Company entered into an amendment to the Loan Agreement (as amended, the
“Amended Loan Agreement”) with the Lender. The amendment extended the term of the Revolver for an
additional two years, to February 11, 2014, terminated the $20,000 Term Loan under the original Loan
Agreement, increased the original $15,000 Revolver to $35,000. The amendment also included modifications to
the financial covenants as summarized below.

The Amended Loan Agreement provides for conventional affirmative and negative covenants, including a
minimum quick ratio of 1.0 to 1.0 and a $15,000 minimum trailing four quarter cash flow covenant through and
including June 30, 2012 (with $17,500 of minimum cash flow required thereafter).

75

There are no other changes to the Loan Agreement other than the modification described above.

Following the acquisition of KOR Electronics, both KOR and PDI became guarantors.

The Company has had no borrowings under the credit facility since inception and was in compliance with

all covenants in the Amended Loan Agreement as of June 30, 2012.

L. Commitments and Contingencies

LEGAL CLAIMS

The U.S. Department of Justice (“DOJ”) is conducting an investigation into the conduct of certain former
employees of PDI in the 2008-2009 time frame and has asserted that such conduct may have constituted a
violation of the Procurement Integrity Act and that civil penalties would apply to any such violations. PDI and its
former parent company, KOR, have been cooperating in the investigation. While the parties have engaged in
discussions and correspondence regarding this matter, no resolution has been reached and no litigation has
commenced. The Company is entitled to indemnity with respect to this matter pursuant to the terms of the
Merger Agreement, and based on this indemnity and the associated escrow arrangement, the matter is not
expected to have a material impact on the Company’s cash flows, results of operations, or financial condition.

In addition to the foregoing, the Company is subject to litigation, claims, investigations and audits arising
from time to time in the ordinary course of its business. Although legal proceedings are inherently unpredictable,
the Company believes that it has valid defenses with respect to those matters currently pending against it and
intends to defend itself vigorously. The outcome of these matters, individually and in the aggregate, is not
expected to have a material impact on the Company’s cash flows, results of operations, or financial position.

INDEMNIFICATION OBLIGATIONS

The Company’s standard product sales and license agreements entered into in the ordinary course of business
typically contain an indemnification provision pursuant to which the Company indemnifies, holds harmless, and
agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection
with any patent, copyright or other intellectual property infringement claim by any third party with respect to the
Company’s products. Such provisions generally survive termination or expiration of the agreements. The potential
amount of future payments the Company could be required to make under these indemnification provisions is, in
some instances, unlimited.

PURCHASE COMMITMENTS

As of June 30, 2012, the Company has entered into non-cancelable purchase commitments for certain
inventory components and services used in its normal operations. The purchase commitments covered by these
agreements are for less than one year and aggregate to $14,002.

76

LEASE COMMITMENTS

improvement allowances and rent holidays,

The Company leases certain facilities, machinery and equipment under various cancelable and
non-cancelable operating leases that expire at various dates through fiscal 2017. The leases contain various
renewal options. Rental charges are subject to escalation for increases in certain operating costs of the lessor. For
tenant
liability on the
consolidated balance sheets and amortizes the deferred rent over the terms of the leases as reductions to rent
expense on the consolidated statements of operations. Rental expense during the fiscal years ended June 30,
2012, 2011 and 2010 was $3,803, $3,369 and $3,613, respectively. Minimum lease payments under the
Company’s non-cancelable operating leases are as follows:

the Company records a deferred rent

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,905
3,461
2,777
2,662
2,231

Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$15,036

Year Ending
June 30,

M. Shareholders’ Equity

FOLLOW-ON PUBLIC STOCK OFFERING

On February 16, 2011, the Company completed a follow-on public stock offering of 5,578 shares of
common stock, which were sold at a price to the public of $17.75. The follow-on public stock offering resulted in
$93,605 of net proceeds to the Company. The underwriting discount of $4,950 and other expenses of $446
related to the follow-on public stock offering were recorded as an offset to additional paid-in-capital.

PREFERRED STOCK

The Company is authorized to issue 1,000 shares of preferred stock with a par value of $0.01 per share.

SHAREHOLDER RIGHTS PLAN

The Company has adopted a Shareholder Rights Plan, the purpose of which is, among other things, to
enhance the Board’s ability to protect the shareholder interests and to ensure that shareholders receive fair
treatment in the event any coercive takeover attempt of the Company is made in the future. The following
summary description of the Shareholder Rights Plan does not purport to be complete and is qualified in its
entirety by reference to the Company’s Shareholder Rights Plan, which has been previously filed with the
Securities and Exchange Commission as an exhibit to a Registration Statement on Form 8-A.

In connection with the adoption of the Shareholder Rights Plan, the Board of Directors of the Company
declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of
common stock to shareholders of record as of the close of business on December 23, 2005. The Rights currently
are not exercisable and are attached to and trade with the outstanding shares of common stock. Under the
Shareholder Rights Plan, the Rights become exercisable if a person becomes an “acquiring person” by acquiring
15% or more of the outstanding shares of common stock or if a person commences a tender offer that would
result in that person owning 15% or more of the common stock. If a person becomes an “acquiring person,” each
holder of a Right (other than the acquiring person) would be entitled to purchase, at the then-current exercise
price, such number of shares of the Company’s preferred stock which are equivalent to shares of common stock
having a value of twice the exercise price of the Right. If the Company is acquired in a merger or other business
combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the
then-current exercise price, shares of the acquiring company’s common stock having a value of twice the
exercise price of the Right.

77

STOCK NET SETTLEMENT PROGRAM

The Company may net settle shares in connection with the surrender of shares to cover the minimum taxes
on vesting of restricted stock. During fiscal 2010, 42 shares were net settled in such transactions for a total cost
of $433. Effective May 1, 2010, the Company discontinued the net share settlement practice for settling restricted
stock awards.

N. Stock-Based Compensation

STOCK OPTION PLANS

The number of shares authorized for issuance under the Company’s 2005 Stock Incentive Plan , as amended
and restated (the “2005 Plan”), is 6,092 shares, including a 1,000 share increase approved by the Company’s
shareholders on October 21, 2011. The 2005 Plan will be increased by any future cancellations, forfeitures or
terminations (other than by exercise) under the Company’s 1997 Stock Option Plan (the “1997 Plan”). The 2005
Plan provides for the grant of non-qualified and incentive stock options, restricted stock, stock appreciation rights
and deferred stock awards to employees and non-employees. All stock options are granted with an exercise price
of not less than 100% of the fair value of the Company’s common stock at the date of grant and the options
generally have a term of seven years. There were 2,675 shares available for future grant under the 2005 Plan at
June 30, 2012.

The number of shares authorized for issuance under the 1997 Plan was 8,650 shares, of which 100 shares
could be issued pursuant to restricted stock grants. The 1997 Plan provided for the grant of non-qualified and
incentive stock options and restricted stock to employees and non-employees. All stock options were granted
with an exercise price of not less than 100% of the fair value of the Company’s common stock at the date of
grant. The options typically vest over periods of zero to four years and have a maximum term of 10 years.
Following shareholder approval of the 2005 Plan on November 14, 2005, the Company’s Board of Directors
determined that no further grants of stock options or other awards would be made under the 1997 Plan, and the
1997 Plan subsequently expired in June 2007. The foregoing does not affect any outstanding awards under the
1997 Plan, which remain in full force and effect in accordance with their terms.

EMPLOYEE STOCK PURCHASE PLAN

The number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as
amended and restated (“ESPP”), is 1,400 shares, including a 300 share increase approved by the Company’s
shareholders on October 21, 2011. Under the ESPP, rights are granted to purchase shares of common stock at
85% of the lesser of the market value of such shares at either the beginning or the end of each six-month offering
period. The ESPP permits employees to purchase common stock through payroll deductions, which may not
exceed 10% of an employee’s compensation as defined in the ESPP. The number of shares issued under the
ESPP during fiscal years 2012, 2011 and 2010 was 104, 89 and 94, respectively. Shares available for future
purchase under the ESPP totaled 360 at June 30, 2012.

78

STOCK OPTION AND AWARD ACTIVITY

The following table summarizes activity of the Company’s stock option plans since June 30, 2010:

Options Outstanding

Number of
Shares

Weighted Average
Exercise Price

Weighted Average
Remaining
Contractual Term
(Years)

Aggregate
Intrinsic Value as
of 6/30/2012

Outstanding at June 30, 2010 . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at June 30, 2011 . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at June 30, 2012 . . . . . . . . . . . .

2,612
77
(315)
(81)

2,293
—
(72)
(36)

2,185

Vested and expected to vest at June 30,

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at June 30, 2012 . . . . . . . . . . . . .

2,184
2,102

$13.70
13.70
8.25
16.41

$14.35
—
6.48
23.70

$14.46

$14.46
$14.66

4.69

3.88

2.89

2.88
2.85

$3,489

$3,486
$3,173

The intrinsic value of the options exercised during fiscal year 2012, 2011 and 2010 was $534, $2,979 and
$532, respectively. Non-vested stock options are subject to the risk of forfeiture until the fulfillment of specified
conditions. As of June 30, 2012, there was $110 of total unrecognized compensation cost related to non-vested
options granted under the Company’s stock plans that is expected to be recognized over a weighted-average
period of 0.3 years from June 30, 2012. As of June 30, 2011, there was $1,218 of total unrecognized
compensation cost related to non-vested options granted under the Company’s stock plans that was expected to
be recognized over a weighted-average period of 0.9 years from June 30, 2011.

The following table summarizes the status of the Company’s non-vested restricted stock awards since

June 30, 2010:

Non-vested Restricted Stock Awards

Number of
Shares

Weighted Average
Grant Date
Fair Value

Outstanding at June 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

828
738
(279)
(100)

1,187
585
(409)
(88)

1,275

$ 9.44
12.47
9.42
10.57

$11.23
14.30
10.62
13.14

$12.71

An aggregate of 79 shares of restricted stock that were granted to employees of LNX Corporation joining
the Company in connection with the acquisition of LNX in January 2011 are included in the granted figure in the
table above.

An aggregate of 144 shares of restricted stock that were granted to employees of KOR and PDI joining the
Company in connection with the acquisition of KOR in December 2011 are included in the granted figure in the
table above.

79

The total fair value of restricted stock awards vested during fiscal year 2012, 2011 and 2010 was $5,848,

$4,175 and $3,485, respectively.

Non-vested restricted stock awards are subject to the risk of forfeiture until the fulfillment of specified
conditions. As of June 30, 2012,
there was $10,515 of total unrecognized compensation cost related to
non-vested restricted stock awards granted under the Company’s stock plans that is expected to be recognized
over a weighted-average period of 2.4 years from June 30, 2012. As of June 30, 2011, there was $10,400 of total
unrecognized compensation cost related to non-vested restricted stock awards granted under the Company’s
stock plans that is expected to be recognized over a weighted-average period of 2.6 years from June 30, 2011.

STOCK-BASED COMPENSATION EXPENSE AND ASSUMPTIONS

The Company recognized the full expense of its share-based payment plans in the consolidated statements
of operations for the fiscal years 2012, 2011 and 2010 in accordance with FASB ASC 718 and did not capitalize
any such costs on the consolidated balance sheets, as such costs that qualified for capitalization were not
material. Under the fair value recognition provisions of FASB ASC 718, stock-based compensation cost is
measured at the grant date based on the value of the award and is recognized as expense over the service period.
The following table presents share-based compensation expenses from continuing operations included in the
Company’s consolidated statement of operations:

Year Ended June 30,

2012

2011

2010

Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

349
5,309
958

$

263
4,609
708

$

251
3,145
620

Share-based compensation expense before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,616
(2,357)

5,580
(1,966)

4,016
(1,499)

Share-based compensation expense, net of income taxes . . . . . . . . . . . . . . . . . . . . .

$ 4,259

$ 3,614 $ 2,517

There were no options granted during fiscal year 2012. The following table sets forth the weighted-average

key assumptions and fair value results for stock options granted during fiscal years 2011 and 2010:

Years Ended June 30,

2012

2011

2010

Weighted-average fair value of options granted . . . . . . . . . . . . . . .
Option life(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock volatility(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$—
—
—
—
—

$
7.25
5.0 years
1.27%
63%
0%

$

7.17
5.0 years
2.38%
87%
0%

(1) The option life was determined based upon historical option activity.
(2) The risk-free interest rate for each grant is equal to the U.S. Treasury yield curve in effect at the time of

grant for instruments with a similar expected life.

(3) The stock volatility for each grant is measured using the weighted average of historical daily price changes
of the Company’s common stock over the most recent period equal to the expected option life of the grant,
the historical short-term trend of the option and other factors, such as expected changes in volatility arising
from planned changes in the Company’s business operations.

80

O. Operating Segment, Significant Customers and Geographic Information

Operating segments are defined as components of an enterprise evaluated regularly by the Company’s
senior management in deciding how to allocate resources and assess performance. The Company is presently
organized in two operating segments. These reportable segments were determined based upon the nature of the
products offered to customers,
the market characteristics of each operating segment and the Company’s
management structure:

• Advanced Computing Solutions: this operating segment is focused on specialized, high-performance
embedded, real-time digital signal and image processing solutions that encompass signal acquisition,
including microwave front-end, digitalization, digital signal processing, exploitation processing, high
capacity digital storage and communications, targeted to key market segments, including defense,
communications and other commercial applications. With the addition of KOR, the ACS segment also
designs and develops DRFM units for a variety of modern EW applications, as well as radar
environment simulation and test systems for defense applications.

• Mercury Federal Systems: this operating segment is focused on services and support work with the
Department of Defense and federal intelligence and homeland security agencies, including designing,
engineering, and deploying new ISR capabilities to address present and emerging threats to U.S. forces.
With the addition of PDI, the MFS segment also provides sophisticated analysis and exploitation,
multi-sensor data fusion and enrichment, and data processing services for the U.S.
intelligence
community.

The accounting policies of the reportable segments are the same as those described in “Note B: Summary of
Significant Accounting Policies.” Beginning with the three months ended March 31, 2012, the profitability
measure employed by the Company and its chief operating decision maker (“CODM”) as the basis for allocating
resources to segments and assessing segment performance is adjusted EBITDA, The Company believes the
adjusted EBITDA financial measure assists in providing an enhanced understanding of its underlying operational
measures to manage its business, to evaluate its performance compared to prior periods and the marketplace, and
to establish operational goals. The Company believes that adjusted EBITDA provides a more comprehensive
basis for decision making and assessing segment performance than income (loss) from operations prior to stock
compensation expense which was used in prior reporting periods.

81

Adjusted EBITDA is defined as earnings from continuing operations before interest income and expense,
income taxes, depreciation, amortization of acquired intangible assets, restructuring, impairment of long-lived
assets, acquisition costs and other related expenses, fair value adjustments from purchase accounting and stock-
based compensation costs. Prior year’s amounts have been presented to reflect the current profitability measures
for comparative purposes. Additionally, asset information by reportable segment is not reported because the
Company and its CODM utilize consolidated asset information when making business decisions. The following
is a summary of the performance of the Company’s operations by reportable segment:

ACS

MFS

Eliminations

Total

YEAR ENDED JUNE 30, 2012

Net revenues to unaffiliated customers . . . . . . . . . . . . . . . . . .
Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$215,899
12,208

$28,670
3

$

360
(12,211)

$244,929
—

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$228,107

$28,673

$(11,851)

$244,929

Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 43,802

$ 4,913

YEAR ENDED JUNE 30, 2011

Net revenues to unaffiliated customers . . . . . . . . . . . . . . . . . .
Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$217,423
6,260

$11,415
52

$

$

159

$ 48,874

(128)
(6,312)

$228,710
—

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$223,683

$11,467

$ (6,440)

$228,710

Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 42,304

$ (914)

YEAR ENDED JUNE 30, 2010

Net revenues to unaffiliated customers . . . . . . . . . . . . . . . . . .
Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$188,967
4,779

$10,735
336

$

$

(507)

$ 40,883

128
(5,115)

$199,830
—

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$193,746

$11,071

$ (4,987)

$199,830

Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 30,454

$ (641)

$

43

$ 29,856

The following table reconciles the Company’s net income, the most directly comparable GAAP financial

measure, to its adjusted EBITDA:

(In thousands)

Year Ended June 30,

2012

2011

2010

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of income taxes . . . . . . . . .

$22,619
—

$18,442
(65)

$28,358
289

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs and other related expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustments from purchase accounting . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22,619
27
9,152
7,859
3,799
2,821
—
1,219
(5,238)
6,616

18,507
45
8,060
6,364
1,984
—
150
412
(219)
5,580

28,069
(151)
(9,377)
5,147
1,710
231
211
—
—
4,016

Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$48,874

$40,883

$29,856

82

The geographic distribution of the Company’s revenues and long-lived assets from continuing operations is

summarized as follows:

YEAR ENDED JUNE 30, 2012

US

Europe

Asia
Pacific

Eliminations

Total

Net revenues to unaffiliated customers . . . . . . . . . .
Inter-geographic revenues . . . . . . . . . . . . . . . . . . . .

$235,292
5,511

$ 4,983
747

$4,654
175

$ — $244,929
—

(6,433)

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$240,803

$ 5,730

$4,829

$ (6,433)

$244,929

Identifiable long-lived assets . . . . . . . . . . . . . . . . . .

$ 15,895

$

32

$

2

$ — $ 15,929

YEAR ENDED JUNE 30, 2011

Net revenues to unaffiliated customers . . . . . . . . . .
Inter-geographic revenues . . . . . . . . . . . . . . . . . . . .

$219,435
5,637

$ 3,665
2,277

$5,610
243

$ — $228,710
—

(8,157)

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$225,072

$ 5,942

$5,853

$ (8,157)

$228,710

Identifiable long-lived assets . . . . . . . . . . . . . . . . . .

$ 15,390

$

24

$ 704

$ — $ 16,118

YEAR ENDED JUNE 30, 2010

Net revenues to unaffiliated customers . . . . . . . . . .
Inter-geographic revenues . . . . . . . . . . . . . . . . . . . .

$180,103
13,916

$ 9,960
789

$9,767
198

$ — $199,830
—

(14,903)

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$194,019

$10,749

$9,965

$(14,903)

$199,830

Identifiable long-lived assets . . . . . . . . . . . . . . . . . .

$ 13,384

$

21

$ 716

$ — $ 14,121

Foreign revenue is based on the country in which the Company’s legal subsidiary is domiciled. Identifiable

long-lived assets exclude goodwill and intangible assets.

Customers comprising 10% or more of the Company’s revenues for the fiscal years shown below are as

follows:

Raytheon Company (ACS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northrop Grumman Corporation (ACS)
Lockheed Martin Corporation (ACS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended
June 30,

2012

2011

2010

22%
17
15

54%

17%
21%
13

51%

20%
*
17

37%

Although the Company typically has several customers from which it derives 10% or more of its revenue,
the sales to each of these customers are spread across multiple programs and platforms. For the fiscal years ended
June 30, 2012 and 2010, the AEGIS Program individually comprised 11% and 15% of the Company’s revenues,
respectively. For the fiscal year ended June 30, 2011, no single program comprised 10% or more of the
Company’s revenues.

83

P. Income Taxes

The components of income before income taxes and income tax expense (benefit) were as follows:

Year Ended June 30,

2012

2011

2010

Income from continuing operations before income taxes:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$31,277
494

$26,072
495

$18,714
(22)

$31,771

$26,567

$18,692

Income tax expense (benefit) from continuing operations:
Federal:

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,591
(2,582)

$ 4,974
1,992

$ (356)
(8,286)

$ 8,009

$ 6,966

$ (8,642)

State:

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,401
(335)

Foreign:

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,066

$

$

77
—

77

$

$

$

$

855
48

903

161
30

191

$

98
(711)

$ (613)

$ (122)
—

$ (122)

$ 9,152

$ 8,060

$ (9,377)

The following is the reconciliation between the statutory federal income tax rate and the Company’s

effective income tax rate from continuing operations:

Income taxes at federal statutory rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax, net of federal tax benefit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic manufacturing deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deemed repatriation of foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRS audit adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in the fair value of the liability related to the LNX earn-out
. . . . . . . . . .
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended June 30,

2012

2011

2010

35.0%
2.6
(4.2)
(3.0)
—
1.0
—
—
(5.4)
1.3
2.2
(0.7)

28.8%

35.0%
2.2
(6.9)
(2.6)
—
1.6
—
—
—
0.6
1.7
(1.3)

35.0%
0.5
(5.9)
—
(1.4)
1.8
(1.5)
0.4
—
—
(79.8)
0.7

30.3% (50.2)%

84

The components of the Company’s net deferred tax assets (liabilities) were as follows:

June 30,

2012

2011

Deferred tax assets:

Inventory valuation and receivable allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state research and development tax credit carryforwards . . . . . . . . . . . . . .
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale-leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repatriation of foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other temporary differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,788
1,367
6,036
8,569
—
2,116
919
—
1,333

$ 4,189
1,424
5,565
8,716
900
2,556
328
76
594

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,128
(8,682)

24,348
(7,973)

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,446

16,375

Deferred tax liabilities:

Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,488)
(3,995)
(8,507)

(4,776)
(2,452)
(5,346)

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(15,990)

(12,574)

Net deferred tax (liabilities) assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

456

$ 3,801

At June 30, 2012, the Company evaluated the need for a valuation allowance on deferred tax assets. In
assessing whether the deferred tax assets are realizable, management considered whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. The Company continues to conclude that it was “more likely than not”, that most
domestic deferred tax assets would be realizable based on the financial performance in fiscal year 2012,
projected future taxable income and the reversal of existing deferred tax liabilities.

The Company continues to record a full valuation allowance on Massachusetts research and development
(“R&D”) and investment tax credits as of June 30, 2012 as management continues to believe that it is not more
likely than not that these deferred tax assets would be realized.

The Company had state research and development credit carryforwards of $12,813, which will expire 2018
through 2027. The Company also had state investment tax credits carryforwards of $124 that will expire in 2015.
As of June 30, 2012, the Company also had approximately $399 in foreign operating loss carryforwards.

Upon consideration of changing business conditions and cash position in its foreign subsidiaries,
management has determined that it would no longer need to indefinitely reinvest the earnings of certain foreign
subsidiaries. Therefore, the Company has accrued deferred taxes in association with the $1,200 in undistributed
earnings and profits.

The Company files income tax returns in all jurisdictions in which it operates. The Company has established
reserves to provide for additional income taxes that may be due in future years as these previously filed tax
returns are audited. These reserves have been established based upon management’s assessment as to the
potential exposures. All tax reserves are analyzed quarterly and adjustments are made as events occur and
warrant modification.

85

The changes in the Company’s reserves for unrecognized income tax benefits are summarized as follows:

Unrecognized tax benefits, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .
Increases for previously recognized positions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements of previously recognized positions . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases for previously recognized positions . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases for currently recognized positions . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended June 30,

2012

2011

$1,831
716
—
(84)
179

$1,856
27
(59)
(229)
236

Unrecognized tax benefits, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,642

$1,831

The $2,642 of unrecognized tax benefits as of June 30, 2012, if released, would reduce income tax expense.

The Company’s major tax jurisdiction is the U.S. and the open tax years are 2009 through 2011.

The Company expects that there will not be any material changes in its reserves for unrecognized tax

benefits within the next 12 months. Currently there are no significant tax audits underway.

Q. Restructuring Plan

In fiscal 2012, the Company announced a restructuring plan (“2012 Plan”) affecting both the ACS and MFS
business segments. The 2012 Plan primarily consisted of involuntary separation costs related to the reduction in
force which eliminated 41 positions largely in engineering and manufacturing functions; and facility costs related
to outsourcing of certain manufacturing activities at the Company’s Huntsville, Alabama site. The 2012 Plan for
which expense of $2,821 was recorded in fiscal 2012 was implemented to cope with the near term uncertainties
in the defense industry and improve the Company’s overall business scalability. Future restructuring expenses of
approximately $737 associated with the 2012 Plan are expected in fiscal 2013 as the Company starts transitioning
the manufacturing activities formerly conducted at the Huntsville, Alabama facility. This restructuring expense
will affect the ACS business segment.

All of the restructuring charges are classified as operating expenses in the consolidated statements of
operations and any remaining obligations are expected to be paid within the next twelve months. The remaining
restructuring liability is classified as accrued expenses in the consolidated balance sheets.

The following table presents the detail of expenses by business segment for the Company’s restructuring

plans:

ACS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Severance

Facilities Other

Total

2,406
109

2,515
(2)

—
—

—
—

306
—

306
(121)

2,712
109

2,821
(123)

Restructuring liability at June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,513

$—

$ 185

$2,698

86

R. Employee Benefit Plans

The Company maintains a qualified 401(k) plan (the “401(k) Plan”) for its U.S. employees. The 401(k) Plan
covers U.S. employees who have attained the age of 21. During fiscal 2012, 2011 and 2010, the Company
matched employee contributions up to 3% of eligible compensation. The Company may also make optional
contributions to the plan for any plan year at its discretion. Expense recognized by the Company for matching
contributions related to the 401(k) plan was $2,196, $1,762 and $1,569 during the fiscal years ended June 30,
2012, 2011 and 2010, respectively.

S. Related Party Transactions

In July 2008, the Company and our former CEO, James Bertelli, entered into an agreement for consulting
services through June 30, 2010. The consideration for these services totaled $190 and was paid out over the
service period. As of June 30, 2010, the Company had made all payments for consulting services under this
agreement. Additionally, in July 2008, the Company entered into a five year non-compete agreement with
Mr. Bertelli. This agreement, which is carried as an intangible asset on the Company’s balance sheet, was valued
at $500 and is being amortized over the life of the agreement. As of December 31, 2010, the Company had made
all payments under this non-compete agreement.

T. Subsequent Events

On June 8, 2012, the Company and Wildcat Merger Sub Inc., a newly formed, wholly-owned subsidiary of
the Company (the “Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
Micronetics, Inc. (“Micronetics”). On August 8, 2012, the transaction closed with the Merger Sub merging with
and into Micronetics with Micronetics continuing as the surviving company and wholly-owned subsidiary of the
Company.

Headquartered in Hudson, NH, Micronetics is a leading designer and manufacturer of microwave and radio

frequency (RF) subsystems and components for defense and commercial customers.

Pursuant to the terms of the Merger Agreement, at the closing of the merger on August 8, 2012, each share
of common stock of Micronetics issued and outstanding immediately prior to the closing was converted into the
right to receive $14.80 in cash, without interest (the “Merger Consideration”). All outstanding options to acquire
shares of Micronetics common stock that were vested as of the closing were cancelled and the holders of such
options are entitled to receive an amount of cash equal to the product of the total number of shares previously
subject to such vested options and the excess of the Merger Consideration over the exercise price per share. All
outstanding Micronetics stock options that were unvested at the closing were assumed by Mercury. Mercury
funded the acquisition with cash on hand.

The transaction will be accounted for using the acquisition method of accounting which requires, among
other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition
date. The acquisition related disclosures required by FASB ASC 805 cannot be made as the initial accounting for
the business transaction is incomplete. Key financial data such as the determination of the fair value of the assets
acquired and liabilities assumed is not yet available.

87

SUPPLEMENTARY INFORMATION (UNAUDITED)

The following sets forth certain unaudited consolidated quarterly statements of operations data for each of
the Company’s last eight quarters. In management’s opinion, this quarterly information reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation for the periods presented. Such
quarterly results are not necessarily indicative of future results of operations and should be read in conjunction
with the audited consolidated financial statements of the Company and the notes thereto included elsewhere
herein.

2012 (In thousands, except per share data)

1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . .
Income from operations before income taxes . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net earnings per common share:
Basic net earnings per share:

Income from continuing operations . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net earnings per share:

Income from continuing operations . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$49,122
$29,916
$ 3,565
$ 3,967
$ 1,314
$ 2,653
$ 2,653

$
$

$
$

0.09
0.09

0.09
0.09

$67,959
$40,913
$13,485
$13,873
$ 4,828
$ 9,045
$ 9,045

$
$

$
$

0.31
0.31

0.30
0.30

$66,989
$35,063
$ 7,106
$ 7,625
$ 2,380
$ 5,245
$ 5,245

$
$

$
$

0.18
0.18

0.17
0.17

$60,859
$30,264
$ 5,956
$ 6,306
$
630
$ 5,676
$ 5,676

$
$

$
$

0.19
0.19

0.19
0.19

2011 (In thousands, except per share data)

1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . .
Income from operations before income taxes . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net earnings per common share:
Basic net earnings per share:

Income from continuing operations . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net earnings per share:

Income from continuing operations* . . . . . . . .
Net income* . . . . . . . . . . . . . . . . . . . . . . . . . . .

$52,108
$30,660
$ 5,245
$ 5,759
$ 2,077
$ 3,682
$ 3,630

$
$

$
$

0.16
0.16

0.16
0.15

$55,513
$31,640
$ 6,518
$ 6,879
$ 1,696
$ 5,183
$ 5,183

$
$

$
$

0.22
0.22

0.22
0.22

$59,855
$32,882
$ 6,999
$ 7,385
$ 2,007
$ 5,378
$ 5,378

$
$

$
$

0.20
0.20

0.20
0.20

$61,234
$34,717
$ 6,223
$ 6,544
$ 2,280
$ 4,264
$ 4,251

$
$

$
$

0.15
0.15

0.14
0.14

* Due to the effects of rounding, the sum of the four quarters does not equal the annual total.

88

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES

We conducted an evaluation as of June 30, 2012 under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer
and principal financial officer, respectively), and concluded that our disclosure controls and procedures (as
defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, the
“Exchange Act”) were effective as of June 30, 2012 to ensure that the information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and that it is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.

(b) INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that
our internal control over financial reporting or our internal controls will prevent or detect all errors and all fraud.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the control system’s objectives will be met. The design of any system of controls is based in part
on certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.

(c) MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Under the supervision of the Chief Executive Officer and Chief Financial Officer, management
conducted an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2012
based on the framework in Internal Control-Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission. As a result of this assessment, management concluded that our
internal control over financial reporting was effective as of June 30, 2012. The effectiveness of our internal
control over financial reporting as of June 30, 2012 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in its report.

The audited consolidated financial statements of the Company include the results of acquired KOR
Electronics and its wholly-owned subsidiary, Paragon Dynamics, Inc. (“acquired business”). Upon consideration
of the date of the acquisition and the time constraints under which our management’s assessment would have to
be made, management determined that it would not be possible to conduct a sufficiently comprehensive
assessment of the acquired business’ controls over financial reporting as allowable under section 404 of the
Sarbanes-Oxley Act of 2002. Accordingly, these operations have been excluded from the scope of management’s
assessment of internal controls. The Company’s consolidated financial statements reflect revenues and total
assets from the acquired business of approximately 8 percent and 22 percent (of which 17 percent represented
goodwill and intangible assets included within the scope of the Company’s assessment), respectively, as of
June 30, 2012.

89

(d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fourth quarter of fiscal 2012 identified in connection with our
Chief Executive Officer’s and Chief Financial Officer’s evaluation that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

90

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated herein by reference to our Proxy Statement for our
2012 Annual Meeting of Shareholders (the “Shareholders Meeting”), except that information required by this
item concerning our executive officers appears in Part I, Item 4.1 of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to our Proxy Statement for the

Shareholders Meeting.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to our Proxy Statement for the

Shareholders Meeting.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

The information required by this item is incorporated herein by reference to our Proxy Statement for the

Shareholders Meeting.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to our Proxy Statement for the

Shareholders Meeting.

91

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

The financial statements, schedule, and exhibits listed below are included in or incorporated by reference as

part of this report:

1.

Financial statements:

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2012 and 2011
Consolidated Statements of Operations and Comprehensive Income for the fiscal years ended June 30,
2012, 2011 and 2010
Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 30, 2012, 2011 and
2010
Consolidated Statements of Cash Flows for the years ended June 30, 2012, 2011 and 2010
Notes to Consolidated Financial Statements

2.

Financial Statement Schedule:

II. Valuation and Qualifying Accounts

92

MERCURY COMPUTER SYSTEMS, INC.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED JUNE 30, 2012, 2011 AND 2010
(In thousands)

Allowance for Doubtful Accounts

BALANCE
AT
BEGINNING
OF PERIOD

ADDITIONS REVERSALS

WRITE-
OFFS

BALANCE
AT END OF
PERIOD

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 17
$163
$425

$61
$ 9
$33

$ —
$ —
$ —

$ 73
$155
$295

$ 5
$ 17
$163

Deferred Tax Asset Valuation Allowance

BALANCE
AT
BEGINNING
OF PERIOD

CHARGED
TO COSTS &
EXPENSES

CHARGED
TO OTHER
ACCOUNTS DEDUCTIONS

BALANCE
AT END OF
PERIOD

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 7,973
$ 7,555
$22,394

709
$
$
418
$(14,839)

$ —
$ —
$ —

$ —
$ —
$ —

$8,682
$7,973
$7,555

3.

Exhibits:

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index on page 78, which is

incorporated herein by reference.

93

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in
Chelmsford, Massachusetts, on August 22, 2012.

MERCURY COMPUTER SYSTEMS, INC.

By

/s/ KEVIN M. BISSON

Kevin M. Bisson
SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, AND TREASURER
[PRINCIPAL FINANCIAL OFFICER]

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by

the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title(s)

Date

/s/ MARK ASLETT

Mark Aslett

/S/ KEVIN M. BISSON

Kevin M. Bisson

/S/ CHARLES A. SPEICHER

Charles A. Speicher

/S/

JAMES K. BASS
James K. Bass

President, Chief Executive Officer
and Director (principal executive
officer)

Senior Vice President, Chief
Financial Officer, and Treasurer
(principal financial officer)

Vice President, Controller, and
Chief Accounting Officer
(principal accounting officer)

August 22, 2012

August 22, 2012

August 22, 2012

Director

August 22, 2012

/S/ GEORGE W. CHAMILLARD

Director

August 22, 2012

George W. Chamillard

/S/ MICHAEL A. DANIELS

Director

August 22, 2012

Michael A. Daniels

/S/ GEORGE K. MUELLNER

Director

August 22, 2012

George K. Muellner

/S/ WILLIAM K. O’BRIEN

Director

August 22, 2012

William K. O’Brien

/S/ LEE C. STEELE

Director

August 22, 2012

Lee C. Steele

/S/ VINCENT VITTO

Vincent Vitto

Chairman of the Board of
Directors

August 22, 2012

94

ITEM NO.

DESCRIPTION OF EXHIBIT

EXHIBIT INDEX

1.1

3.1.1

3.1.2

3.1.3

3.2

4.1

4.2

10.1.1*

10.1.2*

10.1.3*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8.1*

10.8.2*

Underwriting Agreement, dated February 10, 2011, among the Company and Jefferies &
Company, Inc. and Lazard Capital Markets LLC as representatives of the several underwriters
named therein (incorporated herein by reference to Exhibit 1.1 of the Company’s current report on
Form 8-K filed on February 11, 2011)
Articles of Organization (incorporated herein by reference to Exhibit 3.1.1 of the Company’s
annual report on Form 10-K for the fiscal year ended June 30, 2009)
Articles of Amendment (incorporated herein by reference to Exhibit 3.1.2 of the Company’s
annual report on Form 10-K for the fiscal year ended June 30, 2010)
Articles of Amendment (incorporated herein by reference to Exhibit 1 of the Company’s
registration statement on Form 8-A filed on December 15, 2005)
Bylaws, amended and restated effective as of May 4, 2011 (incorporated herein by reference to
Exhibit 3.2 of the Company’s quarterly report on Form 10-Q for the quarter ended March 31,
2011)
Form of Stock Certificate (incorporated herein by reference to Exhibit 4.1 of the Company’s
Registration Statement on Form S-1 (File No. 333-41139))
Shareholder Rights Agreement, dated as of December 14, 2005, between the Company and
Computershare Trust Company, N.A. (formerly known as EquiServe Trust Company, N.A.)
(incorporated herein by reference to Exhibit 2 of the Company’s registration statement on
Form 8-A filed on December 15, 2005)
1997 Stock Option Plan, as amended and restated (incorporated herein by reference to
Exhibit 10.1.1 of the Company’s annual report on Form 10-K for the fiscal year ended June 30,
2010)
Form of Stock Option Agreement under the 1997 Stock Option Plan (incorporated herein by
reference to Exhibit 10.1.2 of the Company’s annual report on Form 10-K for the fiscal year ended
June 30, 2010)
Form of Restricted Stock Award Agreement under the 1997 Stock Option Plan (incorporated
herein by reference to Exhibit 10.1.3 of the Company’s annual report on Form 10-K for the fiscal
year ended June 30, 2010)
1998 Stock Option Plan (incorporated herein by reference to Exhibit 10.2 of the Company’s annual
report on Form 10-K for the fiscal year ended June 30, 2009)
1997 Employee Stock Purchase Plan, as amended and restated (incorporated herein by reference to
Appendix B to the Company’s definitive proxy statement filed on September 19, 2011)
Form of Indemnification Agreement between the Company and each of its current directors
(incorporated herein by reference to Exhibit 10.4 of the Company’s annual report on Form 10-K
for the fiscal year ended June 30, 2009)
Annual Executive Bonus Plan – Corporate Financial Performance (incorporated herein by
reference to Exhibit 10.6 of the Company’s annual report on Form 10-K for the fiscal year ended
June 30, 2009)
Annual Executive Bonus Plan – Individual Performance (incorporated herein by reference to
Exhibit 10.7 of the Company’s annual report on Form 10-K for the fiscal year ended June 30,
2009)
2005 Stock Incentive Plan, as amended and restated (incorporated herein by reference to
Appendix A to the Company’s definitive proxy statement filed on September 19, 2011)
Form of Stock Option Agreement under the 2005 Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.8.1 of the Company’s annual report on Form 10-K for the fiscal year ended
June 30, 2011)
Form of Restricted Stock Award Agreement under the 2005 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.8.2 of the Company’s annual report on Form 10-K for the fiscal
year ended June 30, 2011)

95

ITEM NO.

DESCRIPTION OF EXHIBIT

10.8.3*

10.8.4*

10.9.1*

10.9.2*

10.10*†
10.11.1*

10.11.2*

10.11.3*

10.12.1*

10.12.2*

10.13*

10.14*

10.15††

10.16††
10.17

10.18

10.19

10.20

Form of Deferred Stock Award Agreement under the 2005 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.8.3 of the Company’s annual report on Form 10-K for the fiscal
year ended June 30, 2011)
Form of Stock Option Agreement for performance stock options under the 2005 Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.1 of the Company’s current report on
Form 8-K filed on September 28, 2007)
Form of Change in Control Severance Agreement between the Company and Mark Aslett
(incorporated herein by reference to Exhibit 10.9.1 of the Company’s annual report on Form 10-K
for the fiscal year ended June 30, 2011)
Form of Change in Control Severance Agreement between the Company and Non-CEO Executives
(incorporated herein by reference to Exhibit 10.9.2 of the Company’s annual report on Form 10-K
for the fiscal year ended June 30, 2011)
Compensation Policy for Non-Employee Directors
Employment Agreement, dated as of November 19, 2007, by and between the Company and Mark
Aslett (incorporated herein by reference to Exhibit 10.1 of the Company’s current report on
Form 8-K filed on November 20, 2007)
First Amendment to Employment Agreement, dated as of December 20, 2008, by and between the
Company and Mark Aslett (incorporated by reference to Exhibit 10.2 of the Company’s quarterly
report on Form 10-Q for the quarter ended December 31, 2008)
Second Amendment to Employment Agreement, dated as of September 30, 2009, by and between
the Company and Mark Aslett (incorporated by reference to Exhibit 10.1 of the Company’s
quarterly report on Form 10-Q for the quarter ended September 30, 2009)
Agreement, dated as of March 27, 2008, by and between the Company and Didier M.C. Thibaud
(incorporated herein by reference to Exhibit 10.13 of the Company’s annual report on Form 10-K
for the fiscal year ended June 30, 2008)
First Amendment to Agreement, dated as of December 22, 2008, by and between the Company and
Didier M.C. Thibaud (incorporated herein by reference to Exhibit 10.4 of the Company’s quarterly
report on Form 10-Q for the quarter ended December 31, 2008)
Agreement, dated March 1, 2010, by and between the Company and Gerald M. Haines II
(incorporated herein by reference to Exhibit 10.13 of the Company’s annual report on Form 10-K
for the fiscal year ended June 30, 2011)
Agreement, dated November 26, 2011, by and between the Company and Kevin M. Bisson
(incorporated herein by reference to Exhibit 10.1 of the Company’s current report on Form 8-K
filed on January 17, 2012)
Purchase and Sale Agreement dated as of April 12, 2007 among 1999 Riverneck, LLC, Riverneck
Road, LLC, 191 Riverneck, LLC and BTI 199-201 Riverneck, L.P.
Lease Agreement dated April 20, 2007 between BTI 199-201 Riverneck, L.P. and the Company
Loan and Security Agreement dated February 12, 2010 between the Company and Silicon Valley
Bank (incorporated herein by reference to Exhibit 10.1 of the Company’s current report on
Form 8-K filed on February 19, 2010)
First Loan Modification Agreement dated March 30, 2011 between the Company and Silicon
Valley Bank (incorporated by reference to Exhibit 10.1 of the Company’s current report on
Form 8-K filed on April 1, 2011)
Stock Purchase Agreement by and among the Company, LNX Corporation, and the Holders of the
Securities of LNX Corporation (incorporated herein by reference to Exhibit 10.1 of the Company’s
quarterly report on Form 10-Q for the quarter ended March 31, 2011)
Agreement and Plan of Merger dated as of December 22, 2011 by and among the Company,
King Merger, Inc., KOR Electronics, and the Securityholders’ Representative (incorporated by
reference to Exhibit 10.1 of the Company’s quarterly report on Form 10-Q for the quarter ended
December 31, 2011)

96

ITEM NO.

DESCRIPTION OF EXHIBIT

10.21

10.22*

21.1†
23.1†
31.1†

31.2†

32.1+

101++

Agreement and Plan of Merger by and among the Company, Wildcat Merger Sub Inc., and
Micronetics, Inc. dated as of June 8, 2012 (incorporated herein by reference to Exhibit 10.1 of the
Company’s current report on Form 8-K filed on June 11, 2012)
Micronetics, Inc. 2006 Equity Incentive Plan (incorporated herein by reference to Exhibit 99.1 to
the Company’s registration statement on Form S-8 filed on August 10, 2012)
Subsidiaries of the Company
Consent of KPMG LLP
Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statement of
Operations, (ii) Consolidated Balance Sheet, (iii) Consolidated Statement of Shareholders’ Equity,
(iv) Consolidated Statement of Cash Flows, and (v) Notes to Consolidated financial Statements

* Identifies a management contract or compensatory plan or arrangement in which an executive officer or

director of the Company participates.

† Filed with this Form 10-K.
†† Indicates an exhibit the Company is re-filing with this Form 10-K since the Company cannot incorporate by

reference to Exchange Act reports that are more than five years old.

+ Furnished herewith. This certification shall not be deemed “filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be incorporated by
reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

++ XBRL (Extensible Business Reporting Language) information is furnished and not filed.

97

CERTIFICATION

EXHIBIT 31.1

I, Mark Aslett, certify that:

1.

I have reviewed this annual report on Form 10-K of Mercury Computer Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial
to provide reasonable assurance regarding the
reporting to be designed under our supervision,
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
to the registrant’s auditors and the audit committee of the
internal control over financial reporting,
registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: August 22, 2012

/s/ MARK ASLETT

Mark Aslett
PRESIDENT AND CHIEF EXECUTIVE OFFICER
[PRINCIPAL EXECUTIVE OFFICER]

CERTIFICATION

EXHIBIT 31.2

I, Kevin M. Bisson, certify that:

1.

I have reviewed this annual report on Form 10-K of Mercury Computer Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial
to provide reasonable assurance regarding the
reporting to be designed under our supervision,
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
to the registrant’s auditors and the audit committee of the
internal control over financial reporting,
registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: August 22, 2012

/s/ KEVIN M. BISSON

Kevin M. Bisson
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER, AND TREASURER
[PRINCIPAL FINANCIAL OFFICER]

EXHIBIT 32.1

Mercury Computer Systems, Inc.

Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Mercury Computer Systems, Inc. (the “Company”) on Form 10-K
for the fiscal year ended June 30, 2012 as filed with the Securities and Exchange Commission (the “Report”), we,
Mark Aslett, President and Chief Executive Officer of the Company, and Kevin Bisson, Senior Vice President,
Chief Financial Officer, and Treasurer of the Company, certify, pursuant to Section 1350 of Chapter 63 of Title
18, United States Code, that to our knowledge the Report fully complies with the requirements of Section 13(a)
or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and the information contained in the
Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 22, 2012

/S/ MARK ASLETT

Mark Aslett
PRESIDENT AND CHIEF EXECUTIVE OFFICER

/S/ KEVIN M. BISSON

Kevin M. Bisson
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER, AND TREASURER

SHAREHOLDER RETURN PERFORMANCE GRAPH

Set forth below is a line graph comparing the cumulative total shareholder return of our common stock against the
cumulative total return of the Spade Defense Index and a peer group of 23 companies for the period of June 30, 2007
through June 30, 2012. The graph and table assume that $100 was invested on June 30, 2007 in each of our common
stock, the Spade Defense Index and a peer group and that all dividends were reinvested. The peer group consists of the
following companies:

AeroVironment, Inc.
American Science and Engineering, Inc.
Analogic Corporation
Anaren, Inc.
API Technologies Corp.
Cognex Corporation
Comtech Telecommunications Corp.
CPI International, Inc.

Cray, Inc.
Digital Globe, Inc.
Ducommun Incorporated
Electro Scientific Industries, Inc.
GeoEye, Inc.
Globecomm Systems Inc.
IRobot Corporation
KEYW Holdings Corporation

KVH Industries, Inc.
NCI, Inc.
Radisys Corporation
Satcon Technology Corporation
Sonus Networks, Inc.
Stratasys, Inc.
Symmetricom, Inc.

We retained the same peer group used in fiscal 2011 with the following exceptions: (i) EMS Technologies, Inc., Herley
Industries,
Inc. were all acquired and are no longer public companies; and
(ii) AeroVironment, Inc., Cray, Inc., Digital Globe, Inc., GeoEye, Inc., and KEYW Holdings Corporation were added
to the peer group. In fiscal 2012, we used this updated peer group for analyzing our performance.

Inc., and Integral Systems,

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG MERCURY COMPUTER SYSTEMS, INC.,
THE SPADE DEFENSE INDEX AND THE PEER GROUP

Measurement Point

Mercury Computer
Systems, Inc.

Spade Defense Index

Peer Group

6/30/07
6/30/08
6/30/09
6/30/10
6/30/11
6/30/12

100.00
59.86
73.53
93.24
148.49
102.78

100.00
86.04
64.25
74.46
93.97
87.88

100.00
76.38
62.22
73.02
92.32
74.65

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG MERCURY COMPUTER SYSTEMS, INC.,
THE SPADE DEFENSE INDEX AND THE PEER GROUP

160

140

120

100

80

60

40

20

N
R
U
T
E
R

0
2007

2008

2009

2010

2011

2012

FISCAL YEAR

Mercury Computer Systems, Inc.
Spade Defense Index
Peer Group

ASSUMES $100 INVESTED ON JUNE 30, 2007
ASSUMES  DIVIDEND REINVESTED
FISCAL YEAR ENDED JUNE 30, 2012

DIRECTORS AND MANAGEMENT

BOARD OF DIRECTORS
Vincent Vitto
Chairman of the Board
Retired President and CEO
The Charles Stark Draper Laboratory, Inc.

Mark Aslett
President and Chief Executive Offi cer
Mercury Computer Systems, Inc.

James K. Bass
Retired President and CEO
Piper Aircraft, Inc.

George W. Chamillard
Retired Chairman, Teradyne, Inc.

Michael A. Daniels
Retired Chairman and CEO
Mobile 365, Inc. and
Network Solutions, Inc.

George K. Muellner
Retired Executive
The Boeing Company

William K. O’Brien
Retired Chairman and CEO
Enterasys Networks

Lee C. Steele
Partner, Tatum, LLC

EXECUTIVE OFFICERS 
Mark Aslett
President and Chief Executive Offi cer

Kevin M. Bisson
Senior Vice President, Chief Financial 
Offi cer and Treasurer

Gerald M. Haines II
Senior Vice President, Corporate 
Development, Chief Legal Offi cer 
and Secretary

Charles A. Speicher
Vice President, Controller 
and Chief Accounting Offi cer

Didier M.C. Thibaud
President,
Advanced Computing Solutions

CORPORATE OFFICE
MERCURY COMPUTER SYSTEMS, INC.
201 Riverneck Road
Chelmsford, MA 01824-2820
Tel 978.256.1300  
      866.411.MRCY
ir.mc.com 
NASDAQ: MRCY

INTERNATIONAL SUBSIDIARIES
NIHON MERCURY COMPUTER SYSTEMS K.K.
No. 2 Gotanda Fujikoshi Bldg. 4F
5-23-1 Higashi Gotanda, Shinagawa-ku
Tokyo 141-0022
JAPAN
Tel 81.3.3473.0140  

CORPORATE INFORMATION

MERCURY COMPUTER SYSTEMS LTD
Unit 1, Easter Park, Benyon Road
Silchester, Reading, RG7 2PQ
UNITED KINGDOM
Tel 44.1189.702050  

AUDITOR
KPMG LLP
Two Financial Center
60 South Street 
Boston, MA 02111

TRANSFER AGENT AND REGISTRAR
Computershare Investor Services
P.O. Box 43023
Providence, RI 02940-4023
Tel 781.575.2879
www.computershare.com/investor 

COMMON STOCK
Mercury Computer Systems, Inc. common stock 
is traded on the Nasdaq Global Select Market 
under the symbol MRCY.

STOCKHOLDER INFORMATION
The Company’s Form 10-K and other published 
information is available on request, free of 
charge, by writing or calling Investor Relations 
as listed below.

INVESTOR RELATIONS
Mercury Computer Systems, Inc.
201 Riverneck Road  
Chelmsford, MA 01824-2820
Tel 866.411.MRCY

Mercury Computer Systems, Inc. is an Equal Opportunity/Affi rmative Action Employer.

Copyright © 2012 Mercury Computer Systems, Inc.

 
Mercury Computer Systems is a best-of-breed provider of commercially 
developed, open sensor and Big Data processing systems, 
software and services for critical commercial, 
defense and intelligence applications. 

mc.com

201 Riverneck Road
Chelmsford, MA 01824-2820
tel 978.256.1300  866.411.MRCY
fax 978.256.3599  www.mc.com

Copyright © 2012 Mercury Computer Systems, Inc. All rights reserved. 

Where Challenges Drive Innovation