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," "should," "plan," "expect," "anticipate," "continue," "estimate," "project," "intend," 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, sale of our VSG operating segment, 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, general economic and business conditions, including the current adverse economic conditions in the United States and other countries in which we operate, effects of continued geo-political unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing various engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, continued funding of defense programs and the timing of such funding, 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 delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, inability to identify opportunities to rationalize our business portfolio in a timely manner or at all, timing and costs associated with disposing of businesses, difficulties in retaining key employees and customers, 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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, as supplemented by Part II Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q. 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 high-performance embedded, real-time digital signal and image processing systems and software for embedded and other specialized computing markets. Our solutions play a critical role in a wide range of applications, transforming sensor data to information for analysis and interpretation. In military reconnaissance and surveillance platforms, our systems process real-time radar, sonar, and signals intelligence data. Our systems are also used in state-of-the-art medical diagnostic imaging devices including MRI and digital X-ray, and in semiconductor imaging applications including photomask generation and wafer inspection. We also provide radio frequency (RF) products for enhanced communications capabilities in military and commercial applications. Additionally, we entered the defense prime contracting market space in fiscal 2008 through the creation of a federal business group to focus on reaching the intelligence agencies and homeland security programs. Further, for the three- and nine-month periods ended March 31, 2008, the consolidated financial statements, excluding the statement of cash flows, were reclassified to reflect the discontinuation and sale of the Biotech business
("Biotech") and the Embedded Systems and Professional Services ("ES/PS")
businesses, in accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

On January 27, 2009, we signed a definitive agreement and closed on the sale of the Visage Imaging ("VI") operating segment to Australia-based Pro Medicus Limited for gross consideration of $3 million in cash. Of the proceeds, a total of $1.1 million has been held back or placed in escrow for general indemnification purposes and employee termination payments to be incurred by Pro Medicus Limited. The accounting for this sale and the

Visage operating segment's operating results were included in discontinued operations in the three and nine months ended March 31, 2009 and prior period results have been reclassified to reflect the discontinuation and sale (see Note M to the consolidated financial statements).

In March 2009, we determined that the Visualization Sciences Group ("VSG") operating segment met the criteria per SFAS 144 for classification as held-for-sale and for disclosure as discontinued operations. As such, the VSG operating segement's operating results were included in discontinued operations in the three and nine months ended March 31, 2009 and prior period results have been reclassified to reflect the discontinuation (see Note M to the consolidated financial statements).

Since we are an OEM supplier to our commercial markets and conduct business with our defense customers via commercial off-the-shelf (COTS) distribution, 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 product. 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. Additionally, order patterns of one customer do not necessarily correlate with the order patterns of another customer and, therefore, we generally cannot identify sequential quarterly trends, even within our business units.

RESULTS OF OPERATIONS:

The following tables set forth, for the periods indicated, certain financial
data as a percentage of total revenues:



                                              Three months ended                Nine months ended
                                                  March 31,                         March 31,
                                             2009            2008             2009             2008
Revenues                                      100.0 %         100.0 %          100.0 %          100.0 %
Cost of revenues                               42.3            44.0             43.4             41.0

Gross margin                                   57.7            56.0             56.6             59.0
Operating expenses:
Selling, general and administrative            24.9            32.9             27.5             34.9
Research and development                       22.0            23.7             23.5             24.6
Amortization of acquired intangible
assets                                          1.0             2.5              1.4              2.7
Restructuring                                   0.4             2.1              0.5              0.9

Total operating expenses                       48.3            61.2             52.9             63.1

Income (loss) from operations                   9.4            (5.2 )            3.7             (4.1 )
Other income (expense), net                     0.1             2.3             (0.2 )            3.0

Income (loss) from continuing
operations before income taxes                  9.5            (2.9 )            3.5             (1.1 )
Income tax expense                             (0.2 )          (1.5 )           (0.1 )           (2.2 )

Income (loss) from continuing
operations                                      9.3            (4.4 )            3.4             (3.3 )
Loss from discontinued operations,
net of taxes                                   (1.4 )          (6.7 )          (14.0 )           (7.4 )
Gain on sale of discontinued
operations, net of taxes                        8.2              -               3.3               -

Net income (loss)                              16.1 %         (11.1 )%          (7.3 )%         (10.7 )%

REVENUES



                  Three months ended    As a % of      Three months ended    As a % of
                      March 31,         Total Net          March 31,         Total Net
(in thousands)           2009            Revenue              2008            Revenue      $ Change      % Change
ACS              $             48,599          96 %   $             50,313          99 %   $  (1,714 )       (3.4 )%
EBU                             1,964           4                      361           1         1,603          444

Total revenues   $             50,563         100 %   $             50,674         100 %   $    (111 )        0.2 %

Total revenues remained relatively flat at $50.6 million during the three months ended March 31, 2009 as compared to the comparable period in fiscal 2008. International revenues represented approximately 7.9% and 14.1% of total revenues during the three months ended March 31, 2009 and 2008, respectively.

ACS revenues decreased $1.7 million, or 3.4%, during the three months ended March 31, 2009 as compared to the same period in fiscal 2008. The decrease was primarily due to a decrease in commercial sales of $1.9 million primarily driven by declines in sales of commercial communications products. This decrease was partially offset by an increase in defense sales, primarily driven by an increase in sales of radar application products.

EBU revenues increased $1.6 million during the three months ended March 31, 2009 as compared to the same period in fiscal 2008. The increase in EBU revenues was due to increased revenue from Mercury's wholly-owned subsidiary, Mercury Federal Systems, Inc. ("MFS"). MFS began generating external revenues in the first quarter of fiscal 2009, and in the three months ended March 31, 2009, revenues were $2.0 million. This increase was partially offset by a $0.4 million decrease in revenues resulting from the shutdown of the AUSG reporting unit that began following the April 2008 exclusive license agreement of certain intellectual property ("IP") associated with AUSG.

                  Nine months ended    As a % of      Nine months ended    As a % of
                      March 31,        Total Net          March 31,        Total Net
(in thousands)          2009            Revenue             2008            Revenue      $ Change      % Change
ACS              $           137,028          98 %   $           139,178          99 %   $  (2,150 )       (1.5 )%
EBU                            3,469           2                   1,394           1         2,075          149

Total revenues   $           140,497         100 %   $           140,572         100 %   $     (75 )       (0.1 )%

Total revenues remained relatively flat at $140.5 million during the nine months ended March 31, 2009 as compared to the comparable period in fiscal 2008. International revenues represented approximately 6.6% and 9.8% of total revenues during the nine months ended March 31, 2009 and 2008, respectively.

ACS revenue decreased $2.2 million, or 1.5%, to $137.0 million for the nine months ended March 31, 2009 as compared to the same period in fiscal year 2008. The decrease was primarily due to a decrease in commercial sales of $9.9 million driven by declines in commercial communications, electronic design and automation and legacy medical products. This decrease was largely offset by an increase in defense sales of $7.7 million, which was led by increases in sales relating to radar applications.

EBU revenues increased $2.1 million during the nine months ended March 31, 2009 as compared to the same period in fiscal 2008. The increase in EBU revenues was due to increased MFS revenue. MFS began generating external revenues in the first quarter of fiscal 2009, and in the nine months ended March 31, 2009, revenues were $3.3 million. The increase in MFS revenue was partially offset by a $1.2 million decrease in revenues resulting from the shutdown of the AUSG reporting unit that began following the April 2008 exclusive license agreement of IP associated with AUSG.

GROSS PROFIT

Gross profit was 57.7% for the three months ended March 31, 2009, an increase of 170 basis points from the 56.0% gross profit achieved during the same period in fiscal 2008. The increase in gross profit was largely due to a shift in customer mix between commercial and defense customers. This increase was partially offset by an increase in service revenue, which tends to carry a lower gross margin, and a $0.5 million increase in reserves for excess and obsolete inventory, largely due to the decline in commercial revenue.

Gross profit was 56.6% for the nine months ended March 31, 2009, a decrease of 240 basis points from the 59.0% gross profit achieved during the same period in fiscal 2008. The decrease in gross profit was primarily due to a shift from legacy products, which carry higher gross margins, to new products and increases in service revenue, both of which tend to carry lower gross margins. The decrease was also due to an increase in reserves for excess and obsolete inventory of $2.7 million, largely due to the decline in commercial revenue.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses decreased $4.1 million, or 24.6%, to $12.6 million during the three months ended March 31, 2009 as compared to $16.7 million during the same period in fiscal 2008. The decrease was primarily due to a $3.3 million decrease in employee compensation expense, including stock based compensation expense, driven by our restructuring and cost saving measures, which include a $0.6 million decrease attributable to the shutdown of our AUSG reporting unit. Additionally, in the three months ended March 31, 2009, there was a $0.3 million decrease in legal expense and a $0.2 million decrease in depreciation expense due to assets becoming fully depreciated.

Selling, general and administrative expenses decreased $10.4 million, or 21.2%, to $38.7 million during the nine months ended March 31, 2009 as compared to $49.1 million during the same period in fiscal 2008. The decrease was primarily due to a $7.7 million decrease in employee compensation expense, including stock based compensation expense, driven by our restructuring and cost saving measures, which included a $1.8 million decrease attributable to the shutdown of our AUSG reporting unit. Additionally, in the nine months ended March 31, 2009, there was a $0.7 million decrease in depreciation expense due to assets becoming fully depreciated, $0.5 million decrease in legal expense and a $0.4 million decrease in travel expense.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased $0.9 million, or 7.5%, to $11.1 million during the three months ended March 31, 2009 as compared to $12.0 million during the same period in fiscal 2008. The decrease was primarily due to a $1.2 million decrease in employee compensation expense driven by our restructuring and cost saving measures, which included a $0.5 million decrease attributable to the shutdown of our AUSG business. Additionally, in the three months ended March 31, 2009, there was a $0.2 million decrease in depreciation expense due to assets becoming fully depreciated. This decrease was partially offset by a $1.2 million increase in outside development expenses related to new product development initiatives.

Research and development expenses decreased $1.5 million, or 4.3%, to $33.0 million during the nine months ended March 31, 2009 as compared to $34.5 million during the same period in fiscal 2008. The decrease was primarily due to a $2.9 million decrease in employee compensation expense driven by our restructuring and cost saving measures, which included a $1.5 million decrease attributable to the shutdown of our AUSG business. Additionally, in the nine months ended March 31, 2009, there was a $0.5 million decrease in depreciation expense due to those assets becoming fully depreciated and a $0.2 million decrease in consultant expenses. This decrease was partially offset by a $2.6 million increase in outside development expenses related to new product development initiatives.

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS

Amortization of acquired intangible assets decreased $0.8 million to $0.5 million for the three months ended March 31, 2009 as compared to $1.3 million during the comparable period in fiscal 2008. Amortization of acquired intangible assets decreased $1.9 million to $2.0 million for the nine months ended March 31, 2009 as compared to $3.9 million during the comparable period in fiscal 2008. The decreases in both periods were primarily attributable to assets becoming fully amortized during the three months ended March 31, 2009.

RESTRUCTURING EXPENSE

Restructuring expense decreased $0.9 million to $0.2 million during the three months ended March 31, 2009 as compared to $1.1 million during the comparable period in fiscal 2008. During the three months ended March 31, 2009, the restructuring charges primarily related to the elimination of four positions and additional severance accruals for our ACS Plan, which was enacted in fiscal 2008 to reduce payroll and overhead costs to realign costs with our revenue base. Restructuring charges incurred during the three months ended March 31, 2008 primarily related to the AUSG Restructuring Plan, including $0.6 million for severance costs and other costs associated with the elimination of twelve positions and an accelerated depreciation and amortization charge of $0.4 million.

Restructuring expense decreased $0.5 million to $0.7 million during the nine months ended March 31, 2009 as compared to $1.3 million during the same period in fiscal 2008. During the nine months ended March 31, 2009, the restructuring charges primarily related to the elimination of fifteen positions and severance accruals for our ACS Plan, which was enacted in fiscal 2008 to reduce payroll and overhead costs and to realign expenses with our revenue base. Restructuring charges incurred during the nine months ended March 31, 2008 primarily related to the AUSG Restructuring Plan, including $0.6 million for severance costs and other costs associated with the elimination of twelve positions and an accelerated depreciation and amortization charge of $0.4 million.

INTEREST INCOME

Interest income decreased by $1.3 million to $0.2 million during the three months ended March 31, 2009 as compared to the same period in fiscal 2008. Interest income decreased by $3.8 million to $1.9 million during the nine months ended March 31, 2009 as compared to the same period in fiscal 2008. The decreases during both periods were primarily attributable to decreased rates of return on our marketable securities, as well as a decrease in the amount of cash invested in marketable securities as a result of the February 2009 repurchase of $119.7 million of our Convertible Senior Notes.

INTEREST EXPENSE

Interest expense decreased $0.3 million to $0.5 million in the three months ended March 31, 2009 as compared to the same period in fiscal 2008. Interest expense decreased $0.2 million to $2.3 million during the nine months ended March 31, 2009 as compared to the same period in fiscal 2008. The decrease was primarily due to the decrease in notes payable following the February 2009 repurchase of $119.7 million of our Convertible Senior Notes.

INCOME TAX PROVISION

We recorded a tax provision of $101 during the three months ended March 31, 2009 as compared to a $732 provision during the same period in fiscal 2008. We recorded a tax provision of $101 during the nine months ended March 31, 2009 as compared to a $1.9 million provision during the same period in fiscal 2008. Our effective tax rate for the three and nine months ended March 31, 2009 differed from the U.S. statutory tax rate of 35% primarily due to research and development tax credits and a decrease in the valuation allowance on deferred tax assets primarily related to deferred financing costs and deferred compensation.

DISCONTINUED OPERATIONS

In March 2009, we reported the Visualization Sciences Group ("VSG") operating segment as discontinued operations, as we currently expect to sell the business by the end of the fourth quarter of fiscal 2009. As of March 31, 2009, we determined that the business met the criteria per SFAS 144 for classification as held-for-sale and for disclosure as discontinued operations.

In January 2009, we completed the sale of our Visage Imagine ("VI") operating segment to Australia-based Pro Medicus Limited for gross consideration of $3.0 million in cash. Of the proceeds, a total of $1.1 million was held back or placed in escrow for general indemnification purposes and employee termination payments to be incurred by Pro Medicus Limited. The sale resulted in a gain of $4.1 million on disposal of the discontinued operation. The gain was primarily comprised of cash proceeds of $1.0 million and recognition of a foreign currency translation gain of $3.9 million associated with the VI business, offset by net assets of the business of $0.8 million.

Loss from discontinued operations decreased $2.7 million in the three months ended March 31, 2009 to a loss from discontinued operations of $0.7 million as compared to the same period in fiscal 2008. As a result of the sale to Pro Medicus Limited in January 2009, only one month of the VI operating segment's operations were included in loss from discontinued operations.

Loss from discontinued operations increased $8.2 million in the nine months ended March 31, 2009 to a loss from discontinued operations of $19.7 million as compared to the same period in fiscal 2008. The increase in loss from discontinued operations was primarily due to a $13.1 million goodwill impairment charge related to VI that was recorded in the second quarter of fiscal 2009 due to the fact that the carrying amount of VI's goodwill exceeded the implied fair value.

SEGMENT OPERATING RESULTS

Results from operations of the ACS segment improved $2.6 million to income from operations of $5.9 million for the three months ended March 31, 2009 as compared to income from operations of $3.3 million in the three months ended March 31, 2008. The increase in income from operations was primarily driven by a decrease in operating expenses of $2.9 million as compared to the same period in fiscal year 2008. This decrease was primarily due to a decrease in associate headcount as a result of organizational restructuring. These cost savings were partially offset by a decline in revenues and increased charges for excess and obsolete inventory of $0.5 million. ACS results for the three months ended March 31, 2008 have been adjusted to include the absorption of corporate costs that were previously allocated to the VI and VSG operating segments.

Results from operations of the ACS segment improved $2.8 million to income from operations of $10.7 million for the nine months ended March 31, 2009 as compared to income from operations of $7.9 million in the nine months ended March 31, 2008. The increase in income from operations was primarily driven by a decrease in operating expenses of $6.7 million as compared to the same period in fiscal year 2008. This decrease was driven primarily by a decrease in associate headcount as the result of organizational restructuring. These cost savings were partially offset by a decline in revenues and increased charges for excess and obsolete inventory of $2.7 million. ACS results for the nine months ended March 31, 2008 have been adjusted to include the absorption of corporate costs that were previously allocated to the VI and VSG operating segments.

Results from operations of the EBU segment improved $3.3 million during the three months ended March 31, 2009 to operating income of $0.1 million as compared to an operating loss of $3.2 million in the three months ended March 31, 2008. The improvement in results from operations was primarily due to the shutdown of our AUSG reporting unit in the third quarter of fiscal 2008, which resulted in a $2.2 million reduction in operating expenses. The improvement was also due to increased MFS profitability driven by a $2.0 million increase in revenue.

Results from operations of the EBU segment improved $4.8 million during the nine months ended March 31, 2009 to an operating loss of $0.8 million as compared to an operating loss of $5.6 million in the nine months ended March 31, 2008. The improvement in results from operations was primarily due to the shutdown of our AUSG reporting unit in the third quarter of fiscal 2008. During the nine months ended March 31, 2009, AUSG recorded an immaterial amount of operating expenses as compared to $4.4 million in the same period of fiscal 2008.

See Note H to our Consolidated Financial Statements included in this report for more information regarding our operating segments.

OFF-BALANCE SHEET ARRANGEMENTS

Other than lease commitments incurred in the normal course of business and certain indemnification provisions (see Note J to the Consolidated Financial Statements), 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 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.

LIQUIDITY AND CAPITAL RESOURCES



                                                          March 31,      March 31,
   As of and for the nine months ended                       2009           2008
   Net cash provided by operating activities              $    7,856     $   11,261
   Net cash provided by investing activities                  58,757         50,457
   Net cash (used in) provided by financing activities       (85,940 )          765
   Net (decrease) increase in cash and cash equivalents      (18,461 )       62,701
   Cash and cash equivalents at end of period                 40,584        113,994

Cash and Cash Equivalents

Our cash and cash equivalents decreased by $73.4 million from March 31, 2008 to March 31, 2009, primarily as the result of the repurchase of $119.7 million of our Convertible Senior Notes ("Notes"), offset by a $33.3 million borrowing against our auction rate securities and higher net sales of marketable securities.

During the nine months ended March 31, 2009, we generated $7.9 million in cash . . .