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 financial 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 and the potential for defense budget sequestration, 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 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 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 the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012. 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, 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. 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.

As of December 31, 2012, we had 769 employees. Our revenue, net loss and adjusted EBITDA for the three month period ended December 31, 2012 were $49.8 million, ($4.8) million, and $1.0 million, respectively. Our revenue, net loss and adjusted EBITDA for the six month period ended December 31, 2012 were $99.2 million, ($12.0) million and $2.6 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation of our adjusted EBITDA to net loss.

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 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.

With the acquisition of Micronetics, Inc. ("Micronetics") in August 2012, we added a leading designer and manufacturer of microwave and RF subsystems and components for defense and commercial customers. The acquisition was directly aligned with our strategy of expanding our capabilities, services and offerings along the sensor processing chain.

For the six months ended December 31, 2012, ACS accounted for 82% 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") in December 2011, 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. For the six months ended December 31, 2012, MFS accounted for 18% of our total net revenues.

Since we are an OEM supplier to our commercial markets and conduct business with our defense customers via commercial terms, 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.

RESULTS OF OPERATIONS:

Three months ended December 31, 2012 compared to the three months ended
December 31, 2011

The following tables set forth, for the three months periods indicated,
financial data from the consolidated statements of operations:



                                                         As a % of                                 As a % of
                                   December 31,          Total Net           December 31,          Total Net
(In thousands)                         2012               Revenue                2011               Revenue
Net revenues                      $       49,804              100.0 %       $       67,959              100.0 %
Cost of revenues                          32,232               64.7                 27,046               39.8

Gross margin                              17,572               35.3                 40,913               60.2
Operating expenses:
Selling, general and
administrative                            14,574               29.3                 14,419               21.2
Research and development                   7,588               15.2                 11,724               17.3
Amortization of intangible
assets                                     2,230                4.5                    692                1.0
Restructuring and other
charges                                      217                0.4                     -                  -
Acquisition costs and other
related expenses                              42                0.1                    593                0.9

Total operating expenses                  24,651               49.5                 27,428               40.4

(Loss) income from
operations                                (7,079 )            (14.2 )               13,485               19.8
Other income, net                            103                0.2                    388                0.6

(Loss) income from
operations before
income taxes                              (6,976 )            (14.0 )               13,873               20.4
Tax (benefit) provision                   (2,192 )             (4.4 )                4,828                7.1

Net (loss) income                 $       (4,784 )             (9.6 )%      $        9,045               13.3 %

REVENUES



                       December 31,        December 31,
     (In thousands)        2012                2011           $ Change       % Change
     ACS              $       43,453      $       64,062      $ (20,609 )          (32 )%
     MFS                       7,862               5,191          2,671             51 %
     Eliminations             (1,511 )            (1,294 )         (217 )           17 %

     Total revenues   $       49,804      $       67,959      $ (18,155 )          (27 )%

Total revenues decreased $18.2 million, or 27%, to $49.8 million during the three months ended December 31, 2012 as compared to the comparable period in fiscal 2012. International revenues represented approximately 8% and 2% of total revenues during the three months ended December 31, 2012 and 2011, respectively.

Net ACS revenues decreased $20.6 million, or 32%, during the three months ended December 31, 2012 as compared to the same period in fiscal 2012. This decrease was primarily driven by lower defense sales of $20.8 million which were slightly offset by a $0.2 million increase in commercial sales. Organic ACS defense revenues for the three months ended December 31, 2012 declined $36.5 million as a result of lower revenues in four particular programs year over year and a general slowdown in funding due to current constraints on U.S. defense spending and uncertainties surrounding the future defense budget. This decline was offset by $6.2 million and $9.5 million of revenues from the acquisitions of KOR Electronics and Micronetics, respectively.

Net MFS revenues increased $2.7 million during the three months ended December 31, 2012 as compared to the same period in fiscal 2012. This increase was primarily driven by $3.4 million in revenues contributed from the acquisition of PDI, partially offset by lower revenues from a wide area persistent surveillance contract.

Eliminations revenue is attributable to development programs where the revenue is recognized in each segment under contract accounting, and reflects the reconciliation to our consolidated results.

GROSS MARGIN

Gross margin was 35.3% for the three months ended December 31, 2012, a change of 24.9% from the 60.2% gross margin achieved during the same period in fiscal 2012. The decrease in gross margin was primarily due to a shift in program revenue mix coupled with a revenue decline in our higher margin organic ACS digital computing business. In addition, the acquisitions of KOR, PDI, and Micronetics generate lower gross margins than our organic ACS digital computing business. In the long term, we expect our future gross margins to be in line with our targeted business model of 45%.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased $0.2 million, or 1%, to $14.6 million during the three months ended December 31, 2012, compared to $14.4 million during the comparable period in fiscal 2012. The increase was primarily due to a $0.4 million increase in employee compensation expense, primarily as a result of the KOR, PDI and Micronetics acquisitions which was partially offset by the cost reduction initiatives as a result of our fiscal 2013 restructuring plan. Selling, general and administrative expenses increased as a percentage of revenues to 29.3% during the three months ended December 31, 2012 from 21.2% during the same period in fiscal 2012 due to lower revenues in the second quarter of fiscal 2013 as compared to the comparable period in fiscal 2012.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased $4.1 million, or 35%, to $7.6 million during the three months ended December 31, 2012, compared to $11.7 million during the comparable period in fiscal 2012. The decrease was primarily due to cost reduction initiatives as a result of our fiscal 2013 restructuring plan, including a $3.7 million decrease in employee compensation expense, including stock-based compensation, and a $1.5 million decrease in costs of prototype and development materials directly related to headcount reduction. These decreases were partially offset by $1.0 million in lower resource allocations to customer funded projects and $0.4 million due to the acquisition of KOR, PDI, and Micronetics.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of acquired intangible assets increased $1.5 million, to $2.2 million for the three months ended December 31, 2012 as compared to $0.7 million during the comparable period in fiscal 2012, primarily due to amortization of intangible assets from the KOR, PDI and Micronetics acquisitions.

RESTRUCTURING EXPENSE

We implemented restructuring plans in the first quarter of fiscal 2013 and in the fourth quarter of fiscal 2012. These plans consisted of involuntary separation costs related to a reduction in force and facility costs

related to the outsourcing of certain manufacturing activities. The plans were implemented to cope with reduced defense revenues and the near term uncertainties in the defense industry driven by the potential for sequestration. The $0.2 million of restructuring expense recorded during the three months ended December 31, 2012 was primarily attributed to charges for facility space idled during the period. We expect to generate approximately $25.0 million in annualized savings from the fiscal 2012 and 2013 cost reduction activities.

ACQUISITIONCOSTS AND OTHER RELATED EXPENSES

We incurred less than $0.1 million of acquisition costs and other related expenses during the three months ended December 31, 2012, in connection with the acquisition of Micronetics. Acquisition costs and other related expenses of $0.6 million incurred during the comparable period in fiscal 2012 were in connection with the KOR and PDI acquisitions.

OTHER INCOME, NET

Other income, net decreased $0.3 million, or 73%, to $0.1 million during the three months ended December 31, 2012, as compared to the same period in fiscal 2012. Other income, net consists of $0.3 million in amortization of the gain on the sale leaseback of our corporate headquarters located in Chelmsford, Massachusetts offset by net foreign currency exchange losses. Interest income and interest expense were de minimis.

INCOME TAXES

We recorded an income tax benefit of $2.2 million during the three months ended December 31, 2012 as compared to a $4.8 million income tax provision, for the same period in fiscal 2012. Our income tax benefit for the three months ended December 31, 2012 differed from the federal statutory tax rate of 35% primarily due to the impact of the Section 199 manufacturing deduction, state taxes and stock compensation. Our effective tax rate during the comparable period in fiscal 2012 also differed from the federal statutory rate primarily due to the impact of the Section 199 manufacturing deduction and research and development tax credits. Due to the enactment of the "American Taxpayer Relief Act of 2012", we expect to realize a tax benefit of $1.2 million in the second half of fiscal 2013 as a result of the retroactive extension of the research and development tax credits.

SEGMENT OPERATING RESULTS

Adjusted EBITDA, the profitability measure for our segment reporting, for ACS decreased $15.7 million during the three months ended December 31, 2012 to $2.4 million as compared to $18.1 million for the same period in fiscal 2012. The decrease in adjusted EBITDA is primarily driven by lower revenues of $20.6 million coupled with lower margins driven by both a shift in the organic ACS digital computing program mix and the KOR and Micronetics acquisitions.

Adjusted EBITDA for the MFS segment decreased $1.8 million during the three months ended December 31, 2012 to $(0.7) million as compared to $1.1 million for the same period in fiscal 2012. The decrease in adjusted EBITDA was primarily due to lower margins on a wide area persistent surveillance contract.

See Note K to our consolidated financial statements included in this report for more information regarding our operating segments.

Six months ended December 31, 2012 compared to the six months ended December 31, 2011

The following tables set forth, for the six months periods indicated, financial data from the consolidated statements of operations:

                                                         As a % of                                 As a % of
                                   December 31,          Total Net           December 31,          Total Net
(In thousands)                         2012               Revenue                2011               Revenue
Net revenues                      $       99,232              100.0 %       $      117,081              100.0 %
Cost of revenues                          61,270               61.7                 46,252               39.5

Gross margin                              37,962               38.3                 70,829               60.5
Operating expenses:
Selling, general and
administrative                            29,107               29.3                 28,064               24.0
Research and development                  17,627               17.8                 23,589               20.1
Amortization of intangible
assets                                     4,018                4.1                  1,508                1.3
Restructuring and other
charges                                    5,201                5.2                      -                  -
Acquisition costs and other
related expenses                             272                0.3                    618                0.5

Total operating expenses                  56,225               56.7                 53,779               45.9

(Loss) income from
operations                               (18,263 )            (18.4 )               17,050               14.6
Other income, net                            436                0.4                    790                0.6

(Loss) income from
operations before
income taxes                             (17,827 )            (18.0 )               17,840               15.2
Tax (benefit) provision                   (5,843 )             (5.9 )                6,142                5.2

Net (loss) income                 $      (11,984 )            (12.1 )%      $       11,698               10.0 %

REVENUES



                        December 31,       December 31,
      (In thousands)        2012               2011           $ Change       % Change
      ACS              $       81,261     $      109,458      $ (28,197 )          (26 )%
      MFS                      17,778              9,363          8,415             90 %
      Eliminations                193             (1,740 )        1,933            111 %

      Total revenues   $       99,232     $      117,081      $ (17,849 )          (15 )%

Total revenues decreased $17.8 million, or 15%, to $99.2 million during the six months ended December 31, 2012 as compared to the comparable period in fiscal 2012. International revenues represented approximately 6% and 3% of total revenues during the six months ended December 31, 2012 and 2011, respectively.

Net ACS revenues decreased $28.2 million, or 26%, during the six months ended December 31, 2012 as compared to the same period in fiscal 2012. This decrease was primarily driven by lower defense sales of $29.2 million which were slightly offset by a $1.0 million increase in commercial sales. Organic ACS defense revenues for the six months ended December 31, 2012 declined $55.7 million as a result of lower revenues in five particular programs year over year and a general slowdown in funding due to current constraints on U.S. defense spending and uncertainties surrounding the future defense budget. This decline was partially offset by $12.1 million and $14.4 million of revenues from the acquisitions of KOR Electronics and Micronetics, respectively.

Net MFS revenues increased $8.4 million during the six months ended December 31, 2012 as compared to the same period in fiscal 2012. This increase was primarily driven by $7.2 million in revenues contributed from the acquisition of PDI and higher revenues from a wide area persistent surveillance contract.

Eliminations revenue is attributable to development programs where the revenue is recognized in each segment under contract accounting, and reflects the reconciliation to our consolidated results.

GROSSMARGIN

Gross margin was 38.3% for the six months ended December 31, 2012, a change of 22.2% from the 60.5% gross margin achieved during the same period in fiscal 2012. The decrease in gross margin was primarily due to a shift in program revenue mix coupled with a revenue decline in our higher margin organic ACS digital computing business. In addition, the acquisitions of KOR, PDI, and Micronetics realize lower gross margins than our organic ACS digital computing business.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased $1.0 million, or 3.7%, to $29.1 million during the six months ended December 31, 2012, compared to $28.1 million during the comparable period in fiscal 2012. The increase was primarily due to a $0.8 million increase in employee compensation expense, including stock based compensation, primarily as a result of the KOR, PDI and Micronetics acquisitions which was partially offset by the cost reduction initiatives as a result of our fiscal 2013 restructuring plan. Selling, general and administrative expenses increased as a percentage of revenues to 29.3 % during the six months ended December 31, 2012 from 24.0% during the same period in fiscal 2012 due to lower revenues in the first six months of fiscal 2013 as compared to the same period in fiscal 2012.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased $6.0 million, or 25.3%, to $17.6 million during the six months ended December 31, 2012, compared to $23.6 million during the comparable period in fiscal 2012. The decrease was primarily due to cost reduction initiatives as a result of our fiscal 2013 restructuring plan, including a $4.8 million decrease in employee compensation expense, and a $2.1 million decrease in costs of prototype and development materials directly related to headcount reductions. These decreases were partially offset by $0.9 million due to the inclusion of KOR, PDI, and Micronetics.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of acquired intangible assets increased $2.5 million, to $4.0 million for the six months ended December 31, 2012 as compared to $1.5 million . . .