SEC Filing | Mercury Systems, Inc.

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

¨	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		04-2741391
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

201 RIVERNECK ROAD CHELMSFORD, MA		01824
(Address of principal executive offices)		(Zip Code)

978-256-1300

(Registrant’s telephone number, including area code)

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 x No ¨

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

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x 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 x

Shares of Common Stock outstanding as of April 29, 2011: 30,178,652 shares

MERCURY COMPUTER SYSTEMS, INC.

INDEX


		PAGE NUMBER
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)		3

	Consolidated Balance Sheets as of March 31, 2011 and June 30, 2010		3

	Consolidated Statements of Operations for the three and nine months ended March 31, 2011 and 2010		4

	Consolidated Statements of Cash Flows for the nine months ended March 31, 2011 and 2010		5

	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		34

Item 4.	Controls and Procedures		34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		35

Item 1A.	Risk Factors		35

Item 5.	Other Information		35

Item 6.	Exhibits		37

	Signatures		38

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share and share data)

(Unaudited)


	March 31, 2011		June 30, 2010
Assets
Current assets:
Cash and cash equivalents	$	156,421	$	56,241
Marketable securities and related receivables		—		18,025
Accounts receivable, net of allowance for doubtful accounts of $17 at March 31, 2011 and $163 at June 30, 2010		43,604		36,726
Unbilled receivables		1,151		6,938
Inventory		19,279		17,622
Deferred tax assets		6,076		5,393
Prepaid income taxes		159		2,546
Prepaid expenses and other current assets		3,231		2,363

Total current assets		229,921		145,854
Restricted cash		3,000		3,000
Property and equipment, net		12,792		10,298
Goodwill		79,813		57,653
Acquired intangible assets, net		17,387		1,141
Deferred tax assets		—		5,419
Other non-current assets		1,721		973

Total assets	$	344,634	$	224,338

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	7,030	$	10,533
Accrued expenses		6,952		5,078
Accrued compensation		12,381		10,723
Income taxes payable		1,009		220
Deferred revenues and customer advances		7,546		8,051

Total current liabilities		34,918		34,605
Deferred gain on sale-leaseback		5,845		6,713
Deferred tax liabilities		1,087		—
Income taxes payable		1,825		1,836
Other non-current liabilities		6,805		2,072

Total liabilities		50,480		45,226
Commitments and contingencies (Note P)
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; 27,745,446 and 22,883,314 shares issued and outstanding at March 31, 2011 and June 30, 2010, respectively		289		229
Additional paid-in capital		210,760		110,270
Retained earnings		81,862		67,671
Accumulated other comprehensive income		1,243		942

Total shareholders’ equity		294,154		179,112

Total liabilities and shareholders’ equity	$	344,634	$	224,338

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

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,						Nine Months Ended March 31,
	2011			2010			2011			2010
Net revenues	$	59,855		$	43,603		$	167,476		$	136,192
Cost of revenues		26,973			18,800			72,294			58,222

Gross margin		32,882			24,803			95,182			77,970
Operating expenses:
Selling, general and administrative		14,437			12,538			42,653			37,367
Research and development		10,683			10,629			32,061			30,726
Impairment of long-lived assets		—			61			—			211
Amortization of acquired intangible assets		663			434			1,299			1,302
Restructuring		—			(11	)		—			243
Acquisition costs and other related expenses		100			—			407			—

Total operating expenses		25,883			23,651			76,420			69,849

Income from operations		6,999			1,152			18,762			8,121
Interest income		6			195			19			437
Interest expense		(10	)		(147	)		(68	)		(317	)
Other income, net		390			264			1,310			799

Income from continuing operations before income taxes		7,385			1,464			20,023			9,040
Income tax expense (benefit)		2,007			(2,235	)		5,780			(999	)

Income from continuing operations		5,378			3,699			14,243			10,039
Loss from discontinued operations, net of income taxes		—			(423	)		(52	)		(408	)
Gain on sale of discontinued operations, net of income taxes		—			—			—			74

Net income	$	5,378		$	3,276		$	14,191		$	9,705

Basic net earnings (loss) per share:
Income from continuing operations	$	0.20		$	0.16		$	0.59		$	0.45
Loss from discontinued operations		—			(0.02	)		—			(0.02	)
Gain on sale of discontinued operations		—			—			—			—

Net income	$	0.20		$	0.14		$	0.59		$	0.43

Diluted net earnings (loss) per share:
Income from continuing operations	$	0.20		$	0.16		$	0.57		$	0.44
Loss from discontinued operations		—			(0.02	)		—			(0.02	)
Gain on sale of discontinued operations		—			—			—			—

Net income	$	0.20		$	0.14		$	0.57		$	0.42

Weighted-average common shares outstanding:
Basic		26,272			22,627			24,105			22,509

Diluted		27,324			23,152			24,911			22,921

Comprehensive income:
Net income	$	5,378		$	3,276		$	14,191		$	9,705
Foreign currency translation adjustments		60			88			299			101
Net unrealized gain (loss) on investments		2			—			2			(83	)

Total comprehensive income	$	5,440		$	3,364		$	14,492		$	9,723

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

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	14,191		$	9,705
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		5,939			5,092
Stock-based compensation expense		4,222			2,968
Provision (benefit) for deferred income taxes		854			(64	)
Excess tax benefit from stock-based compensation		(570	)		(819	)
Impairment of long-lived assets		—			211
Gain on sale of discontinued operations		—			(74	)
Other non-cash income		(694	)		(966	)
Changes in operating assets and liabilities, net of effects of business acquired:
Accounts receivable, net and unbilled receivables		1,308			(1,872	)
Inventory		1,841			(3,264	)
Prepaid expenses and other current assets		(1,196	)		950
Prepaid income taxes		2,483			(2,330	)
Other assets		(748	)		(86	)
Accounts payable and accrued expenses		(3,313	)		3,996
Deferred revenues and customer advances		(2,215	)		(570	)
Income taxes payable		676			(916	)
Other non-current liabilities		67			334

Net cash provided by operating activities		22,845			12,295

Cash flows from investing activities:
Acquisition of business, net of cash acquired		(29,508	)		—
Sales and maturities of marketable securities		18,025			12,175
Purchases of property and equipment		(5,336	)		(4,948	)
Payments for acquired intangible assets		(2,375	)		(183	)
Payments on sale of discontinued operations		—			(805	)

Net cash (used in) provided by investing activities		(19,194	)		6,239

Cash flows from financing activities:
Proceeds from follow-on public stock offering, net		93,945			—
Proceeds from employee stock plans		2,188			1,266
Payments under line of credit		—			(8,432	)
Payments of deferred financing activities		(6	)		(169	)
Excess tax benefit from stock-based compensation		570			819
Repurchases of common stock		—			(428	)
(Payments) proceeds of capital lease obligations and other		(240	)		44

Net cash provided by (used in) financing activities		96,457			(6,900	)

Effect of exchange rate changes on cash and cash equivalents		72			240

Net increase in cash and cash equivalents		100,180			11,874
Cash and cash equivalents at beginning of period		56,241			46,950

Cash and cash equivalents at end of period	$	156,421		$	58,824

Cash paid during the period for:
Interest	$	16		$	—
Income taxes	$	1,548		$	2,504
Supplemental disclosures—non-cash activities:
Issuance of restricted stock awards to employees	$	8,698		$	6,112
Acquisition of intangible assets	$	495		$	—
Capital lease	$	251		$	—

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

MERCURY COMPUTER SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

(Unaudited)

A. Description of Business

Mercury Computer Systems, Inc. (the “Company” or “Mercury”) designs, manufactures and markets commercially developed, high-performance embedded, real-time digital signal and image processing systems and software for specialized defense and commercial computing markets. The Company’s 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, the Company’s systems process real-time radar, video, sonar and signals intelligence data. The Company’s systems are also used in semiconductor imaging applications, including photomask generation and wafer inspection. The Company also provides radio frequency products for enhanced communications capabilities in military and commercial applications. Additionally, the Company entered the defense prime contracting market space in fiscal 2008 through the creation of its wholly-owned subsidiary, Mercury Federal Systems, Inc. (“MFS”), to focus on reaching the federal 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, or EW, systems and services, which 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’s products are deployed in over 300 different programs across 26 different prime defense contractors.

B. Summary of Significant Accounting Policies

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to the Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures, normally included in annual consolidated financial statements have been condensed or omitted pursuant to those rules and regulations; however, in the opinion of management the financial information reflects all adjustments, consisting of adjustments of a normal recurring nature, necessary for fair presentation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended June 30, 2010 which are contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on August 19, 2010. The results for the three and nine months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full fiscal year.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. GAAP 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.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Effective March 31, 2010, the Financial Accounting Standards Board (“FASB”) amended Accounting Standard Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other (“FASB ASC 350”), formerly FASB Statement No. 142, Goodwill and Other Intangible Assets, paragraph 20-50, Goodwill Disclosures, to require an entity to disclose accumulated goodwill impairment losses in the rollforward of goodwill for years beginning after December 15, 2008. The FASB staff clarified that the intent of the amendment was to include accumulated goodwill impairment losses in the rollforward from the adoption date of FASB ASC 350. There are no accumulated goodwill impairment losses at March 31, 2011.

C. Acquisitions

On January 12, 2011, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with LNX Corporation (“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 Advanced Computing Solutions (“ACS”) business unit.

The Company acquired LNX for a purchase price of $31,000 paid in cash, plus an earnout of up to $5,000 payable in cash, based upon achievement of financial targets during calendar years 2011 and 2012. 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 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. As of March 31, 2011, the Company expects to achieve the financial targets for calendar years 2011 and 2012 and to pay the full earnout. The purchase price was subject to post-closing adjustment based on a determination of LNX’s closing net working capital.

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 $4,650 remaining in escrow is available for indemnification claims.

Following the acquisition, the Company’s LNX subsidiary became a guarantor under the Company’s Loan Agreement and granted a security interest in its assets in favor of the Lender (see Note J).

The following table presents the net purchase price for the acquisition of LNX:


	Net Purchase Price
Consideration transferred
Cash paid at closing	$	31,000
Working capital adjustment		(272	)
Less cash acquired		(1,220	)

Total cash paid, net of cash acquired		29,508
Fair value of contingent consideration		4,828

Net purchase price	$	34,336

The following table presents the allocation of the net purchase price for LNX:


	Net Purchase Price Allocation
Cash	$	1,220
Accounts receivable		2,131
Inventory		3,473
Property and equipment		1,655
Intangible assets		14,800
Other assets		1,176
Goodwill		22,160
Accrued expenses		(4,478	)
Other current liabilities		(500	)
Deferred taxes & other non-current liabilities		(6,081	)

Total purchase price		35,556
Less cash acquired		(1,220	)

Net purchase price	$	34,336

The amounts above represent the initial fair value estimates as of March 31, 2011 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.

The goodwill of $22,160 arising from the LNX acquisition consists largely of the synergies and expansion of the Company’s service offerings related to next generation radio frequency receivers for signal intelligence, communication intelligence as well as electronic attack applications expected from combining the operations of the Company and LNX.

Acquisition costs associated with the LNX acquisition were expensed as incurred. The Company incurred $100 and $407 acquisition costs and other related expenses for the three and nine months ended March 31, 2011, respectively.

For the three and nine months ended March 31, 2011, LNX revenues and net income included in the Company’s consolidated statements of operations was immaterial. The Company has not furnished pro forma financial information relating to the LNX acquisition because such information is not material to the Company’s financial results.

D. Multiple-Deliverable Arrangements

The Company enters into multiple-deliverable arrangements that may include a combination of hardware components, related integration or other services. These arrangements generally do not include any performance-, cancellation-, termination- or refund-type provisions. Total revenue recognized under multiple-deliverable revenue arrangements in the three and nine months ended March 31, 2011 was approximately 42% and 48% of total revenues, respectively. Revenue recognized under multiple-deliverable arrangements in the three and nine months ended March 31, 2010 was approximately 42% and 52% of total revenues, respectively. The majority of the Company’s multiple-deliverable revenue arrangements typically ship complete within the same quarter.

Each deliverable within the Company’s multiple-deliverable revenue arrangements is accounted for as a separate unit of accounting under the guidance of the FASB Accounting Standards Update (“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 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.

The Company allocates arrangement consideration to each deliverable in an arrangement based on its relative selling price. The Company determines the selling price of its deliverables based on the following hierarchy: (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. The Company is not able to establish TPE due to the nature of the markets in which the Company competes, and, as such, the Company determines selling price using VSOE or BESP.

VSOE is generally limited to the price charged when the same or similar product is sold separately or, if applicable, the stated substantive renewal rate in the agreement. If a product or service is seldom sold separately, it is unlikely that the Company can determine VSOE for the product or service. The Company defines VSOE as a median price of recent standalone transactions that are priced within a narrow range, as defined by the Company.

The Company’s determination of BESP involves a weighting of several factors based on the specific facts and circumstances of the arrangement. Specifically, the Company considers the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and gross margin for similar parts, the Company’s ongoing pricing strategy and policies (as evident in the price list as established and updated 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 will determine BESP for deliverables in future agreements based on the specific facts and circumstances of each arrangement.

The Company analyzes the selling prices used in its allocation of arrangement consideration at a minimum on an annual basis. Selling prices are 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 fluctuations in the selling prices of its products.

E. Net Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted net earnings (loss) per share:


	Three Months Ended March 31,					Nine Months Ended March 31,
	2011		2010			2011			2010
Income from continuing operations	$	5,378	$	3,699		$	14,243		$	10,039
Loss from discontinued operations, net of income taxes		—		(423	)		(52	)		(408	)
Gain on sale of discontinued operations, net of income taxes		—		—			—			74

Net income	$	5,378	$	3,276		$	14,191		$	9,705

Shares used in computation of net earnings (loss) per share—basic		26,272		22,627			24,105			22,509
Effect of dilutive equity instruments		1,052		525			806			412

Shares used in computation of net earnings (loss) per share—diluted		27,324		23,152			24,911			22,921

Net earnings (loss) per share—basic
Income from continuing operations	$	0.20	$	0.16		$	0.59		$	0.45
Loss from discontinued operations		—		(0.02	)		—			(0.02	)
Gain on sale of discontinued operations		—		—			—			—

Net income	$	0.20	$	0.14		$	0.59		$	0.43

Net earnings (loss) per share—diluted
Income from continuing operations	$	0.20	$	0.16		$	0.57		$	0.44
Loss from discontinued operations		—		(0.02	)		—			(0.02	)
Gain on sale of discontinued operations		—		—			—			—

Net income	$	0.20	$	0.14		$	0.57		$	0.42

Weighted average equity instruments to purchase 650 and 950 shares of common stock were not included in the calculation of diluted net earnings per share for the three and nine months ended March 31, 2011, respectively, because the equity instruments were anti-dilutive. Weighted average equity instruments to purchase 1,679 and 1,925 shares of common stock were not included in the calculation of diluted net earnings per share for the three and nine months ended March 31, 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 $93,649. As a result, an additional 2,996 and 999 weighted average shares outstanding were included in the calculation of basic and diluted net earnings per shares for the three and nine months ended March 31, 2011, respectively.

F. Marketable Securities and Related Receivables

The Company had no marketable securities and related receivables at March 31, 2011.

On June 30, 2010, the Company exercised the put option to sell its remaining $18,025 auction rate securities (“ARS”) balance to UBS at par value. The transaction settled on July 1, 2010. As a result of the transaction, the Company had a receivable balance of $18,025 from UBS as of June 30, 2010. The receivable balance was considered a level 1 financial instrument and its fair value was equivalent to the cash that was received on July 1, 2010. The realized net gains on the ARS in fiscal 2010 were not material.

G. 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. 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. Inventory was comprised of the following:


	March 31, 2011		June 30, 2010
Raw materials	$	6,234	$	6,287
Work in process		8,943		6,326
Finished goods		4,102		5,009

Total	$	19,279	$	17,622

There are no amounts in inventory relating to contracts having production cycles longer than one year.

H. Property and Equipment

Property and equipment consisted of the following:


	March 31, 2011			June 30, 2010
Computer equipment and software	$	49,355		$	50,680
Furniture and fixtures		6,920			6,795
Building and leasehold improvements		1,593			1,354
Machinery and equipment		4,641			2,732
Vehicles		119			—

		62,628			61,561
Less: accumulated depreciation		(49,836	)		(51,263	)

	$	12,792		$	10,298

Depreciation expense related to property and equipment for the three and nine months ended March 31, 2011 was $1,660 and $4,640, respectively. Depreciation expense related to property and equipment for the three and nine months ended March 31, 2010 was $1,312 and $3,790, respectively.

I. Goodwill and Acquired Intangible Assets

The following table sets forth the changes in the carrying amount of goodwill for nine months ended March 31, 2011:


	Amounts
Balance at June 30, 2010	$	57,653
Goodwill arising from the LNX acquisition		22,160

Balance at March 31, 2011	$	79,813

In the nine months ended March 31, 2011, there were no triggering events, as defined by FASB ASC Topic 350, Intangibles—Goodwill and Other (“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, 2010, ACS was the only reporting unit that had a goodwill balance, and as such, the annual impairment analysis was performed for this reporting unit only.

Acquired intangible assets consisted of the following:


	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life
MARCH 31, 2011
Customer relationships	$	18,300	$	(7,354	)	$	10,946		6.7 years
Licensing agreements, trademarks and patents		4,045		(1,344	)		2,701		5.5 years
Completed technologies		2,900		(106	)		2,794		6.0 years
Backlog		800		(101	)		699		2.0 years
Non-compete agreements		500		(253	)		247		5.0 years

	$	26,545	$	(9,158	)	$	17,387

JUNE 30, 2010
Customer relationships	$	7,200	$	(6,891	)	$	309		5.2 years
Licensing agreements, trademarks and patents		1,300		(786	)		514		8.0 years
Non-compete agreements		500		(182	)		318		5.0 years

	$	9,000	$	(7,859	)	$	1,141

Estimated future amortization expense for acquired intangible assets remaining at March 31, 2011 is $697 for fiscal 2011, $2,810 for fiscal 2012, $2,830 for fiscal 2013, $2,826 for fiscal 2014, $2,690 for fiscal 2015 and $5,534 thereafter.

The following table summarizes the acquired intangible assets arising as a result of the LNX acquisition. LNX is included in the ACS reporting unit and operating segment. These assets are included in the Company’s gross carrying amounts as of March 31, 2011.


Classification	Amount		Weighted Average Useful Life
Customer relationships	$	11,100		7.7 years
Completed technologies		2,900		6.0 years
Backlog		800		2.0 years

Total	$	14,800

In the nine months ended March 31, 2011, the Company purchased two IP licenses for $2,745. These licenses were recorded as intangible assets and are being amortized over one and five years.

J. Debt

Debt consisted of the following:


	March 31, 2011			June 30, 2010
Capital lease obligations	$	256		$	142
Less: current portion		(170	)		(53	)

Total non-current capital lease obligations	$	86		$	89

The current portion of capital lease obligations is included in accrued expenses and the non-current portion is included in other non-current liabilities on the consolidated balance sheets at March 31, 2011 and June 30, 2010.

Borrowings Under UBS Line of Credit

As of June 30, 2010, there were no borrowings against the UBS line of credit. The UBS line of credit terminated on July 1, 2010 upon the settlement of the put option for the ARS.

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 adjusted EBITDA as defined in the Loan Agreement. In addition, the Loan Agreement contains certain 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, and 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).

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 March 31, 2011.

K. Shareholders’ Equity

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 $93,649 of net proceeds to the Company. The underwriting discount of $4,950 and other expenses of $402 related to the follow-on public stock offering were recorded as an offset to additional paid-in-capital.

The Company intends to use the net proceeds of the follow-on public stock offering for general corporate purposes, which may include the acquisition of other companies or businesses, working capital and capital expenditures.

L. 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 5,092 shares, which 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”). On October 21, 2010, the Company’s shareholders approved an increase in the number of shares authorized for issuance under the 2005 plan to 5,092, an increase of 1,000. 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 2,508 shares available for future grant under the 2005 Plan at March 31, 2011.

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 directed 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 1,100 shares. 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. There were 54 and 50 shares issued under the ESPP during the nine months ended March 31, 2011 and 2010, respectively. Shares available for future purchase under the ESPP totaled 199 at March 31, 2011.

STOCK OPTION AND AWARD ACTIVITY

The following table summarizes activity of the Company’s stock option plans since June 30, 2009:


	Options Outstanding
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
Outstanding at June 30, 2009		2,980		$	13.87		5.69
Granted		56			10.41
Exercised		(130	)		7.72
Cancelled		(294	)		17.38

Outstanding at June 30, 2010		2,612		$	13.70		4.69
Granted		77			13.70
Exercised		(202	)		8.18
Cancelled		(78	)		16.88

Outstanding at March 31, 2011		2,409		$	14.06		4.14

The following table summarizes the status of the Company’s non-vested restricted stock awards since June 30, 2009:


	Non-vested Restricted Stock Awards
	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding at June 30, 2009		666		$	8.97
Granted		609			10.21
Vested		(325	)		10.39
Forfeited		(122	)		8.22

Outstanding at June 30, 2010		828		$	9.44
Granted		711			12.23
Vested		(190	)		10.99
Forfeited		(45	)		9.09

Outstanding at March 31, 2011		1,304		$	10.75

STOCK-BASED COMPENSATION ASSUMPTIONS AND EXPENSE

The Company recognized the expense for its share-based payment plans in the consolidated statements of operations for the three and nine months ended March 31, 2011 and 2010 in accordance with FASB ASC 718, Compensation—Stock Compensation (“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 included in the Company’s consolidated statement of operations:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2011		2010		2011		2010
Cost of revenues	$	63	$	56	$	170	$	166
Selling, general and administrative		1,036		687		3,590		2,405
Research and development		200		200		462		397

Share-based compensation expense	$	1,299	$	943	$	4,222	$	2,968

The following table sets forth the weighted-average key assumptions and fair value results for stock options granted during the three and nine months ended March 31, 2011 and 2010:


	Three Months Ended March 31,						Nine Months Ended March 31,
	2011			2010			2011			2010
Weighted-average fair value of options granted	$	—	(*)	$	—	(*)	$	7.25		$	7.17
Option life(1)		—	(*)		—	(*)		5 years			5 years
Risk-free interest rate(2)		—	(*)		—	(*)		1.3	%		2.4	%
Stock volatility(3)		—	(*)		—	(*)		63	%		87	%
Dividend rate		—	(*)		—	(*)		0	%		0	%

The following table sets forth the weighted-average key assumptions and fair value results for employees’ stock purchase rights during the three and nine months ended March 31, 2011 and 2010:


	Three Months Ended March 31,						Nine Months Ended March 31,
	2011			2010			2011			2010
Weighted-average fair value of stock purchase rights granted	$	4.97		$	3.45		$	3.95		$	3.80
Option life(1)		6 months			6 months			6 months			6 months
Risk-free interest rate(2)		0.2	%		0.2	%		0.2	%		0.3	%
Stock volatility(3)		41	%		53	%		53	%		82	%
Dividend rate		0	%		0	%		0	%		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.

(*)	No stock options were granted by the Company during the three months ended March 31, 2011 and 2010.

M. Income Tax Expense

The Company recorded tax expense of $2,007 and a tax benefit $2,235 for the three months ended March 31, 2011 and 2010, respectively, on income from continuing operations before taxes of $7,385 and $1,464 for the three months ended March 31, 2011 and 2010, respectively. The Company recorded tax expense of $5,780 and a tax benefit of $999 for the nine months ended March 31, 2011 and 2010, respectively, on income from continuing operations before taxes of $20,023 and $9,040 for the nine months ended March 31, 2011 and 2010, respectively. Income tax expense for the three and nine months ended March 31, 2011 differed from the federal statutory rate primarily due to the impact of research and development tax credits, the impact of a Section 199 manufacturing deduction, and favorable discrete items. Income tax expense for the three and nine months ended March 31, 2010 differed from the federal statutory rate primarily due to a partial release of the valuation allowance on deferred tax assets, several favorable discrete items which included a benefit from the Company’s 2009 tax return filing concerning its ability to utilize certain net operating losses, a decrease of the Company’s valuation allowance for uncertain tax positions, and the favorable settlement of issues regarding the Company’s 2006 through 2008 tax return filings.

No material changes in the Company’s unrecognized tax positions occurred during the three and nine months ended March 31, 2011. The Company does not expect there to be any material changes in its liabilities for unrecognized tax benefits within the next 12 months.

N. Restructuring Expense

In July 2009, the Company announced a restructuring plan within the ACS business unit (the “Q1 FY10 Plan”). This plan was enacted following the completion of the Company’s divestitures as part of the Company’s reorganization of part of its business operations. There were no expenses recorded during three and nine months ended March 31, 2011 against the plan. The Company had a reversal of $11 for unused outplacement costs in the three months ended March 31, 2010 and recorded expense of $243 in the nine months ended March 31, 2010 against this plan. At March 31, 2011, the Company has no restructuring liability in the consolidated balance sheet.

O. Operating Segment, Geographic Information and Significant Customers

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 organized in two business 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 (“ACS”). This business unit is focused on specialized, high performance computing solutions with key market segments, including defense, semiconductor, and commercial computing. This segment also provides software and customized design services to meet the specified requirements of military and commercial applications.

•

Mercury Federal Systems (“MFS”). This business unit is focused on services and support work with the Department of Defense and federal intelligence and homeland security agencies, including designing and engineering new ISR capabilities to address present and emerging threats to U.S. forces.

The accounting policies of the reportable segments are the same as those described in “Note B: Summary of Significant Accounting Policies.” The profitability measure employed by the Company and its chief operating decision maker (“CODM”) for making decisions about allocating resources to segments and assessing segment performance was income (loss) from operations prior to stock compensation expense. As such, stock-based compensation expense has been excluded from each operating segments’ income (loss) from operations below and reported separately to reconcile the reported segment income (loss) from operations to the consolidated operating income reported in the consolidated statements of operations. 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			Stock Compensation Expense			Eliminations			Total
THREE MONTHS ENDED MARCH 31, 2011
Net revenues to unaffiliated customers	$	56,364	$	3,452		$	—		$	39		$	59,855
Intersegment revenues		1,728		—			—			(1,728	)		—

Net revenues	$	58,092	$	3,452		$	—		$	(1,689	)	$	59,855

Income (loss) from operations	$	8,013	$	410		$	(1,299	)	$	(125	)	$	6,999
Depreciation and amortization expense	$	2,313	$	10		$	—		$	—		$	2,323
THREE MONTHS ENDED MARCH 31, 2010
Net revenues to unaffiliated customers	$	41,152	$	2,315		$	—		$	136		$	43,603
Intersegment revenues		1,001		—			—			(1,001	)		—

Net revenues	$	42,153	$	2,315		$	—		$	(865	)	$	43,603

Income (loss) from operations	$	2,625	$	(332	)	$	(943	)	$	(198	)	$	1,152
Depreciation and amortization expense	$	1,739	$	7		$	—		$	—		$	1,746
NINE MONTHS ENDED MARCH 31, 2011
Net revenues to unaffiliated customers	$	158,732	$	8,872		$	—		$	(128	)	$	167,476
Intersegment revenues		4,499		—			—			(4,499	)		—

Net revenues	$	163,231	$	8,872		$	—		$	(4,627	)	$	167,476

Income (loss) from operations	$	23,474	$	(22	)	$	(4,222	)	$	(468	)	$	18,762
Depreciation and amortization expense	$	5,911	$	28		$	—		$	—		$	5,939
NINE MONTHS ENDED MARCH 31, 2010
Net revenues to unaffiliated customers	$	127,592	$	8,464		$	—		$	136		$	136,192
Intersegment revenues		3,594		336			—			(3,930	)		—

Net revenues	$	131,186	$	8,800		$	—		$	(3,794	)	$	136,192

Income (loss) from operations	$	11,257	$	30		$	(2,968	)	$	(198	)	$	8,121
Depreciation and amortization expense	$	5,071	$	21		$	—		$	—		$	5,092

The geographic distribution of the Company’s revenues from continuing operations is summarized as follows:


	U.S.		Europe		Asia Pacific		Eliminations			Total
THREE MONTHS ENDED MARCH 31, 2011
Net revenues to unaffiliated customers	$	58,441	$	381	$	1,033	$	—		$	59,855
Inter-geographic revenues		905		573		120		(1,598	)		—

Net revenues	$	59,346	$	954	$	1,153	$	(1,598	)	$	59,855

THREE MONTHS ENDED MARCH 31, 2010
Net revenues to unaffiliated customers	$	38,466	$	2,807	$	2,330	$	—		$	43,603
Inter-geographic revenues		4,546		191		17		(4,754	)		—

Net revenues	$	43,012	$	2,998	$	2,347	$	(4,754	)	$	43,603

NINE MONTHS ENDED MARCH 31, 2011
Net revenues to unaffiliated customers	$	159,746	$	2,743	$	4,987	$	—		$	167,476
Inter-geographic revenues		4,781		1,735		240		(6,756	)		—

Net revenues	$	164,527	$	4,478	$	5,227	$	(6,756	)	$	167,476

NINE MONTHS ENDED MARCH 31, 2010
Net revenues to unaffiliated customers	$	121,455	$	7,157	$	7,580	$	—		$	136,192
Inter-geographic revenues		10,601		311		152		(11,064	)		—

Net revenues	$	132,056	$	7,468	$	7,732	$	(11,064	)	$	136,192

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

The geographic distribution of the Company’s long-lived assets from continuing operations is summarized as follows:


	U.S.		Europe		Asia Pacific		Eliminations		Total
March 31, 2011	$	16,671	$	27	$	666	$	—	$	17,364
June 30, 2010	$	13,384	$	21	$	716	$	—	$	14,121

Identifiable long-lived assets exclude goodwill, intangible assets, deferred tax accounts, and investments in other entities.

Customers comprising 10% or more of the Company’s revenues for the periods shown below are as follows:


	Three Months Ended March 31,						Nine Months Ended March 31,
	2011			2010			2011			2010
Northrop Grumman Corporation		22	%		*			20	%		12	%
Raytheon Company		14	%		27	%		18	%		25	%
KLA-Tencor Corporation		13	%		*			10	%		*
Lockheed Martin Corporation		*			*			11	%		*

		49	%		27	%		59	%		37	%

*	Indicates that the amount is less than 10% of the Company’s revenues for the respective period.

Although the Company typically has several defense 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 three and nine months ended March 31, 2011, no programs individually comprised 10% or more of the Company’s revenues. For the three months ended March 31, 2010, only one program individually comprised 10% or more of the Company’s revenue, the Joint Strike Fighter program at 14%. In the nine months ended March 31, 2010, there were no programs that individually comprised 10% or more of the Company’s revenue.

P. Commitments and Contingencies

LEGAL CLAIMS

The Company is subject to legal proceedings, claims and tax audits that arise in the ordinary course of business. The Company does not believe the outcome of these matters will have a material adverse effect on its financial position, results of operations or cash flows.

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.

In connection with the divestitures of the Company’s former VI, VSG, Biotech and ES/PS businesses, the Company provided indemnification to the buyers of the respective businesses. The Company’s indemnification obligations generally cover the buyers for damages resulting from breaches of representations, warranties and covenants contained in the applicable purchase and sale agreement and generally cover pre-closing tax liabilities of the divested businesses. In addition, the Company also agreed to indemnify the buyer of the VI business for certain post-closing employee severance expenses. The Company’s indemnification obligations related to divested businesses are generally subject to caps and expire at various defined future dates.

PURCHASE COMMITMENTS

In September 2006, the Company entered into a supply agreement with a third-party vendor to purchase certain inventory parts that went “end of life.” This supply agreement, as subsequently amended, commits the vendor to acquiring and storing approximately $6,500 of inventory until August 31, 2012 and allows the Company to place orders for the inventory four times a year. Upon the earlier of January 31, 2007 or completion of the wafer fabrication process, the Company was required to and paid approximately $1,900 of the $6,500. Further, upon expiration of the agreement on August 31, 2012, if the Company does not purchase the full $6,500 in inventory, it may be required to pay a penalty equal to 35% of the remaining inventory balance. As of March 31, 2011, the remaining minimum commitment related to this agreement was $1,642, which is the 35% penalty on the remaining inventory balance. While the Company expects to continue to purchase this inventory through the expiration of the agreement, it does not expect to purchase the full $6,500 noted above. As of March 31, 2011, the Company has recorded an accrued liability of approximately $562 for the 35% penalty it anticipates on paying for unpurchased inventory.

The Company’s purchase obligations typically represent open non-cancelable purchase commitments for certain inventory components and services used in normal operations. At March 31, 2011, the purchase commitments covered by these agreements were for less than one year and aggregated approximately $16,091.

Q. Subsequent Events

The Company has evaluated subsequent events from the date of the consolidated balance sheet through the date the consolidated financial statements were issued, no subsequent events were noted.

ITEM 2.

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,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “likely,” “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, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of continued geopolitical unrest and regional conflicts, 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, continued funding of defense programs, the timing of such funding, 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 benefits from acquisitions and 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 the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010. 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.

Unless the context otherwise requires, all references to “Mercury,” “we,” “our,” “us” or “our company” in this report refer to Mercury Computer Systems, Inc., a Massachusetts corporation, and its consolidated subsidiaries.

OVERVIEW

We design, manufacture and market commercially developed, high-performance embedded, real-time digital signal and image processing systems and software for specialized defense and commercial 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, video, sonar and signals intelligence data. Our systems are also used in semiconductor imaging applications, including photomask generation and wafer inspection. We also provide radio frequency 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 our wholly-owned subsidiary, Mercury Federal Systems, Inc. (“MFS”), to focus on reaching the federal intelligence and homeland security agencies.

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, or EW, systems and services, which 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 are deployed in over 300 different programs across 26 different prime defense contractors.

As of March 31, 2011, we had 612 employees and, for the three and nine months ended March 31, 2011, we had revenues of $59.9 million and $167.5 million and income from continuing operations of $5.4 million and $14.2 million, respectively.

Our operations are organized in the following two business units:

•

Advanced Computing Solutions (“ACS”). This business unit is focused on specialized, high performance signal processing solutions that encompass signal acquisition, digitalization, computing, storage and communications, targeted to key market segments including defense, semiconductor, communications and other commercial computing. ACS’s commercially developed, open system architecture solutions span the full range of embedded technologies from board level products to fully integrated subsystems. Our products utilize leading-edge processor technologies architected to address highly data-intensive applications that include signal, sensor and image processing within environmentally constrained military and commercial applications. 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 systems integration services extend our capabilities to tailor solutions to meet the specialized requirements of our customers. Our recently acquired subsidiary, LNX Corporation (“LNX”), is included in the ACS business unit. In fiscal 2011, ACS has accounted for 95% of our total net revenues.

•

Mercury Federal Systems (“MFS”). This business unit is focused on services and support work with the Department of Defense, or the DoD, and federal intelligence and homeland security agencies, including designing and engineering new intelligence, surveillance and reconnaissance, or ISR, capabilities to address present and emerging threats to U.S. forces. MFS is part of our long-term strategy to expand our software and services presence and pursue growth in platform-ready ISR subsystems, particularly those with classified intellectual property. MFS offers a wide range of engineering architecture and design services that enable clients to deploy leading edge computing capabilities for ISR systems on an accelerated time cycle. The business unit enables us to combine classified intellectual property with the commercially developed application-ready subsystems being developed by ACS, providing customers with platform-ready, affordable ISR subsystems. In fiscal 2011, MFS has accounted for 5% of our total net revenues.

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.

RESULTS OF OPERATIONS:

Three months ended March 31, 2011 compared to the three months ended March 31, 2010

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


(In thousands)	March 31, 2011		As a % of Total Net Revenue			March 31, 2010			As a % of Total Net Revenue
Net revenues	$	59,855		100.0	%	$	43,603			100.0	%
Cost of revenues		26,973		45.1			18,800			43.1

Gross margin		32,882		54.9			24,803			56.9
Operating expenses:
Selling, general and administrative		14,437		24.1			12,538			28.8
Research and development		10,683		17.8			10,629			24.4
Impairment of long-lived assets		—		—			61			0.1
Amortization of acquired intangible assets		663		1.1			434			1.0
Restructuring		—		—			(11	)		—
Acquisition costs and other related expenses		100		0.2			—			—

Total operating expenses		25,883		43.2			23,651			54.3

Income from operations		6,999		11.7			1,152			2.6
Other income, net		386		0.6			312			0.8

Income from continuing operations before income taxes		7,385		12.3			1,464			3.4
Income tax expense (benefit)		2,007		3.3			(2,235	)		(5.1	)

Income from continuing operations		5,378		9.0			3,699			8.5
Loss from discontinued operations, net of income taxes		—		—			(423	)		(1.0	)

Net income	$	5,378		9.0	%	$	3,276			7.5	%

REVENUES


(In thousands)	March 31, 2011		March 31, 2010		$ Change			% Change
ACS	$	56,364	$	41,152	$	15,212			37	%
MFS		3,452		2,315		1,137			49	%
Other		39		136		(97	)		(71	%)

Total revenues	$	59,855	$	43,603	$	16,252			37	%

Total revenues increased $16.3 million, or 37%, to $59.9 million during the three months ended March 31, 2011 as compared to the comparable period in fiscal 2010. International revenues represented approximately 2% and 12% of total revenues during the three months ended March 31, 2011 and 2010, respectively. The decrease in international revenues during the three months ended March 31, 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 our 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.

Net ACS revenues increased $15.2 million, or 37%, to $56.4 million during the three months ended March 31, 2011 as compared to the same period in fiscal 2010. This increase was primarily driven by an increase

in sales to defense customers of $8.8 million, mostly driven by an increase in the radar and sonar markets, partially offset by a slight decrease in electronic warfare applications. The increase was also due to a $6.4 million increase in sales to commercial customers, primarily relating to an increase in the semiconductor market, slightly offset by a decrease in sales in the commercial computing market. We expect that sales to commercial customers will decrease due to recent information from ASML that our system has been designed out of their products.

Net MFS revenues increased $1.1 million, or 49%, to $3.5 million during the three months ended March 31, 2011 as compared to the same period in fiscal 2010. This change was primarily driven by a $1.2 million increase in revenue relating to a persistent ISR development program.

Net Other revenue decreased $0.1 million during the three months ended March 31, 2011 as compared to the same period in fiscal 2010. Net Other revenue is attributable to development programs where the revenue recognized in our two business segments under contract accounting is either greater or less than revenue recognized on a consolidated basis.

GROSS MARGIN

Gross margin was 54.9% for the three months ended March 31, 2011, a decrease of 200 basis points from the 56.9% gross margin achieved during the same period in fiscal 2010. The decrease in gross margin was primarily due to a $0.5 million increase in charges for work performed by our engineers on customer funded efforts and a $0.4 million increase in warranty costs.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased $1.9 million, or 15%, to $14.4 million during the three months ended March 31, 2011 compared to $12.5 million during the same period in fiscal 2010. The increase was primarily due to a $1.7 million increase in employee compensation expense, including stock-based compensation expense, driven by a 51 person increase in headcount, company-wide pay increases and variable compensation increases. Additionally, there was a $0.2 million increase in business meeting and travel expenses. Selling, general and administrative expenses decreased as a percentage of revenues to 24.1% during the three months ended March 31, 2011 from 28.8% during the same period in fiscal 2010. We seek to continue improving our operating leverage by maintaining our selling, general and administrative expenses growth rate well below our revenue growth rate.

RESEARCH AND DEVELOPMENT

Research and development expenses increased $0.1 million, or 1%, to $10.7 million during the three months ended March 31, 2011 compared to $10.6 million during the same period in fiscal 2010. The increase was primarily the result of a $0.7 million increase in employee compensation expense driven by a 21 person increase in headcount, company-wide pay increases and variable compensation increases. This increase was primarily offset by fewer purchases of prototype materials to support long-term construction contracts nearing the end of their development stage. Research and development continues to be a focus of our business with approximately 17.8% of our revenues dedicated to research and development activities during the three months ended March 31, 2011 and approximately 24.4% of our revenues dedicated to such activities during the same period in fiscal 2010. We have continued to improve the leverage of our research and development investments.

IMPAIRMENT OF LONG-LIVED ASSETS

Impairment of long-lived assets was $0.1 million in the three months ended March 31, 2010, as we wrote down the remaining balance of an intangible asset due the cancellation of a license agreement. There were no impairment charges recorded in the three months ended March 31, 2011.

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS

Amortization of acquired intangible assets increased to $0.7 million during the three months ended March 31, 2011 compared to $0.4 million during the same period in fiscal 2010, primarily due to amortization of intangible assets from the LNX acquisition completed during the third quarter of fiscal 2011.

ACQUISITION COSTS AND OTHER RELATED EXPENSES

We incurred $0.1 million of acquisition costs and other related expenses during the three months ended March 31, 2011, in connection with the acquisition of LNX Corporation, which was concluded on January 12, 2011.

INTEREST INCOME

Interest income for the three months ended March 31, 2011 decreased by $0.2 million to nil compared to the same period in fiscal 2010. The decrease was attributable to the sale of our marketable securities at the end of fiscal 2010. Our marketable securities held during fiscal 2010 yielded higher interest rates than the money market funds and U.S. treasury securities in which our cash and cash equivalents were invested during the three months ended March 31, 2011. We held no marketable securities during the three months ended March 31, 2011.

INTEREST EXPENSE

Interest expense for the three months ended March 31, 2011 decreased by $0.1 million to nil compared to the same period in fiscal 2010. The decrease was the result of the repayment of our borrowings against our auction rate securities (“ARS”) at the end of fiscal 2010. We did not have any debt during the three months ended March 31, 2011, other than capital lease obligations.

OTHER INCOME (EXPENSE)

Other net income increased $0.1 million, or 48%, to $0.4 million during the three months ended March 31, 2011, as compared to the same period in fiscal 2010. Other income (expense) primarily consists of $0.3 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 TAX PROVISION (BENEFIT)

We recorded a provision for income taxes of $2.0 million during the three months ended March 31, 2011 as compared to a benefit of $2.2 million during the same period in fiscal 2010. Our provision for income taxes for the three months ended March 31, 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 Section 199 manufacturing deduction, and favorable discrete items. Our provision for income taxes for the three months ended March 31, 2010 differed from the federal statutory rate primarily due to a partial release of the valuation allowance on deferred tax assets, 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 of our valuation allowance for uncertain tax positions and a decrease due to the favorable settlement of issues regarding our 2006 through 2008 tax return filings.

SEGMENT OPERATING RESULTS

Operating profit for ACS increased $5.4 million during the three months ended March 31, 2011 to $8.0 million as compared to $2.6 million for the same period in fiscal 2010. The increase in operating profit was primarily driven by increased revenues of $15.2 million, which drove an improvement in gross margin. 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.

Results from operations of the MFS segment increased $0.7 million during the three months ended March 31, 2011 to an operating profit of $0.4 million as compared to an operating loss of $0.3 million for the same period in fiscal 2010. This increase was related to an increase in revenue relating to an ISR development program. See Note O to our consolidated financial statements included in this report for more information regarding our operating segments and geographic information.

Nine months ended March 31, 2011 compared to the nine months ended March 31, 2010

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


(In thousands)	March 31, 2011			As a % of Total Net Revenue			March 31, 2010			As a % of Total Net Revenue
Net revenues	$	167,476			100.0	%	$	136,192			100.0	%
Cost of revenues		72,294			43.2			58,222			42.7

Gross margin		95,182			56.8			77,970			57.3
Operating expenses:
Selling, general and administrative		42,653			25.5			37,367			27.4
Research and development		32,061			19.1			30,726			22.5
Impairment of long-lived assets		—			—			211			0.2
Amortization of acquired intangible assets		1,299			0.8			1,302			1.0
Restructuring		—			—			243			0.2
Acquisition costs and other related expenses		407			0.2			—			—

Total operating expenses		76,420			45.6			69,849			51.3

Income from operations		18,762			11.2			8,121			6.0
Other income, net		1,261			0.8			919			0.6

Income from continuing operations before income taxes		20,023			12.0			9,040			6.6
Income tax expense (benefit)		5,780			3.5			(999	)		(0.8	)

Income from continuing operations		14,243			8.5			10,039			7.4
Loss from discontinued operations, net of income taxes		(52	)		—			(408	)		(0.3	)
Gain on sale of discontinued operations, net of income taxes		—			—			74			—

Net income	$	14,191			8.5	%	$	9,705			7.1	%

REVENUES


(In thousands)	March 31, 2011			March 31, 2010		$ Change			% Change
ACS	$	158,732		$	127,592	$	31,140			24	%
MFS		8,872			8,464		408			5	%
Other		(128	)		136		(264	)		(194	%)

Total revenues	$	167,476		$	136,192	$	31,284			23	%

Total revenues increased $31.3 million, or 23%, to $167.5 million during the nine months ended March 31, 2011 as compared to the same period in fiscal 2010. International revenues represented approximately 5% and 11% of total revenues during the nine months ended March 31, 2011 and 2010, respectively. The decrease in international revenues during the nine months ended March 31, 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.

Net ACS revenues increased $31.1 million, or 24%, to $158.7 million during the nine months ended March 31, 2011 as compared to the same period in fiscal 2010. This increase was primarily driven by an increase in sales to defense customers of $15.8 million, mostly driven by an increase in sales in the radar market, partially offset by a decrease in sales in electronic warfare applications. The increase was also due to a $15.3 million increase in sales to commercial customers, primarily relating to an increase in sales in the semiconductor market, slightly offset by a decrease in the commercial computing market. We expect that sales to commercial customers will decrease due to recent information from ASML that our system has been designed out of their products.

Net MFS revenues increased $0.4 million, or 5%, to $8.9 million, during the nine months ended March 31, 2011 as compared to the same period in fiscal 2010. This change was primarily driven by a $1.5 million increase in revenue relating to an ISR development program, partially offset by the completion of fiscal 2010 development programs.

Net Other revenue decreased $0.3 million during the three months ended March 31, 2011 as compared to the same period in fiscal 2010. Net Other revenue is attributable to development programs where the revenue recognized in our two business segments under contract accounting is either greater or less than revenue recognized on a consolidated basis.

GROSS MARGIN

Gross margin was 56.8% for the nine months ended March 31, 2011, a decrease of 50 basis points from the 57.3% gross margin achieved during the same period in fiscal 2010. The decrease in gross margin was primarily due to a decrease in direct margin resulting from a shift in product mix and an increase in other cost of goods sold due to additional headcount in the customer service and sustained engineering groups, partially offset by higher revenues.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased $5.3 million, or 14%, to $42.7 million during the nine months ended March 31, 2011 compared to $37.4 million during the same period in fiscal 2010. The increase was primarily due to a $4.6 million increase in employee compensation expense, including stock-based compensation, driven by a 51 person increase in headcount, company-wide pay increases and variable compensation increases. Additionally, there was a $0.4 million increase in depreciation expense. Selling, general and administrative expenses decreased as a percentage of revenues to 25.5% during the nine months ended March 31, 2011 from 27.4% during the same period in fiscal 2010. We have continued to improve our operating leverage by maintaining our selling, general and administrative expense year over year growth rate well below our revenue growth rate and seek to continue this trend.

RESEARCH AND DEVELOPMENT

Research and development expenses increased $1.4 million, or 4%, to $32.1 million during the nine months ended March 31, 2011 compared to $30.7 million during the same period in fiscal 2010. The increase was primarily the result of a $1.5 million increase in employee compensation expense, including stock-based compensation expense, driven by a 21 person increase in headcount, company-wide pay increases and variable compensation increases. Additionally, there was a $0.8 million increase in IT and facility support expense and a $0.2 million increase in depreciation expense. Additionally, there was less time spent on billable projects by our engineers by $0.4 million. These increases were partially offset by fewer purchases of prototype materials to support long-term construction contracts nearing the end of their development stage. Research and development continues to be a focus of our business with approximately 19.1% of our revenues dedicated to research and

development activities during the nine months ended March 31, 2011 and approximately 22.5% of our revenues dedicated to such activities during the same period in fiscal 2010. We have continued to improve the leverage of our research and development investments.

IMPAIRMENT OF LONG-LIVED ASSETS

We recorded $0.2 million in impairment charges in the nine months ended March 31, 2010. These charges were the result of the $0.1 million impairment of the remaining value of a terminated license agreement and $0.1 million for 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 recorded in the nine months ended March 31, 2011.

AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS

Amortization of acquired intangible assets remained relatively flat at $1.3 million for the nine months ended March 31, 2011 and 2010 due to increases in the nine months ended March 31, 2011 associated with our LNX acquisition of $0.4 million and $0.4 million for acquired licenses, offset by certain assets becoming fully amortized during the first quarter of fiscal 2011.

RESTRUCTURING EXPENSE

Restructuring expense decreased $0.2 million to nil during the nine months ended March 31, 2011 as compared to the comparable period in fiscal 2010. Restructuring activities during the nine months ended March 31, 2010 were primarily due to the elimination of four positions under our restructuring plan within the ACS business unit (the “Q1 FY10 Plan”), which was enacted in July 2009 following the completion of our divestitures as part of the reorganization of our business operations.

ACQUISITION COSTS AND OTHER RELATED EXPENSES

We incurred $0.4 million of acquisition costs and other related expenses during the nine months ended March 31, 2011, which consist of transaction costs incurred in connection with the acquisition of LNX Corporation, which was concluded on January 12, 2011.

INTEREST INCOME

Interest income for the nine months ended March 31, 2011 decreased by $0.4 million to nil compared to the same period in fiscal 2010. The decrease was attributable to the sale of our marketable securities at the end of fiscal 2010. Our marketable securities held during fiscal 2010 yielded higher interest rates than the money market funds in which our cash was primarily invested during the nine months ended March 31, 2011. We held no marketable securities during the nine months ended March 31, 2011.

INTEREST EXPENSE

Interest expense for the nine months ended March 31, 2011 decreased by $0.2 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 the nine months ended March 31, 2011, other than capital lease obligations.

OTHER INCOME (EXPENSE)

Other net income increased $0.5 million, or 64%, to $1.3 million during the nine months ended March 31, 2011 as compared to the same period in fiscal 2010. Other income (expense) primarily consists of $0.9 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 $0.5 million increase is primarily associated with a $0.4 million foreign currency exchange gain during the nine months ended March 31, 2011 as compared to a $0.3 million foreign currency exchange loss for the same period in 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 TAX PROVISION (BENEFIT)

We recorded a provision for income taxes of $5.8 million during the nine months ended March 31, 2011 as compared to a tax benefit of $1.0 million during the same period in fiscal 2010. Our provision for income taxes for the nine months ended March 31, 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 Section 199 manufacturing deduction, and favorable discrete items. Our provision for income taxes for the nine months ended March 31, 2010 differed from the federal statutory rate primarily due to a partial release of the valuation allowance on deferred tax assets, 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 of our valuation allowance for uncertain tax positions and a decrease due to the favorable settlement of issues regarding our 2006 through 2008 tax return filings.

SEGMENT OPERATING RESULTS

Operating profit for ACS increased $12.2 million during the nine months ended March 31, 2011 to $23.5 million as compared to $11.3 million for the same period in fiscal 2010. The increase in operating profit was primarily driven by increased revenues of $31.1 million. This improvement was partially offset by lower margins and 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.

Results from operations of the MFS segment decreased $0.1 million during the nine months ended March 31, 2011 to an operating loss of less than $0.1 million as compared to an operating profit of less than $0.1 million for the same period in fiscal 2010. The decrease in operations was a result of program mix and an increase in headcount. See Note O to our consolidated financial statements included in this report for more information regarding our operating segments and geographic information.

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 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.

The following table reconciles our most directly comparable GAAP financial measure to adjusted EBITDA:


	Three Months Ended March 31,					Nine Months Ended March 31,
(In thousands)	2011		2010			2011		2010
Income from continuing operations	$	5,378	$	3,699		$	14,243	$	10,039
Interest expense (income), net		4		(48	)		49		(120	)
Income tax expense (benefit)		2,007		(2,235	)		5,780		(999	)
Depreciation		1,660		1,312			4,640		3,790
Amortization of acquired intangible assets		663		434			1,299		1,302
Restructuring		—		(11	)		—		243
Impairment of long-lived assets		—		61			—		211
Acquisition costs and other related expenses		100		—			407		—
Fair value adjustments from purchase accounting		148		—			148		—
Stock-based compensation cost		1,299		943			4,222		2,968

Adjusted EBITDA	$	11,259	$	4,155		$	30,788	$	17,434

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 the our obligations which require cash.

The following table reconciles our most directly comparable GAAP financial measure to free cash flow:


	Three Months Ended March 31,						Nine Months Ended March 31,
(In thousands)	2011			2010			2011			2010
Cash provided by operating activities	$	5,392		$	4,521		$	22,845		$	12,295
Purchases of property and equipment		(1,738	)		(2,148	)		(5,336	)		(4,948	)

Free cash flow	$	3,654		$	2,373		$	17,509		$	7,347

OFF-BALANCE SHEET ARRANGEMENTS

We provided indemnification to the buyers of our divested businesses. Our indemnification obligations generally cover the buyers for damages resulting from breaches of representations, warranties and covenants contained in the applicable purchase and sale agreement and generally covers pre-closing tax liabilities of the divested businesses. Our indemnification obligations regarding the divested businesses are generally subject to caps on our obligations.

Other than the indemnification relating to the divestitures of our former businesses which have finite terms, our lease commitments incurred in the normal course of business and certain other 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 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


(In thousands)	As of and for the Nine Months Ended March 31,
(In thousands)	2011			2010
Net cash provided by operating activities	$	22,845		$	12,295
Net cash (used in) provided by investing activities	$	(19,194	)	$	6,239
Net cash provided by (used in) financing activities	$	96,457		$	(6,900	)
Net increase in cash and cash equivalents	$	100,180		$	11,874
Cash and cash equivalents at end of period	$	156,421		$	58,824

Cash and Cash Equivalents

Our cash and cash equivalents increased by $100.2 million from June 30, 2010 to March 31, 2011, primarily as the result of $22.8 million generated by operating activities, $93.6 million net proceeds received from a follow-on public stock offering, $18.0 million cash proceeds from sale of marketable securities and $2.8 million generated from stock related activities, offset by $29.5 million in payment, net of cash acquired, for the LNX acquisition, $5.3 million in capital expenditures and $2.4 million in payments for acquired intangible assets.

During the nine months ended March 31, 2011, we generated $22.8 million in cash from operating activities compared to $12.3 million generated from operating activities during the same period in fiscal 2010. The $10.5 million increase in cash generated from operations was largely driven by a higher comparative net income of $4.5 million, a $6.4 million increase in cash generated from prepaid income taxes and income taxes payable, a $5.1 million increase in cash generated from inventory, a $3.2 million increase in cash generated from accounts receivables, a $0.9 million increase in provision for deferred income taxes, and a $2.1 million increase in stock-based compensation and depreciation and amortization expenses. These improvements were partially offset by a $7.3 million increase in cash used for accounts payable and accrued expenses, a $2.1 million increase in cash used for prepaid expenses and other current assets, a $1.9 million increase in cash used for deferred revenue, customer advances, and other non-current liabilities, and a $0.4 million increase in cash used for other assets and other non-cash items. 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 the nine months ended March 31, 2011, we used cash of $19.2 million in investing activities compared to $6.2 million generated from investing activities during the same period in fiscal 2010. The $25.4 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 $2.2 million increase in cash used for purchases of intangible assets and a $0.4 million increase in capital expenditures, offset by a $5.9 million increase in net sales of marketable securities and a $0.8 million decrease in cash payments related to the sale of discontinued operations.

During the nine months ended March 31, 2011, we generated $96.5 million in cash from financing activities compared to $6.9 million used by financing activities during the same period in fiscal 2010. The $103.4 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 $8.4 million in payments under our line of credit with

UBS, an increase of $1.1 million of cash generated from stock related activities, and a $0.2 million decrease in payments of deferred financing costs during the nine months ended March 31, 2010. These increases were slightly offset by $0.3 million of cash used in payments of capital lease obligations and other.

During the nine months ended March 31, 2011, our primary source of liquidity came from existing cash, $93.6 million of net proceeds received from a follow-on public stock offering, and cash generated from operations. Our near-term fixed commitments for cash expenditures consist primarily of payments under operating leases, a supply agreement and inventory purchase commitments with our contract manufacturers. We do not currently have any material commitments for capital expenditures.

On January 12, 2011, we acquired the outstanding equity interests in LNX Corporation. The purchase price for the acquisition was approximately $31.0 million, subject to post-closing adjustments. We funded the purchase price with cash on hand. We acquired LNX Corporation free of bank 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.

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.

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

In fiscal 2010, we exercised the put option to sell our ARS balance to UBS at par. The transaction settled on July 1, 2010 when we received $18.0 million in cash.

Borrowings Under UBS Line of Credit

In fiscal 2010, we repaid all of our borrowings under our line of credit with UBS. Upon the settlement of the put option for our ARS on July 1, 2010, the UBS line of credit terminated.

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 in all of our domestic assets, 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, LNX also became a 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.

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. 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).

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 March 31, 2011.

Shelf Registration Statement

On April 28, 2009, we filed a shelf registration statement on Form S-3 with the SEC. The shelf registration statement, which was declared effective by the SEC, registered up to $100 million of debt securities, preferred stock, common stock, warrants and units. Pursuant to the shelf registration statement described above, on February 16, 2011, we completed a follow-on public stock offering of 5,577,500 shares of our common stock, at a price to the public of $17.75, generating net proceeds, after underwriting fees and expenses, of $93.6 million. We intend to use the net proceeds for general corporate purposes, which may include the following:

•

the acquisition of other companies or businesses;

•

capital expenditures;

•

working 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 existing shelf registration statement, effectively exhausting our shelf registration statement.

Commitments and Contractual Obligations

The following is a schedule of our commitments and contractual obligations outstanding at March 31, 2011:


(In thousands)	Total		Less Than 1 Year		2-3 Years		4-5 Years		More Than 5 Years
Purchase obligations	$	16,091	$	16,091	$	—	$	—	$	—
Operating leases		15,174		3,148		5,344		4,436		2,246
Supply agreement		1,642		1,642		—		—		—
Capital lease obligations		256		170		86		—		—

	$	33,163	$	21,051	$	5,430	$	4,436	$	2,246

We have a liability at March 31, 2011 of $1.9 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 resolutions 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 represent open non-cancelable purchase commitments for certain inventory components and services used in normal operations. The purchase commitments covered by these agreements are generally for less than one year and aggregated approximately $16.1 million at March 31, 2011.

In September 2006, we entered into a supply agreement with a third-party vendor to purchase certain inventory parts that went “end of life.” This supply agreement, as subsequently amended, commits the vendor to acquiring and storing approximately $6.5 million of inventory until August 31, 2012 and allows us to place orders for the inventory four times a year. Upon the earlier of January 31, 2007 or completion of the wafer fabrication process, we were required to and paid approximately $1.9 million of the $6.5 million. Further, upon expiration of the agreement on August 31, 2012, if we do not purchase the full $6.5 million in inventory, we may be required to pay a penalty equal to 35% of the remaining inventory balance. As of March 31, 2011, the remaining minimum commitment related to this agreement was $1.6 million, which is the 35% “penalty” on the remaining inventory balance. While we expect to continue to purchase this inventory through the expiration of the agreement, we do not expect to purchase the full $6.5 million noted above. As of March 31, 2011, we have recorded an accrued liability of approximately $0.6 million for the 35% penalty we anticipate on paying for unpurchased inventory.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, a consensus of the FASB Emerging Issues Task Force (Issue No. 10-A). The guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This guidance is effective for us on July 1, 2011 and it is not expected to have a material impact to our consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations, a consensus of the FASB Emerging Issues Task Force (Issue No. 10-G). This guidance specifies that if a public entity presents comparative financial statements, the entity (acquirer) should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. It also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective prospectively for material business combinations for which the acquisition date is on or after July 1, 2011.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our exposure to market risk from June 30, 2010 to March 31, 2011 as we disclosed in Item 7A of our 2010 Annual Report on Form 10-K filed on August 19, 2010 with the Securities and Exchange Commission.

ITEM 4.

CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2011. We continue to review our disclosure controls and procedures and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our Company’s business. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

(b) Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are subject to legal proceedings, claims and tax audits that arise in the ordinary course of business and in the opinion of management the outcome of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 1A.

RISK FACTORS

You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 (“2010 Annual Report on Form 10-K”). There have been no material changes from the factors disclosed in our 2010 Annual Report on Form 10-K filed on August 19, 2010 with the Securities and Exchange Commission, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the Securities and Exchange Commission.

ITEM 5.

OTHER INFORMATION

On May 4, 2011, our Board of Directors adopted amended and restated by-laws. A summary of the changes to our by-laws reflected in our amended and restated by-laws is set forth below. The following summary of the changes to our by-laws is qualified in its entirety by reference to our amended and restated by-laws filed as Exhibit 3.2 hereto.

Summary of By-Law Amendments

Meetings of Stockholders (Article 3)

Annual Meeting (Section 3.1)

We amended the procedures for a stockholder to properly bring business (other than a stockholder proposal pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended) before a meeting of stockholders. The amended procedures require a stockholder to deliver written notice to the Secretary not less than 120 nor more than 150 days prior to the anniversary date of the immediately preceding annual meeting. The amended procedures also require the stockholder bringing the matter before the meeting to provide the following information: (i) the stockholder’s beneficial ownership of the Company’s stock as of the date of the stockholder’s notice and as of one year prior to the date of such notice; (ii) a description of any derivative positions beneficially held by the stockholder with respect to the Company’s stock; (iii) a description of any arrangements between such stockholder and any other person in connection with the proposed business pursuant to which such stockholder has the right to vote any stock of the Company; (iv) a description of any material interest of such stockholder in the business proposed for the meeting, including any anticipated benefit to the stockholder; and (v) a description of any proportionate interest in stock of the Company or derivative positions with respect to the Company held by a general or limited partnership in which such stockholder is a general partner.

Notice of Meetings (Section 3.4)

We amended the by-laws to provide that written notice of the date of a meeting of stockholders shall not be given more than 60 days before the meeting date. In addition, the amended by-laws permit notice of a meeting to be distributed by electronic transmission.

Directors (Article 4)

Enumeration, Election and Term of Office (Section 4.1)

Size of the Board of Directors

The amended by-laws state that the Board of Directors may be enlarged only by the affirmative vote of a majority of the Board of Directors.

Stockholder Nomination of Directors for Election

The procedures for a stockholder to nominate a director for election have been amended to include the same notice and information requirements discussed above for a stockholder to bring business before a meeting. In addition, the amended by-laws specify that no person shall be eligible for election as a director unless nominated in accordance with the nomination procedures in the by-laws.

Use of the Company’s Proxy Statement by a Stockholder’s Director Nominee

The amended by-laws state that except as required by law, nothing in the by-laws shall obligate the Company to include in any proxy statement or other stockholder communication distributed on behalf of the Company or the Board information with respect to any nominee for director submitted by a stockholder.

Meetings of Directors (Section 4.3)

The amended by-laws permit the Company to provide electronic notice of special meetings of directors in addition to traditional delivery methods.

Officers (Article 5)

The amendments to the by-laws replace references to the Clerk with references to the Secretary and combine the positions of Secretary and Secretary of the Board into one position.

The amendments also delete the by-law provision referring to a superseded Massachusetts corporation law requirement regarding registered agents.

Indemnification of Directors and Others (Article 7)

The amendments replace lengthy indemnification provisions with a provision providing that the Company shall indemnify its directors and officers, and may indemnify its other employees, to the fullest extent permitted by law.

Stock (Article 8)

Record Date (Section 8.6)

The amended by-laws provide that the Board of Directors may fix a record date not more than 70 days before any meeting of stockholders or the payment of any dividend.

Amendments (Article 10)

We deleted certain requirements for amendments to the by-laws that expired by their terms on January 1, 1999. We also removed the statement of the purposes of the Company from Article 10 as Article 1 otherwise provides that the purposes of the Company shall be as set forth in the Articles of Organization.

Control Share Acquisition Statute (Article 11)

The amended by-laws opt out of the Massachusetts Control Share Acquisition statute.

ITEM 6.

EXHIBITS

The following Exhibits are filed or furnished, as applicable, herewith:


3.2		Bylaws, amended and restated effective as of May 4, 2011

10.1		Stock Purchase Agreement by and among Mercury Computer Systems, Inc., LNX Corporation, and the Holders of Securities of LNX Corporation.

10.2		Compensation Policy for Non-Employee Directors

10.3		First Loan Modification Agreement dated March 30, 2011 between Mercury Computer Systems, Inc. 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)

31.1		Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15(d)-14(a), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.1+		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Furnished herewith. This certificate 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.

MERCURY COMPUTER SYSTEMS, INC.

Signatures

Pursuant to the requirements 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 May 5, 2011.


MERCURY COMPUTER SYSTEMS, INC.

By:		/s/ ROBERT E. HULT
		Robert E. Hult Senior Vice President, Chief Financial Officer and Treasurer

Bylaws, Amended and restated

Exhibit 3.2

BY-LAWS

MERCURY COMPUTER SYSTEMS, INC.

TABLE OF CONTENTS


		Page
ARTICLE 1 Articles of Organization			1

ARTICLE 2 Fiscal Year			1

ARTICLE 3 Meetings of Stockholders			1
Section 3.1	Annual Meeting		1
Section 3.2	Special Meetings		2
Section 3.3	Place of Meetings		2
Section 3.4	Notice of Meetings		2
Section 3.5	Quorum and Adjournment		2
Section 3.6	Action without Meeting		2
Section 3.7	Proxies and Voting		3

ARTICLE 4 Directors			3
Section 4.1	Enumeration, Election and Term of Office		3
Section 4.2	Powers		4
Section 4.3	Meetings of Directors		4
Section 4.4	Quorum of Directors		4
Section 4.5	Consent in Lieu of Meeting and Participation in Meetings by Communications Equipment		4
Section 4.6	Committees		5

ARTICLE 5 Officers			5
Section 5.1	Enumeration, Election and Term of Office		5
Section 5.2	President and Chairman of the Board		5
Section 5.3	Treasurer and Assistant Treasurer		5
Section 5.4	Secretary and Assistant Secretary		5
Section 5.5	Temporary Secretary		6
Section 5.6	Other Powers and Duties		6

ARTICLE 6 Resignations, Removals and Vacancies			6
Section 6.1	Resignations		6
Section 6.2	Removals		6
Section 6.3	Vacancies		6

ARTICLE 7 Indemnification of Directors and Others			7

ARTICLE 8 Stock			7
Section 8.1	Stock Authorized		7
Section 8.2	Issue of Authorized Unissued Capital Stock		7
Section 8.3	Certificates of Stock		7
Section 8.4	Replacement Certificate		7
Section 8.5	Transfers		7
Section 8.6	Record Date		8

ARTICLE 9 Miscellaneous Provisions			8
Section 9.1	Execution of Papers		8
Section 9.2	Voting of Securities		8
Section 9.3	Corporate Seal		8
Section 9.4	Corporate Records		8

BY-LAWS

MERCURY COMPUTER SYSTEMS, INC.

ARTICLE 1

Articles of Organization

The name and purposes of the Corporation shall be as set forth in the Articles of Organization. These By-Laws, the powers of the Corporation and its Directors and stockholders, and all matters concerning the conduct and regulation of the business of the Corporation, shall be subject to such provisions in regard thereto, if any, as are set forth in the Articles of Organization. All references in these By-Laws to the Articles of Organization shall be construed to mean the Articles of Organization of the Corporation as from time to time amended or restated.

ARTICLE 2

Fiscal Year

Except as from time to time otherwise determined by the Directors, the fiscal year of the Corporation shall be the twelve months ending on June 30.

ARTICLE 3

Meetings of Stockholders

Section 3.1 Annual Meeting

The annual meeting of the stockholders shall be held on such date and at such time as shall be determined by the Board of Directors each year, which date and time may subsequently be changed at any time, including the year in which any such determination occurs. Purposes for which an annual meeting is to be held, additional to those prescribed by law and by these By-Laws, may be specified by the President or by the Directors.

To be properly brought before the meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder (other than a stockholder proposal included in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, unless a lesser time period is required by applicable law, each such notice must be delivered to or mailed and received by the Secretary of the Corporation not later than (1) with respect to a matter to be brought before an annual meeting of stockholders or special meeting in lieu of an annual meeting, not less than one-hundred twenty (120) nor more than one-hundred fifty (150) days prior to the anniversary date of the immediately preceding annual meeting of stockholders or special meeting in lieu of an annual meeting and (2) in the case of a special meeting not in lieu of an annual meeting or if the annual meeting is called for a date (including any change in a date determined by the Board of Directors) not within forty-five (45) days before or after such anniversary date, not later than the close of business on the tenth (10^th) day following the date on which notice of such meeting was mailed or public disclosure of the date of such meeting was made, whichever first occurs. The notice shall set forth (i) information concerning the stockholder, including his or her name and address; (ii) a representation that the stockholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to present the matter specified in the notice, (iii) the class and number of all shares of stock of the Corporation held of record, owned beneficially (directly or indirectly) and represented by proxy by such stockholder as of the date of such notice and as of one year prior to the date of such notice, (iv) a description of any derivative positions held or beneficially held (directly or indirectly) by the stockholder, including whether and the extent to which any derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of, or any other agreement, arrangement or understanding (including any short position or any borrowing or lending of shares) has been made by or on behalf of, the effect or intent of which is to mitigate loss to, or manage risk or benefit of share price changes for, or to increase or decrease the voting power or pecuniary or economic interest of, such stockholder with respect to stock of the Corporation (any of the foregoing, a “Derivative Position”), (v) a description of any proxy, contract, arrangement, understanding or relationship between such stockholder and any other person or persons (including their names and addresses) in connection with the proposal of such business by such stockholder or pursuant to which such stockholder has a right to vote any stock of the Corporation, (vi) a description of any material interest of such stockholder in such business, including any anticipated benefit to the stockholder therefrom, (vii) a description of any proportionate interest in stock of the Corporation or Derivative Positions with respect to the Corporation held, directly or indirectly, by a general or limited partnership in which such stockholder is a general partner or, directly or indirectly, beneficially owns an interest in such a general partner,

and (viii) such other information as would be required to be included in a proxy statement soliciting proxies for the presentation of such matter to the meeting.

Notwithstanding anything in these By-Laws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this Section; provided, however, that nothing in this Section shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with these By-Laws.

Section 3.2 Special Meetings

A special meeting of the stockholders may be called at any time by the President, or by a majority of the Directors acting by vote or by written instrument or instruments signed by them. A special meeting of the stockholders shall be called by the Secretary, or in the case of death, absence, incapacity or refusal of the Secretary, by any other officer, upon written application of one or more stockholders who hold at least forty (40) percent (or such lesser percentage as may be required by law) in interest of the capital stock entitled to vote thereat. Such call shall state the time, place and purposes of the meeting. In the event that none of the officers is able or willing to call a special meeting, the supreme judicial or superior court, upon application of one or more stockholders who hold at least forty (40) percent (or such lesser percentage as may be required by law) in interest of the capital stock entitled to vote thereat, shall have jurisdiction in equity to authorize one or more of such stockholders to call a meeting by giving notice as is required by law.

Section 3.3 Place of Meetings

All meetings of the stockholders shall be held at the principal office of the Corporation in Massachusetts, unless a different place within Massachusetts or, if permitted by the Articles of Organization, elsewhere within the United States is designated by the President, or by a majority of the Directors acting by vote or by written instrument or instruments signed by them. Any adjourned session of any meeting of the stockholders shall be held at such place within Massachusetts or, if permitted by the Articles of Organization, elsewhere within the United States as is designated in the vote of adjournment.

Section 3.4 Notice of Meetings

A written notice of the place, date and hour of a meetings of stockholders stating the purposes of the meeting shall be given no fewer than seven (7) nor more than sixty (60) days before the meeting to each stockholder entitled to vote thereat, by leaving such notice with him or at his residence or usual place of business or by mailing it, postage prepaid, and addressed to such stockholder at his address as it appears in the records of the Corporation, or by electronic transmission directed at such shareholder in such manner as the shareholder shall have specified to the Corporation, including by facsimile transmission, electronic mail or posting on an electronic network. Such notice shall be given by the Secretary, or in the case of the death, absence, incapacity or refusal of the Secretary, by any other officer or by a person designated either by the Secretary, by the person or persons calling the meeting, by any stockholder or group of stockholders applying for such meeting pursuant to Section 3.2 of Article 3 of these By-Laws or by the Board of Directors. Whenever notice of a meeting is required to be given a stockholder under any provision of law, of the Articles of Organization, or of these By-Laws, a written waiver thereof, executed before or after the meeting by such stockholder or his attorney thereunto authorized, and filed with the records of the meeting, shall be deemed equivalent to such notice.

Section 3.5 Quorum and Adjournment

At any meeting of the stockholders, a quorum for the election of any Director or for the consideration of any question shall consist of a majority in interest of all stock issued, outstanding and entitled to vote at such election or upon such question, respectively, except that if two or more classes of stock are entitled to vote as separate classes for the election of any Director or upon any question, then in the case of each such class a quorum for the election of any Director or for the consideration of such question shall consist of a majority in interest of all stock of that class issued, outstanding and entitled to vote thereon. Stock owned by the Corporation, if any, shall be disregarded in determining any quorum. Both abstentions and broker non-votes are to be counted for the purpose of determining the existence of a quorum for the transaction of business at any meeting. Whether or not a quorum is present, any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, and the meeting may be held as adjourned without further notice. In addition, the presiding officer at any shareholders meeting shall have the authority to reschedule or adjourn any such meeting if (a) no quorum is present for the transaction of business; (b) the Board of Directors determines that an adjournment is necessary or appropriate to enable the shareholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to shareholders; or (c) the Board of Directors determines that adjournment is otherwise in the best interests of the Corporation.

When a quorum for an election is present at any meeting, a plurality of the votes properly cast for any office shall elect such office. When a quorum for the consideration of a question is present at any meeting, a majority of the votes properly cast upon the question shall decide the question; except that if two or more classes of stock are entitled to vote as separate classes upon such question, then in the case of each such class a majority of the votes of such class properly cast upon the question shall decide the vote of that class upon the question; and except in any case where a larger vote is required by law or by the Articles of Organization. For purposes of determining the number of shares voting on a particular proposal, abstentions and broker nonvotes are not to be counted as votes cast or shares voting.

Section 3.6 Action without Meeting

Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting.

Section 3.7 Proxies and Voting

Except as may otherwise be provided in the Articles of Organization, stockholders entitled to vote shall have one vote for each share of stock entitled to vote owned by them. Stockholders entitled to vote may vote in person or by proxy. No proxy dated more than six (6) months before the meeting named therein shall be valid and no proxy shall be valid after the final adjournment of such meeting; provided, however, that a proxy coupled with an interest sufficient in law to support an irrevocable power, including, without limitation, an interest in the shares or in the Corporation generally, may be irrevocable if it so provides, need not specify the meeting to which it relates, and shall be valid and enforceable until the interest terminates, or for such shorter period as may be specified in the proxy. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to the exercise of the proxy the Corporation receives specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Proxies shall be filed with the Secretary, or person performing the duties of Secretary, at the meeting, or any adjournment thereof, before being voted.

The Corporation shall not, directly or indirectly, vote upon any share of its own stock. Both abstentions and broker non-votes are to be counted as present for the purpose of determining the existence of a quorum for the transaction of business at any meeting. However, for purposes of determining the number of shares voting a particular proposal, abstentions and broker non-votes are not to be counted as votes cast or shares voting.

ARTICLE 4

Directors

Section 4.1 Enumeration, Election and Term of Office

The business and affairs of this Corporation shall be managed under the direction of a Board of Directors consisting of not fewer than three (3) nor more than fifteen (15) Directors, the exact number to be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors, such Board of Directors to be divided into such classes and elected by such stockholders as have the right to vote thereon, for such terms as are provided in the Articles of Organization. Each Director shall hold office until his successor shall have been elected and qualified, subject to Article 6 of these By-Laws. Whenever used in these By-Laws, the phrase “entire Board of Directors” shall mean that number of Directors fixed by the most recent resolution adopted pursuant to the preceding sentence prior to the date as of which a determination of the number of Directors then constituting the entire Board of Directors shall be relevant for any purpose under these By-Laws. Subject to the foregoing limitations and the requirements of the Articles of Organization, the Board of Directors may be enlarged by the affirmative vote of a majority of the entire Board of Directors then in office.

Nominations for the election of Directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any stockholder entitled to vote generally in the election of Directors. However, any stockholder entitled to vote generally in the election of Directors may nominate one or more persons for election as Directors at a meeting only if written notice of such stockholder’s intent to make such nomination or nominations has been delivered to or mailed and received by the Secretary of the Corporation not later than, unless a lesser time period is required by applicable law, (1) with respect to an election to be held at an annual meeting of stockholders or special meeting in lieu of an annual meeting, not less than one-hundred twenty (120) nor more than one-hundred fifty (150) days prior to the anniversary date of the immediately preceding annual meeting of stockholders or special meeting in lieu of an annual meeting and (2) in the case of a special meeting not in lieu of an annual meeting or if the annual meeting is called for a date (including any change in a date determined by the Board of Directors) not within forty-five (45) days before or after such anniversary date, not later than the close of business on the tenth (10^th) day following the date on which notice of such meeting was mailed or public disclosure of the date of such meeting was made, whichever first occurs. Each such notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a Director, (i) the name and address of the stockholder and each of his or her nominees; (ii) a representation that the stockholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the stockholder and each such nominee; (iv) such other information as would be required to be included in a proxy statement soliciting proxies for the election of the nominees of such stockholder; and (v) the consent of each nominee to serve as a Director of the Corporation if so elected; and (b) as to the stockholder giving the notice, (i) the class and number of all shares of stock of the Corporation held of record, owned beneficially (directly or indirectly) and represented by proxy by such stockholder as of the date of such notice and as of one year prior to the date of such notice, (ii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder, (iii) a description of any Derivative

Position held or beneficially held (directly or indirectly) by such stockholder with respect to stock of the Corporation, (iv) a description of any proxy, contract, arrangement, understanding or relationship between such stockholder and any other person or persons (including their names and addresses) in connection with the nomination or nominations to be made by such stockholder or pursuant to which such stockholder has a right to vote any stock of the Corporation, (v) a description of any proportionate interest in stock of the Corporation or Derivative Positions with respect to the Corporation held, directly or indirectly, by a general or limited partnership in which such stockholder is a general partner or, directly or indirectly, beneficially owns an interest in such a general partner, and (vi) such other information regarding such stockholder as would be required to be included in a proxy statement soliciting proxies for the election of the nominees of such stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a Director of the Corporation. No person shall be eligible for election as a Director unless nominated in accordance with the provisions set forth herein.

The presiding officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if such officer should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded.

Except as otherwise required by law, nothing in this Section shall obligate the Corporation or the Board of Directors to include in any proxy statement or other stockholder communication distributed on behalf of the Corporation or the Board of Directors information with respect to any nominee for Director submitted by a stockholder.

No Director need be a stockholder. Any election of Directors by the stockholders shall be by ballot if so requested by any stockholder entitled to vote thereon.

Section 4.2 Powers

The business of the Corporation shall be managed by the Board of Directors, which shall exercise all the powers of the Corporation except as otherwise required by law, by the Articles of Organization or by these By-Laws. In the event of one or more vacancies in the Board of Directors the remaining Directors, if at least two (2) Directors still remain in office, may exercise the powers of the full Board until such vacancy or vacancies are filled.

Section 4.3 Meetings of Directors

Regular meetings of the Directors may be held without notice at such places and at such times as may be fixed from time to time by the Directors. A regular meeting of the Directors may be held without notice immediately following an annual meeting of stockholders or any special meeting held in lieu thereof.

Special meetings of Directors may be called by the Chairman of the Board, the President, the Treasurer or any two (2) or more Directors, or if there shall be less than three (3) Directors, by any one (1) Director, and shall be held at such time and place as specified in the call. Reasonable notice of each special meeting of the Directors shall be given to each Director. Such notice may be given by the Secretary or any Assistant Secretary or by the officer or one of the Directors calling the meeting. Notice to a Director shall in any case be sufficient if sent by telegram, telecopier, electronic mail or posting on an electronic network at least forty-eight (48) hours or, by mail at least ninety-six (96) hours before the meeting addressed to the Director at his or her usual or last known business or residence address, or if given to him or her at least forty-eight (48) hours before the meeting in person or by telephone or by handing him or her a written notice. Notice of a meeting need not be given to any Director if a written waiver of notice, executed by him or her before or after the meeting, is filed with the records of the meeting, or to any Director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him or her. A notice or waiver of notice need not specify the purposes of the meeting.

Section 4.4 Quorum of Directors

At any meeting of the Directors, a quorum for any election or for the consideration of any question shall consist of a majority of the Directors then in office, but a smaller number may make a determination pursuant to Section 8.55 or Section 8.56 of Chapter 156D of the Massachusetts Business Corporation Act that indemnification is permissible in a specific proceeding. Whether or not a quorum is present any meeting may be, adjourned from time to time by a majority of the votes properly cast upon the question, and the meeting may be held as adjourned without further notice. When a quorum is present at any meeting, the votes of a majority of the Directors present shall be requisite and sufficient for election to any office and shall decide any question brought before such meeting, except in any case where a larger vote is required by law, by the Articles of Organization or by these By-Laws.

Section 4.5 Consent in Lieu of Meeting and Participation in Meetings by Communications Equipment

Unless the Articles of Organization otherwise provide, any action required or permitted to be taken at any meeting of the Directors may be taken without a meeting if the action is taken by the unanimous consent of all of the Directors. The action must be evidenced by one or more consents describing the action taken, in writing, signed by each Director, or delivered to the Corporation by electronic transmission to the

address specified by the Corporation for the purpose or, if no address has been specified, to the principal office of the Corporation, addressed to the Secretary or other officer or agent having custody of the records of proceedings of Directors, and included in the minutes or filed with the corporate records reflecting the action taken. Action taken under this Section is effective when the last Director signs or delivers the consent, unless the consent specifies a different effective date. A consent signed or delivered under this Section has the effect of a meeting vote and may be described as such in any document. This paragraph shall apply to any Committee designated by the Board of Directors and its members.

Members of the Board of Directors or any Committee designated thereby may participate in meetings of such Board or Committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting.

Section 4.6 Committees

By vote of a majority of the Directors then in office, the Directors may elect from their own number an Executive Committee or other Committees and may by like vote delegate to any such Committee some or all of their powers except those which by law may not be delegated.

ARTICLE 5

Officers

Section 5.1 Enumeration, Election and Term of Office

The officers of the Corporation shall include a President, a Treasurer and a Secretary, who shall be chosen by the Directors at their first meeting following an annual meeting of the stockholders. Each of the officers shall hold office until the next annual election to the office which he or she holds and until his or her successor is chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. The Directors may choose one of their number to be Chairman of the Board and determine his or her powers, duties and term of office. The Directors may at any time appoint such other officers, including one or more Vice Presidents, Assistant Treasurers, and Assistant Secretaries, as they deem wise, and may determine their respective powers, duties and terms of office.

The Corporation may also designate individuals as divisional, group, or segment vice presidents or vice presidents of a particular function, which individual shall carry such title on a non-executive basis and not as an executive officer of the Corporation. Said non-executive vice presidents may be designated by the Board of Directors or by the President pursuant to Board resolutions so-authorizing the President to appoint non-executive vice presidents on a particular occasion or from time to time in his or her discretion, said honorary vice presidents to be titled “Vice President (specific area of function).”

No officer need be a stockholder or a Director except that the Chairman of the Board shall be a Director. The same person may hold more than one office, except that no person shall be both President and Secretary.

Section 5.2 President and Chairman of the Board

The President shall be the Chief Executive Officer of the Corporation and, subject to the control and direction of the Directors, shall have general supervision and control of the business of the Corporation. The President shall preside at all meetings of the stockholders at which he or she is present, and, if the President is a Director, at all meetings of the Directors, if there shall be no Chairman of the Board or in the absence of the Chairman of the Board.

If there shall be a Chairman of the Board, such person shall make his or her counsel available to the other officers of the Corporation, and shall have such other duties and powers as may from time to time be conferred on him or her by the Directors. The Chairman of the Board shall preside at all meetings of the Directors at which he or she is present, and, in the absence of the President, at all meetings of stockholders.

Section 5.3 Treasurer and Assistant Treasurer

The Treasurer shall have the custody of the funds and valuable books and papers of the Corporation, except such as are directed by these By-Laws to be kept by the Secretary. The Treasurer shall perform all other duties usually incident to such office, and shall be at all times subject to the control and direction of the Directors. If required by the Directors, the Treasurer shall give bond in such form and amount and with such sureties as shall be determined by the Directors.

If the Treasurer is absent or unavailable, any Assistant Treasurer shall have the duties and powers of Treasurer and shall have such further duties and powers as the Directors shall from time to time determine.

Section 5.4 Secretary and Assistant Secretary

The Secretary shall record all proceedings of the stockholders and the Board of Directors in books to be kept therefor.

If the Corporation shall not have a transfer agent, the Secretary shall also keep or cause to be kept the stock and transfer records of the Corporation, which shall contain the names of all stockholders and the record address and the amount of stock held by each.

If the Secretary is absent or unavailable, any Assistant Secretary shall have the duties and powers of the Secretary and shall have such further duties and powers as the Directors shall from time to time determine.

Section 5.5 Temporary Secretary

If no Secretary or Assistant Secretary shall be present at any meeting of the stockholders, or at any meeting of the Directors, the person presiding at the meeting shall designate a Temporary Secretary to perform the duties of Secretary.

Section 5.6 Other Powers and Duties

Each officer shall, subject to these By-Laws and to the control and direction of the Directors, have in addition to the duties and powers specifically set forth in these By-Laws, such duties and powers as are customarily incident to such office and such additional duties and powers as the Directors may from time to time determine.

ARTICLE 6

Resignations, Removals and Vacancies

Section 6.1 Resignations

Any Director or officer may resign at any time by delivering his or her resignation in writing to the President or the Secretary or to a meeting of the Directors. Such resignations shall take effect at such time as is specified therein, or if no such time is so specified, then upon delivery thereof to the President or the Secretary or to a meeting of the Directors.

Section 6.2 Removals

Directors, including Directors elected by the Directors to fill vacancies in the Board, may be removed from office (a) with cause by vote of the holders of a majority of the shares issued and outstanding and entitled to vote generally in the election of Directors; (b) with or without cause by vote of the holders of at least 80% of the votes entitled to be cast by the holders of all shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class; (c) with cause by vote of a majority of the Directors then in office; or (d) without cause by vote of at least 80% of the Directors then in office (including the Director to be removed in calculating said percentage); provided that the Directors, of a class elected by a particular class of shareholders may be removed only by vote of the holders of a majority of the shares of such class.

The Directors may terminate or modify the authority of any agent or employee. The Directors may remove any officer from office with or without assignment of cause by vote of a majority of the Directors then in office.

If cause is assigned for removal of any Director or officer, such Director or officer may be removed only after reasonable notice and opportunity to be heard before the body proposing to remove him.

No Director or officer who resigns or is removed shall have any right to any compensation as such Director or officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise; provided, however, that the foregoing provision shall not prevent such Director or officer from obtaining damages for breach of any contract of employment legally binding upon the Corporation.

Section 6.3 Vacancies

Any vacancy in the Board of Directors, including a vacancy resulting from an enlargement of the Board, may be filled by the Directors by vote of a majority of the remaining Directors then in office, though less than a quorum, or by the stockholders at a meeting called for the purpose, provided that any vacancy created by the stockholders may be filled by the stockholders at the same meeting. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new Directorship was created or the vacancy occurred and until such Directors’ successor shall have been elected and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified.

If the office of any officer becomes vacant, the Directors may choose or appoint a successor by vote of a majority of the Directors present at the meeting at which such choice or appointment is made.

Each such successor shall hold office for the unexpired term of the Director’s predecessor and until a successor shall be chosen or appointed and qualified, or until he or she sooner dies, resigns, is removed or becomes disqualified.

ARTICLE 7

Indemnification of Directors and Others

The Corporation shall indemnify its Directors and the officers that have been appointed by the Board of Directors to the fullest extent permitted by law, and may indemnify such other employees as determined by the Board of Directors.

ARTICLE 8

Stock

Section 8.1 Stock Authorized

The total number of shares and the par value, if any, of each class of stock which the Corporation is authorized to issue, and if more than one class is authorized, the descriptions, preferences, voting powers, qualifications and special and relative rights and privileges as to each class and any series thereof, shall be as stated in the Articles of Organization.

Section 8.2 Issue of Authorized Unissued Capital Stock

Any unissued capital stock from time to time authorized under the Articles of Organization and amendments thereto may be issued by vote of the Directors. No stock shall be issued unless the cash, so far as due, or the property, services or expenses for which it was authorized to be issued, has been actually received or incurred by, or conveyed or rendered to, the Corporation, or is in its possession as surplus.

Section 8.3 Certificates of Stock

Each stockholder shall be entitled to a certificate in such form as may be prescribed from time to time by the Directors, stating the number and the class and the designation of the series, if any, of the shares held by him. Such certificates shall be signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer. Such signatures may be facsimiles if the certificate is signed by a transfer agent, or by a registrar, other than a Director, officer or employee of the Corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the time of its issue.

Every certificate issued by the Corporation for shares of stock at a time when such shares are subject to any restriction on transfer pursuant to the Articles of Organization, the By-Laws or any agreement to which the Corporation is a party shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back of the certificate either the full text of the restriction, or a statement of the existence of such restriction and a statement that the Corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. Every stock certificate issued by the Corporation at a time when it is authorized to issue more than one class or series of stock shall set forth upon the face or back of the certificate either the full text of the preferences, voting powers, qualifications and special and relative rights of the shares of each class and series, if any, authorized to be issued, as set forth in the Articles of Organization, or a statement of the existence of such preferences, powers, qualifications and rights and a statement that the Corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. Notwithstanding anything to the contrary provided in these By-Laws and consistent with Section 6.26 of the Massachusetts Business Corporation Act as now in effect and hereafter amended, the Board of Directors of the Corporation may authorize the issue of some or all of the shares of any or all of the classes or series without certificates. The authorization shall not effect shares already represented by certificates, until they are surrendered to the Corporation, and by the approval and adoption of these By-Laws, the Board of Directors has determined that all classes or series of the Corporation stock may be uncertificated shares, whether upon original issue, re-issuance or subsequent transfer. Within a reasonable time after the issue or transfer of shares without certificates, the Corporation shall send the shareholder a written statement of the information required on certificates by Sections (b) and (c) of Section 6.25 and, if applicable, Section 6.27 of the Massachusetts Business Corporation Act, as now in effect and from time to time amended.

Section 8.4 Replacement Certificate

In case of the alleged loss or destruction or the mutilation of a certificate of stock, a new certificate may be issued in place thereof, upon such conditions as the Directors may determine.

Section 8.5 Transfers

Subject to the restrictions, if any, imposed by the Articles of Organization, the By-Laws or any agreement to which the Corporation is a party, and unless otherwise provided by the Board of Directors, shares of stock of the Corporation that are represented by a certificate shall be transferred on the books of the Corporation only by the surrender to the Corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment of such shares or by a written power of attorney to sell, assign or transfer such shares, properly executed, with necessary transfer stamps affixed, and with such proof that the endorsement, assignment or power of attorney is genuine and effective as the Corporation or its transfer agent may reasonably require. Shares of stock that are not represented by a certificate

shall be transferred or assignable on the stock transfer books of the Corporation, by the holders submitting to the Corporation or its transfer agent, such evidence of transfer and following such other procedures as the Corporation or its transfer agent may reasonably require. Except as may otherwise be required by law, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereto, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-Laws. It shall be the duty of each stockholder to notify the Corporation of his post office address.

Section 8.6 Record Date

The Directors may fix in advance a time, which shall be not more than seventy (70) days before the date of any meeting of stockholders or the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution or the right to give such consent or dissent, and in such case only stockholders of record on such date shall have such right, notwithstanding any transfer of stock on the books of the Corporation after the record date; or without fixing such record date the Directors may for any such purposes close the transfer books for all or any part of such period.

If no record date is fixed and the transfer books are not closed:

(1) The record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given.

(2) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto.

ARTICLE 9

Miscellaneous Provisions

Section 9.1 Execution of Papers

All deeds, leases, transfers, contracts, bonds, notes, releases, checks, drafts and other obligations authorized to be executed on behalf of the Corporation shall be signed by the President or the Treasurer except as the Directors may generally or in particular cases otherwise determine.

Section 9.2 Voting of Securities

Except as the Directors may generally or in particular cases otherwise determine the President or the Treasurer may, on behalf of the Corporation (i) waive notice of any meeting of stockholders or shareholders of any other corporation, or of any association, trust or firm, of which any securities are held by this Corporation; (ii) appoint any person or persons to act as proxy or attorney-in-fact for the Corporation, with or without substitution, at any such meeting; and (iii) execute instruments of consent to stockholder or shareholder action taken without a meeting.

Section 9.3 Corporate Seal

The seal of the Corporation shall be a circular die with the name of the Corporation, the word “Massachusetts” and the year of its incorporation cut or engraved thereon, or shall be in such other form as the Board of Directors or the stockholders may from time to time determine.

Section 9.4 Corporate Records

The original, or attested copies, of the Articles of Organization, By-Laws, and the records of all meetings of incorporators and stockholders, and the stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in Massachusetts for inspection by the stockholders at the principal office of the Corporation or at an office of the Secretary, or if the Corporation shall have a transfer agent or a resident agent, at an office of either of them. Said copies and records need not all be kept in the same office.

ARTICLE 10

Amendments

These By-Laws may be altered, amended or repealed or new By-Laws enacted by the affirmative vote of a majority of the entire Board of Directors (if notice of the proposed alteration or amendment is contained in the notice of the meeting at which such vote is taken or if all Directors are present) or at any regular meeting of the stockholders (or at any special meeting thereof duly called for that purpose) by the affirmative vote of a majority of the shares represented and entitled to vote at such meeting (if notice of the proposed alteration or amendment is contained in the notice of such meeting).

ARTICLE 11

Massachusetts Control Share Acquisition Act

The provisions of Chapter 110D of the Massachusetts General Laws shall not apply to control share acquisitions of the Corporation.

As amended and restated effective May 4, 2011

Stock Purchase Agreement

Exhibit 10.1

Execution Version

STOCK PURCHASE AGREEMENT

BY AND AMONG

MERCURY COMPUTER SYSTEMS, INC.,

LNX CORPORATION,

THE HOLDERS OF SECURITIES OF LNX CORPORATION

LISTED ON SCHEDULE I HERETO

AND

THE SELLERS’ REPRESENTATIVE NAMED HEREIN

Dated as of January 12, 2011

TABLE OF CONTENTS


		Page
ARTICLE I DEFINITIONS; CERTAIN RULES OF CONSTRUCTION			2

Section 1.1.	Definitions		2
Section 1.2.	Certain Matters of Construction		14

ARTICLE II PURCHASE AND SALE OF SHARES; TREATMENT OF OPTIONS; CLOSING			15

Section 2.1.	Purchase and Sale of Shares		15
Section 2.2.	Purchase Price		15
Section 2.3.	The Closing		16
Section 2.4.	Closing Deliveries and Payments		16
Section 2.5.	Treatment of Options		17
Section 2.6.	Working Capital Adjustment		17
Section 2.7.	Earnout		20

ARTICLE III REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY			23

Section 3.1.	Organization		23
Section 3.2.	Power and Authorization		23
Section 3.3.	Authorization of Governmental Authorities		24
Section 3.4.	Noncontravention		24
Section 3.5.	Capitalization of the Company		24
Section 3.6.	Financial Matters		25
Section 3.7.	Absence of Certain Developments		26
Section 3.8.	Debt; Guarantees		26
Section 3.9.	Assets		27
Section 3.10.	Real Property		27
Section 3.11.	Intellectual Property		28
Section 3.12.	Legal Compliance; Illegal Payments; Permits		31
Section 3.13.	Tax Matters		32
Section 3.14.	Employee Benefit Plans		34
Section 3.15.	Environmental Matters		36
Section 3.16.	Contracts		37
Section 3.17.	Related Party Transactions		39

TABLE OF CONTENTS

(continued)


		Page
Section 3.18.	Customers and Suppliers		39
Section 3.19.	Labor Matters		39
Section 3.20.	Litigation; Governmental Orders		40
Section 3.21.	Insurance		40
Section 3.22.	No Liabilities		40
Section 3.23.	No Brokers		40

ARTICLE IV INDIVIDUAL REPRESENTATIONS AND WARRANTIES OF THE SELLERS			41

Section 4.1.	Organization		41
Section 4.2.	Power and Authorization		41
Section 4.3.	Authorization of Governmental Authorities		41
Section 4.4.	Noncontravention		41
Section 4.5.	Title		42
Section 4.6.	No Brokers		42

ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BUYER			42

Section 5.1.	Organization		42
Section 5.2.	Power and Authorization		42
Section 5.3.	Authorization of Governmental Authorities		42
Section 5.4.	Noncontravention		43
Section 5.5.	No Brokers		43
Section 5.6.	Investment Representations		43

ARTICLE VI COVENANTS OF THE PARTIES			43

Section 6.1.	Expenses		43
Section 6.2.	Confidentiality		44
Section 6.3.	Publicity		45
Section 6.4.	Noncompetition and Nonsolicitation		45
Section 6.5.	Interest on Overdue Amounts; Set-Offs		46
Section 6.6.	Further Assurances		47
Section 6.7.	Certain Employment and Employee Benefits Matters		47
Section 6.8.	Directors’ and Officers’ Indemnification and Insurance		47

TABLE OF CONTENTS

(continued)


		Page
Section 6.9.	Release by Sellers		48
Section 6.10.	Termination of Certain Agreements		48

ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF THE BUYER AT THE CLOSING			49

Section 7.1.	Completion of Services Business Transfer		49
Section 7.2.	Receipt of Third-Party Valuation of the Services Business and Tax Basis Computation		49
Section 7.3.	Delivery of Securities; Instruments of Transfer; Option Cancellation Acknowledgments		49
Section 7.4.	Delivery of Closing Certificates		49
Section 7.5.	Execution of Consulting Agreement		50
Section 7.6.	Escrow Agreement		50
Section 7.7.	Qualifications		50
Section 7.8.	Absence of Litigation		50
Section 7.9.	Consents, etc		50
Section 7.10.	Proceedings and Documents		50
Section 7.11.	Ancillary Agreements		50
Section 7.12.	Resignations		50
Section 7.13.	Payoff Letters and Lien Releases, etc		50

ARTICLE VIII CONDITIONS TO THE SELLERS’ OBLIGATIONS AT THE CLOSING			50

Section 8.1.	Qualifications		51
Section 8.2.	Absence of Litigation		51
Section 8.3.	Proceedings and Documents		51
Section 8.4.	Ancillary Agreements		51

ARTICLE IX INDEMNIFICATION			51

Section 9.1.	Indemnification by the Sellers		51
Section 9.2.	Indemnification by the Buyer		53
Section 9.3.	Time for Claims; Notice of Claims		54
Section 9.4.	Third Party Claims		55
Section 9.5.	Consent to Jurisdiction Regarding Third Party Claim		57

iii

TABLE OF CONTENTS

(continued)


		Page
Section 9.6.	No Circular Recovery		57
Section 9.7.	Other Limitations and Provisions		57
Section 9.8.	Knowledge and Investigation		58
Section 9.9.	Escrowed Amount		58
Section 9.10.	Remedies Cumulative		59
Section 9.11.	Remedies Exclusive		59

ARTICLE X TAX MATTERS			59

Section 10.1.	Tax Indemnification		59
Section 10.2.	Straddle Period		60
Section 10.3.	Tax Sharing Agreements		60
Section 10.4.	Certain Taxes and Fees		60
Section 10.5.	Cooperation on Tax Matters		60
Section 10.6.	Control		60
Section 10.7.	Purchase Price Adjustment		61
Section 10.8.	Tax Benefits Attributable to Seller Transaction Expenses, Option Exercises, Phantom Equity Plan Payouts and Share Transfers		61
Section 10.9.	Refunds		62

ARTICLE XI MISCELLANEOUS			62

Section 11.1.	Notices		62
Section 11.2.	Succession and Assignment; No Third-Party Beneficiaries		64
Section 11.3.	Amendments and Waivers		65
Section 11.4.	Provisions Concerning the Sellers’ Representative		65
Section 11.5.	Entire Agreement		66
Section 11.6.	Counterparts; Facsimile Signature		67
Section 11.7.	Severability		67
Section 11.8.	Governing Law		67
Section 11.9.	Jurisdiction; Venue; Service of Process		67
Section 11.10.	Specific Performance		68
Section 11.11.	Waiver of Jury Trial		69


		EXHIBITS

EXHIBIT
A-1		Services Business Transfer Agreement
A-2		Transition Services Agreement
B		Form of Consulting Agreement with Lamberto Raffaelli
C		Form of Escrow Agreement
D		Phantom Plan Payment Agreement
E		Form of FIRPTA Certificate

		ANNEXES

ANNEX
I		List of Shareholders and Phantom Plan Participants and Pay-Outs
II		Net Working Capital Calculation Schedule
III		Closing Date Debt Schedule
IV		Funding Schedule
V		Sellers Subject to Non-Compete

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (as amended, modified or supplemented from time to time, this “Agreement”) is made and entered into as of January 12, 2011 by and among MERCURY COMPUTER SYSTEMS, INC., a Massachusetts corporation (“Buyer”), LNX CORPORATION, a Massachusetts corporation (the “Company”), each of the holders of outstanding shares of capital stock of the Company listed on Annex I-A hereto (referred to as the “Shareholders” or the “Sellers”), and Lamberto Raffaelli, in his capacity as the Sellers’ Representative.

RECITALS

WHEREAS, the Company is engaged in (i) the design and manufacturing of radio-frequency and digital products, microwave and millimeter wave components and integrated assemblies, for both military and commercial applications (the “Design & Manufacturing Business”) and (ii) through its Solynx division, the provision of global procurement services (the “Services Business”);

WHEREAS, prior to the Closing (as defined below), the Company will contribute all of its assets and liabilities primarily associated with its Services Business to Solynx Corporation, a Massachusetts corporation (the “New Services Entity”) (such contribution, the “Services Business Transfer”), pursuant to the agreement attached hereto as Exhibit A-1 (the “Services Business Transfer Agreement”) and the Transition Services Agreement in the form of Exhibit A-2 hereto (the “Transition Services Agreement”). In consideration of the contribution of such assets and liabilities to the New Services Entity, the New Services Entity shall issue 100% of its equity interests to the Company and the Company shall distribute such equity interests pro rata to the Shareholders. Following the completion of the Services Business Transfer, only the assets and liabilities relating to the Design & Manufacturing business shall remain with the Company at the Closing;

WHEREAS, the Shareholders own all of the outstanding shares of Common Stock, par value $0.01 per share, of the Company (such common stock being referred to herein as the “Common Stock” and such outstanding common shares being referred to herein as the “Shares”);

WHEREAS, shortly before the execution and delivery of this Agreement the Shareholders listed on Annex I-A hereto as “Former Optionholders” (and in such capacity, referred to herein as the “Former Optionholders”) exercised all their outstanding options to acquire Common Stock (the “Options”) and acquired shares of Common Stock;

WHEREAS, after the exercise of the Options as described above, the Shares constitute all of the outstanding Equity Interests (as defined below) in the Company;

WHEREAS, Buyer desires to purchase from the Shareholders, and the Shareholders desire to sell to Buyer, at the Closing all of the Shares upon the terms and subject to the conditions set forth in this Agreement;

WHEREAS, contemporaneously with the Closing, the Buyer shall enter into a consulting agreement with Lamberto Raffaelli (the “Consulting Agreement”) substantially in the form attached hereto as Exhibit B and shall enter into an Escrow Agreement with Wells Fargo Bank, N.A., as escrow agent (the “Escrow Agent”), and the Sellers’ Representative substantially in the form of Exhibit C hereto (the “Escrow Agreement”); and

WHEREAS, in order to provide for the payments that will become due under the Phantom Equity Plans (as defined in Article II below), shortly before the execution and delivery of this Agreement the Company and the persons identified in Annex I-B hereto (the “Phantom Plan Participants”) entered into the Phantom Plan Payment Agreement in the form of Exhibit D hereto (the “Phantom Plan Payment Agreement”).

AGREEMENT

NOW, THEREFORE, in consideration of the premises and mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the parties to this Agreement hereby agree as follows:

ARTICLE I

DEFINITIONS; CERTAIN RULES OF CONSTRUCTION

Section 1.1. Definitions.

(a) In addition to the other terms defined throughout this Agreement, the following terms shall have the following meanings when used in this Agreement:

“1933 Act” means the Securities Act of 1933.

“Accounting Principles” means GAAP as in effect on the Most Recent Balance Sheet Date and, to the extent in accordance with GAAP as in effect on such date, applied on a basis consistent with the Financials.

“Action” means any claim, action, cause of action, suit, litigation, arbitration, investigation, opposition, interference, audit, assessment, hearing, complaint, demand or other legal proceeding (whether sounding in contract, tort or otherwise, whether civil or criminal and whether brought at law or in equity) that is commenced, brought, conducted, tried or heard by or before, or otherwise involving, any Governmental Authority.

“Affiliate” means, with respect to any specified Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with such specified Person. For purposes of the foregoing, (a) a Person shall be deemed to control a specified Person if such Person (or a Family Member of such Person) possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such specified Person or (b) if such other Person is at such time a direct or indirect beneficial holder of at least 10% of any class of the Equity Interests of such specified Person.

“Ancillary Agreements” means the Services Business Transfer Agreement, the Transition Services Agreement, the Consulting Agreement, the Escrow Agreement, the Phantom Plan Payment Agreement and any certificates to be delivered pursuant to Sections 7.4(a) and (b).

“Applicable Indemnity Percentage” means, (i) for any Shareholder or Phantom Plan Participant, in case of any claims for indemnification by the Buyer pursuant to Section 9.1(a)(i), (ii), (v), (vi) or (vii) or Article X for which sufficient funds are available (and not subject to another pending claim) pursuant to the Escrow Agreement, the percentage set forth for such Shareholder or Phantom Plan Participant on Annex I hereto and (ii) for any Shareholder, in case of any claim for indemnification by the Buyer pursuant to Section 9.1(a)(i), (ii), (v), (vi) or (vii) or Article X for which (or to the extent that) sufficient funds are not available (and not subject to another pending claim) pursuant to the Escrow Agreement, the percentage set forth for such Shareholder on Annex I hereto.

“Business” means the businesses conducted by the Company as of the date hereof, comprised of the Design & Manufacturing Business and the Services Business.

“Business Day” means any day other than a Saturday or a Sunday or a weekday on which banks in Boston, Massachusetts are authorized or required to be closed.

“Change of Control Payment” means (a) any bonus, severance or other payment or other form of Compensation that is created, accelerated, accrues or becomes payable by the Company to any present or former director, stockholder, employee or consultant thereof, including pursuant to any employment agreement, benefit plan or any other Contractual Obligation, including any Taxes payable on or triggered by any such payment (other than payments in respect of the Securities under or as described in Article II of this Agreement) and (b) without duplication of any other amounts included within the definition of Seller Transaction Expenses, any other payment, expense or fee that accrues or becomes payable by the Company to any Governmental Authority, including in connection with the making of any filings, the giving of any notices or the obtaining of any consents, authorizations or approvals from any Governmental Authority, in the case of each of (a) and (b), as a result of, or in connection with, the execution and delivery of this Agreement or any Ancillary Agreement or the consummation of the Contemplated Transactions. Change of Control Payments shall include without limitation all payments pursuant to the Company’s cash incentive plan and all other Company phantom equity plans or agreements.

“Closing Date” means the date on which the Closing actually occurs.

“Closing Debt Amount” means the amount of Debt of the Company as of the Closing Date as set forth on the Closing Date Debt Schedule attached hereto as Annex III. The Closing Debt Amount will not include Debt associated with the car leases and car loans described in Section 3.8 of the Company Disclosure Schedule.

“Code” means the U.S. Internal Revenue Code of 1986.

“Combined Percentage” means, for any Seller or Phantom Plan Participant, the applicable percentage set forth on Annex I-A or Annex I-B as applicable.

“Combined Purchase Price” means the Purchase Price and the corresponding amount to be paid pursuant to Section 2(b) of the Phantom Plan Payment Agreement (prior to any withholding).

“Company Disclosure Schedule” means the separate set of schedules relating to this Agreement and prepared by the Company and delivered by the Company and the Sellers’ Representative to the Buyer immediately prior to the execution and delivery of this Agreement.

“Company Intellectual Property Rights” means all Licensed Intellectual Property Rights and Owned Intellectual Property Rights.

“Company’s Knowledge,” “Knowledge of the Company” and similar formulations mean that one or more of Lamberto Raffaelli, Anne Daniels, Steven Hurwitz, William Tufts, Paul Monte, Michael Groden, Frederick Schindler, Philip Beucler, Arthur Humason, Lawrence LaPlante, Jan Conant and Doris Parr has actual knowledge of the fact or other matter at issue.

“Company Products” means any products being sold, manufactured or developed, and any services being provided, by the Company in connection with and/or related to the Design & Manufacturing Business as currently conducted.

“Compensation” means, with respect to any Person, all salaries, compensation, remuneration, bonuses or benefits of any kind or character whatsoever (including issuances or grants of Equity Interests), made directly or indirectly by the Company to or for the benefit of such Person or any Family Member of such Person.

“Contemplated Transactions” means the transactions contemplated by this Agreement, including (a) the purchase and sale of the Shares and the other transactions described in the recitals to this Agreement, (b) the execution, delivery and performance of the Ancillary Agreements, and (c) the payment of fees and expenses relating to such transactions.

“Contractual Obligation” means, with respect to any Person, any contract, agreement, deed, mortgage, lease, sublease, license, sublicense or other commitment, promise, undertaking, obligation, arrangement, instrument or understanding, whether written or oral, to which or by which such Person is a party or otherwise subject or bound or to which or by which any property, business, operation or right of such Person is subject or bound.

“Debt” means, with respect to any Person, and without duplication, all Liabilities, including all obligations in respect of principal, accrued interest, penalties, fees and premiums, of such Person (a) for borrowed money (including amounts outstanding under overdraft facilities), (b) evidenced by notes, bonds, debentures or other similar Contractual Obligations, (c) in respect of “earn-out” obligations and other obligations for

the deferred purchase price of property, goods or services (other than trade payables or accruals incurred in the Ordinary Course of Business), (d) for the capitalized liability under all capital leases of such Person (determined in accordance with GAAP), (e) in respect of letters of credit and bankers’ acceptances, (f) for Contractual Obligations relating to interest rate protection, swap agreements and collar agreements, and (g) in the nature of Guarantees of the obligations described in clauses (a) through (f) above of any other Person.

“Earnout Payments” means payments the Buyer is required to make to the Sellers and Phantom Plan Participants pursuant to Sections 2.7 and the Phantom Plan Payment Agreement.

“Earn-Out Period 1” means the period from January 1, 2011 to December 31, 2011.

“Earn-Out Period 2” means the period from January 1, 2012 to December 31, 2012.

“ELT” means Elettronica S.p.A.

“Employee Plan” means any plan, program, policy, arrangement or Contractual Obligation, whether formal or informal, whether or not reduced to writing, and whether covering a single individual or a group of individuals, that is (a) a welfare plan within the meaning of Section 3(1) of ERISA, (b) a pension benefit plan within the meaning of Section 3(2) of ERISA, (c) a stock bonus, stock purchase, stock option, restricted stock, stock appreciation right or similar equity-based plan or (d) any other deferred-compensation, retirement, severance, welfare-benefit, reimbursement, bonus, profit-sharing, incentive or fringe-benefit plan, program or arrangement.

“Encumbrance” means any lien, pledge, security interest, mortgage, deed of trust, right of way, easement, encroachment, servitude, and any other like encumbrance, further including, with respect to any security or Equity Interest, any claim, community or other marital property interest, equitable or ownership interest, or other restrictions governing the voting, transfer, receipt of income or exercise of any other attribute of ownership (other than any restriction on the transfer of such security or Equity Interest arising solely under federal and state securities laws). “Encumbered” means subject to any Encumbrance.

“Enforceable” means, with respect to any Contractual Obligation stated to be Enforceable by or against any Person, that such Contractual Obligation is a legal, valid and binding obligation of such Person enforceable by or against such Person in accordance with its terms, except to the extent that enforcement of the rights and remedies created thereby is subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws of general application affecting the rights and remedies of creditors and to general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).

“Environmental Laws” means any Legal Requirement relating to (a) releases or threatened releases of Hazardous Substances, (b) pollution or protection of public health or the environment or worker safety or health or (c) the manufacture, handling, transport, use, treatment, storage, or disposal of Hazardous Substances.

“Equity Interest” means, with respect to any Person, (a) any capital stock, partnership or membership interest, unit of participation or other similar interest (however designated) in such Person and (b) any option, warrant, purchase right, conversion right, exchange right or other Contractual Obligation which would entitle any other Person to acquire any such interest in such Person or otherwise entitle any other Person to share in the equity, profits, earnings, losses or gains of such Person (including stock appreciation, phantom stock, profit participation or other similar rights).

“ERISA” means the U.S. Employee Retirement Income Security Act of 1974.

“Escrowed Amount” means $6,200,000.

“Facilities” means any buildings, plants, improvements or structures located on the Real Property.

“Family Member” means, with respect to any individual, (a) such Person’s spouse, (b) each parent, brother, sister or child of such Person or such Person’s spouse, (c) the spouse of any Person described in clause (b) above, (d) each child of any Person described in clauses (a), (b) or (c) above, (e) each trust created for the benefit of one or more of the Persons described in clauses (a) through (d) above and (f) each custodian or guardian of any property of one or more of the Persons described in clauses (a) through (e) above in his or her capacity as such custodian or guardian. Notwithstanding the foregoing, for purposes of the term “Affiliate” as used in Section 6.4, “Family Member” with respect to any Person means (a) such Person’s spouse and (b) any Person residing in such Person’s household.

“GAAP” means generally accepted accounting principles in the United States consistently applied.

“Government Order” means any order, writ, judgment, injunction, decree, stipulation, ruling, decision, verdict, determination or award made, issued or entered by or with any Governmental Authority.

“Governmental Authority” means any United States federal, state or local or any foreign government, or political subdivision thereof, or any multinational governmental organization or authority, or any other governmental authority, agency or commission entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power, any court or tribunal (or any department, bureau or division thereof), or any arbitrator or arbitral body.

“Guarantee” means, with respect to any Person, (a) any guarantee of the payment or performance of, or any contingent obligation in respect of, any Debt or other Liability of any other Person, (b) any other arrangement whereby credit is extended to any obligor

(other than such Person) on the basis of any promise or undertaking of such Person (i) to pay the Debt or other Liability of such obligor, (ii) to purchase any obligation owed by such obligor, (iii) to purchase or lease assets under circumstances that are designed to enable such obligor to discharge one or more of its obligations or (iv) to maintain the capital, working capital, solvency or general financial condition of such obligor and (c) any liability as a general partner of a partnership or as a venturer in a joint venture in respect of Debt or other Liabilities of such partnership or venture.

“Hazardous Substance” means any pollutant, petroleum, or any fraction thereof, contaminant or toxic or hazardous material (including toxic mold), substance or waste.

“Indemnified Person” means, with respect to any Indemnity Claim, each Buyer Indemnified Person or Seller Indemnified Person asserting the Indemnity Claim (or on whose behalf the Indemnity Claim is asserted) under Section 9.1 or 9.2, as the case may be (it being understood that, as contemplated by Section 11.4, the Sellers’ Representative will be the sole and exclusive agent, representative and attorney-in-fact for each of the Sellers for all purposes of asserting Indemnity Claims, receiving and giving notices and service of process in respect thereof, making filings with any court or other Governmental Authority in respect thereof and controlling and otherwise making all decisions in connection with each Indemnity Claim brought on behalf of any Sellers under Section 9.2 (other than in respect of Section 6.8), and the term “Indemnified Person” shall mean the Sellers’ Representative to the extent that it is acting in such capacity on behalf of any Sellers).

“Indemnifying Party” means, with respect to any Indemnity Claim, the party or parties against whom such Indemnity Claim has been asserted (it being understood that, without in any way limiting the Sellers’ payment and other obligations under any Contractual Obligation or Governmental Order arising out of, relating to, or resulting from any Indemnity Claim, as contemplated by Section 11.4, the Sellers’ Representative will be the sole and exclusive agent, representative and attorney-in-fact for each of the Sellers for all purposes of responding to and defending Indemnity Claims, receiving and giving notices and service of process in respect thereof, making filings with any court or other Governmental Authority in respect thereof, controlling and otherwise making all decisions on behalf of each of the Sellers in connection with each Indemnity Claim brought against any of the Sellers, and the term “Indemnifying Party” shall mean the Sellers’ Representative when it is acting in such capacity on behalf of any or all of the Sellers).

“Indemnity Claim” means a claim for indemnity under Section 9.1 or 9.2, as the case may be.

“Intellectual Property Rights” means any or all statutory and/or common rights of every kind and nature throughout the world, in, arising out of, or associated with:

(a) patents, utility models and all reissues, divisions, re-examinations, renewals, extensions, provisionals, continuations and continuations-in-part thereof and patentable inventions;

(b) copyrights, works of authorship, including computer programs, source code and executable code, whether embodied in software, firmware, documentation, designs, files, records, schematics, layouts, or data, and mask works, rights of privacy and publicity, moral rights, database rights provided by law, and all other proprietary rights;

(c) trademarks, trade names, service marks, service names, brands, trade dress and logos, and the goodwill associated therewith;

(d) domain names, web addresses and uniform resource locators (URLs);

(e) confidential information, trade secrets, and, to the extent confidential discoveries, innovations, know-how, proprietary information (including ideas, research and development, formulas, algorithms, compositions, processes and techniques, data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, business and marketing plans and proposals, graphics, illustrations, artwork, documentation, and manuals), including improvements, modifications, works in process, derivatives, or changes, to any of the foregoing;

(f) any other intellectual property or similar corresponding or equivalent rights to any of the foregoing anywhere in the world; and

(g) any and all registrations and applications relating to any of the foregoing.

“Legal Requirement” means any United States federal, state or local or any foreign law, statute, standard, ordinance, code, rule, regulation, resolution or promulgation, or any Governmental Order, or any Permit granted under any of the foregoing, or any similar provision having the force or effect of law.

“Liability” means, with respect to any Person, any liability or obligation of such Person whether known or unknown, whether asserted or unasserted, whether determined, determinable or otherwise, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, whether directly incurred or consequential, whether due or to become due and whether or not required under GAAP to be accrued on the financial statements of such Person.

“Licensed Intellectual Property Rights” means Intellectual Property Rights licensed to the Company which are used in and/or necessary for the conduct of the Design & Manufacturing Business as currently conducted.

“Material Adverse Effect” means a material adverse effect on the assets, properties, financial condition, business or results of operations of the Company; provided, however, that in no event shall any of the following be taken into account in the determination of whether a Material Adverse Effect has occurred: (a) any change in any Legal Requirement or GAAP; and (b) any change resulting from conditions affecting any

of the industries in which the Company operates or from changes in general business, financial, political, capital market or economic conditions (including any change resulting from any hostilities, war or military or terrorist attack) but only to the extent such change does not adversely affect the Company more than other companies in its industry.

“Net Working Capital” means the remainder of (a) the current assets of the Company reflected in the line items included in the Net Working Capital Calculation Schedule minus (b) the current liabilities of the Company reflected in the line items included in the Net Working Capital Calculation Schedule, in each case, calculated as of the close of business on the day immediately preceding the Closing Date in accordance with the Accounting Principles and excluding all Services Business Assets and Services Business Liabilities that are transferred to the New Services Entity pursuant to the Services Business Transfer Agreement; provided, that (i) Net Working Capital shall not take into account (x) any cash received upon exercise of the Options, (y) any amounts in respect of deferred Tax assets or liabilities, the current portions of any amounts reflected in the Closing Debt Amount or any accrued liabilities that constitute Seller Transaction Expenses that are paid by the Buyer at Closing pursuant to Section 2.4 or (z) any obligation with respect to withholding Taxes and similar amounts referred to in the last paragraph of Section 2.4(a), to the extent such amounts are withheld from payments made at the Closing, and any related cash held by the Company as a result of such withholding; (ii) unless otherwise agreed by the Sellers’ Representative and the Buyer, all of the reserves used to determine Net Working Capital (whether or not in compliance with GAAP) will be at the levels specified in the Most Recent Balance Sheet; and (iii) no purchase accounting adjustments in respect of the Contemplated Transactions shall be included.

“Net Working Capital Adjustment Amount” means the difference between (a) Net Working Capital and (b) the Net Working Capital Target.

“Net Working Capital Calculation Schedule” means the calculation of Net Working Capital attached as Annex II hereto.

“Net Working Capital Target” means $3,554,278.

“Ordinary Course of Business” means an action taken by any Person in the ordinary course of such Person’s business that is consistent with the past customs and practices of such Person (including past practice with respect to quantity, amount, magnitude and frequency, standard employment and payroll policies and past practice with respect to management of working capital and the making of capital expenditures) and that is taken in the ordinary course of the normal day-to-day operations of such Person.

“Organizational Documents” means, with respect to any Person (other than an individual), (a) the certificate or articles of incorporation or organization and any joint venture, limited liability company, operating or partnership agreement and other similar documents adopted or filed in connection with the creation, formation or organization of such Person and (b) all by-laws, voting agreements and similar documents, instruments or

agreements relating to the organization or governance of such Person, in each case, as amended or supplemented.

“Owned Intellectual Property Rights” means Intellectual Property Rights owned by or exclusively licensed to the Company which are used in and/or necessary for the conduct of the Design & Manufacturing Business as currently conducted.

“Permits” means, with respect to any Person, any license, franchise, permit, consent, approval, right, privilege, certificate or other similar authorization issued by, or otherwise granted by, any Governmental Authority to which or by which such Person is subject or bound or to which or by which any property, business, operation or right of such Person is subject or bound.

“Permitted Encumbrance” means (a) statutory liens for current Taxes not yet due and payable or the amount or validity of which is being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with GAAP, (b) mechanics’, materialmen’s, carriers’, workers’, repairers’ and similar statutory liens arising or incurred in the Ordinary Course of Business the existence of which would not constitute an event of default under, or breach of, a Real Property Lease and the Liabilities of the Company in respect of which are not overdue or otherwise in default, (c) zoning, entitlement, building and other land use regulations imposed by Governmental Authorities having jurisdiction over any Owned Real Property which are not violated in any material respect by the current use and operation of the Owned Real Property, (d) covenants, conditions, restrictions, easements, encumbrances and other similar matters affecting title to but not adversely affecting the value of, or the current occupancy or use of the Owned Real Property or other property in any material respect and (e) liens to secure landlords, lessors or renters under leases or rental agreements (to the extent the applicable Company is not in default under such lease or rental agreement).

“Person” means any individual or any corporation, association, partnership, limited liability company, joint venture, joint stock or other company, business trust, trust, organization, Governmental Authority or other entity of any kind.

“Phantom Equity Plan Payouts” means the total amounts to be paid out under the Phantom Plan Payment Agreement.

“Phantom Equity Plans” means the 2007 Special Cash Incentives Plan, as amended to date, and any award agreements issued thereunder and the other phantom equity agreements identified on Section 3.5 of the Company Disclosure Schedule.

“Post-Closing Tax Period” means a taxable period beginning after the Closing Date, or the portion of a Straddle Period beginning after the Closing Date.

“Publicly Available Software” means each of: (a) any software that contains, or is derived in any manner (in whole or in part) from, any software that is distributed as free software, open source software (e.g., Linux) or similar licensing or distribution models; and (b) any software that requires as a condition of use, modification and/or

distribution of such software that such software or other software incorporated into, derived from or distributed with such software (i) be disclosed or distributed in source code form, (ii) be licensed for the purpose of making derivative works, or (iii) be redistributable at no charge.

“Receiver” means the receiver designed by the Company for the JCREW 3.3 program in the form in existence on the Closing Date plus any modifications to or derivative products of such receiver made prior to December 31, 2012.

“Receiver Revenue” means with respect to any period all revenue recognized by the Company, the Buyer or any of its Affiliates with respect to such period from the sale, licensing or other disposition of the Receiver, calculated in accordance with the Specified Accounting Principles. For the avoidance of doubt, Receiver Revenue shall not include non-recurring engineering fees paid by a customer or customer-funded design service and development efforts.

“Representative” means, with respect to any Person, any director, officer, employee, agent, manager, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors.

“Seller Transaction Expenses” means all costs, fees and expenses incurred in connection with or in anticipation of the negotiation, execution and delivery of this Agreement and the Ancillary Agreements or the consummation of the Contemplated Transactions or in connection with or in anticipation of any alternative transactions considered by the Company to the extent such costs, fees and expenses are payable or reimbursable by the Company, including, (i) all brokerage fees, commissions, finders’ fees or financial advisory fees, (ii) the fees and expenses of Choate Hall & Stewart LLP and Sullivan Bille PC and all other fees and expenses of legal counsel, accountants, consultants, valuation firms and other experts and advisors so incurred, (iii) all Change of Control Payments and all accrued but unpaid bonus payments to Company employees (including without limitation the bonus payments to be made pursuant to Section 7.1(b), other than payments to be made pursuant to the terms of the Phantom Plan Payment Agreement), and (iv) the cost of any D&O coverage obtained pursuant to Section 6.8. Seller Transaction Expenses will not include the fees of the Escrow Agent pursuant to the Escrow Agreement.

“Services Business Assets” means all assets transferred to the New Services Entity pursuant to the Services Business Transfer Agreement.

“Services Business Liabilities” means all liabilities of any nature assumed by the New Services Entity pursuant to the Services Business Transfer Agreement.

“Specified Accounting Principles” means GAAP applied on a basis consistent with Buyer’s financial statements included in its periodic reports filed under the Securities Exchange Act of 1934.

“Subsidiary” means, with respect to any specified Person, any other Person of which such specified Person, directly or indirectly through one or more Subsidiaries,

(a) owns at least 50% of the outstanding Equity Interests entitled to vote generally in the election of the Board of Directors or similar governing body of such other Person, or (b) has the power to generally direct the business and policies of that other Person, whether by contract or as a general partner, managing member, manager, joint venturer, agent or otherwise.

“Tax” or “Taxes” means (a) any and all federal, state, local, or foreign taxes, charges, fees, levies or other assessments, including income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar, including FICA), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind or any charge of any kind payable to any Governmental Authority in the nature of (or similar to) taxes whatsoever, including any interest, penalty, or addition thereto, whether disputed or not and (b) any liability for the payment of any amounts of the type described in clause (a) of this definition as a result of being a member of an affiliated, consolidated, combined or unitary group for any period, as a result of any tax sharing or tax allocation agreement, arrangement or understanding, or as a result of being liable for another person’s taxes as a transferee or successor, by Contractual Obligation or otherwise.

“Tax Return” means any return, declaration, report, claim for refund or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

“Treasury Regulations” means the regulations promulgated under the Code.

(b) In addition to the defined terms in paragraph (a) above, the following terms are defined elsewhere in this Agreement:


Term		Section
Accounting Firm		2.6(e)
Agreement		Preamble
Assets		3.9(a)
Base Purchase Price		2.2(a)
Buyer		Preamble
Buyer Indemnified Person		9.1(a)
Claims		6.9
Closing		2.3
Combined Earnout Period		2.7(d)
Common Stock		Recitals
Company		Preamble
Company Plan		3.14(a)
Company Registrations		3.11(c)
Company Stock Plans		2.5
Consulting Agreement		Recitals
Current Liability Policies		3.21


Term		Section
Design & Manufacturing Business		Recitals
Earnout Dispute Notice		2.7(e)
Earnout Period 1 Revenue Payment		2.7(b)
Earnout Period 2 Revenue Payment		2.7(c)
Earnout Statement		2.7(a)
ERISA Affiliate		3.14(a)
Escrow Agent		Recitals
Escrow Agreement		Recitals
Estimated Closing Balance Sheet		2.6(a)
Estimated Closing Statement		2.6(a)
Estimated Purchase Price		2.6(b)
Final Closing Balance Sheet		2.6(e)
Final Closing Statement		2.6(e)
Financials		3.6(a)(ii)
Former Option Holders		Recitals
Funding Schedule		2.4(a)
Inbound IP Contracts		3.11(d)
Indemnified Parties		6.8
IP Contracts		3.11(d)
Large WC Shortfall Adjustment		2.6(f)
Leased Real Property		3.10(a)
Liability Policies		3.21
Losses		9.1(a)
Material Company Contract		3.16(b)
Most Recent Balance Sheet		3.6(a)(ii)
Most Recent Balance Sheet Date		3.6(a)(ii)
New Services Entity		Recitals
Options		Recitals
Outbound IP Contracts		3.11(d)
Owned Real Property		3.10(a)
Phantom Plan Payment Agreement		Recitals
Phantom Plan Participants		Recitals
Pre-Closing Tax Period		10.1
Proposed Final Closing Balance Sheet		2.6(c)
Proposed Final Closing Statement		2.6(c)
Purchase Price		2.2(a)
Qualified Plan		3.14(c)
Real Property		3.10(a)
Real Property Leases		3.10(a)
Registered Agent		11.9(d)
Release Date		9.9
Reviewed Financials		3.6(a)(i)
Scheduled Intellectual Property Rights		3.11(c)
Seller Indemnified Person		9.2
Sellers		Preamble


Term		Section
Sellers’ Representative		11.4(a)
Services Business		Recitals
Services Business Transfer		Recitals
Services Business Transfer Agreement		Recitals
Shareholders		Preamble
Shares		Recitals
Standard Cap		9.1(b)(iii)
Stockholders Agreement		6.10(a)
Straddle Period		10.2
Tax Contest Claims		10.6
Third Party Claim		9.4(a)
Transition Services Agreement		Recitals
Working Capital Dispute Notice		2.6(d)

Section 1.2. Certain Matters of Construction.

(a) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

(b) Section and subsection headings are not to be considered part of this Agreement, are included solely for convenience, are not intended to be full or accurate descriptions of the content of the Sections or subsections of this Agreement and shall not affect the construction hereof.

(c) Except as otherwise explicitly specified to the contrary herein, (i) the words “hereof,” “herein,” “hereunder” and words of similar import shall refer to this Agreement as a whole and not to any particular Section or subsection of this Agreement and reference to a particular Section of this Agreement shall include all subsections thereof, (ii) references to a Section, Exhibit, Annex or Schedule means a Section of, or Exhibit, Annex or Schedule to this Agreement, unless another agreement is specified, (iii) definitions shall be equally applicable to both the singular and plural forms of the terms defined, and references to the masculine, feminine or neuter gender shall include each other gender, (iv) the word “including” means including without limitation, (v) any reference to “$” or “dollars” means United States dollars and (vi) references to a particular statute or regulation include all rules and regulations thereunder and any successor statute, rule or regulation, in each case as amended or otherwise modified from time to time.

(d) The inclusion of an item on any Schedule hereto is not evidence of the materiality of such item for purposes of this Agreement or otherwise, or that such item is a disclosure required under this Agreement. No disclosure in any Schedule relating to any possible breach or violation of any agreement shall be construed as an admission or indication that any such breach or violation exists or has actually occurred, or shall constitute an admission of liability to any third party. The parties intend that each representation, warranty and covenant contained herein

will have independent significance. If any party has breached or violated, or if there is an inaccuracy in, any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not breached or violated, or in respect of which there is not an inaccuracy, will not detract from or mitigate the fact that the party has breached or violated, or there is an inaccuracy in, the first representation, warranty or covenant.

(e) Unless the context clearly requires otherwise, when used herein “or” shall not be exclusive (i.e., “or” shall mean “and/or”).

(f) Time is of the essence with regard to all dates and time periods set forth or referred to in this Agreement.

ARTICLE II

PURCHASE AND SALE OF SHARES;

TREATMENT OF OPTIONS; CLOSING

Section 2.1. Purchase and Sale of Shares. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, each of the Sellers shall, severally and not jointly, sell, transfer and deliver to Buyer, free and clear of all Encumbrances, and Buyer shall purchase from each of such Sellers, all of the outstanding Shares held by such Sellers as listed on Annex I.

Section 2.2. Purchase Price. (a) The aggregate consideration for the purchase and sale of the Shares at Closing will be equal to an amount in cash (such aggregate consideration, the “Purchase Price”) calculated as follows:

(i) $31,000,000 U.S. dollars (the “Base Purchase Price”);

(ii) less the Closing Debt Amount;

(iii) less the amount of any Seller Transaction Expenses not otherwise paid prior to the Closing Date or taken into account in the calculation of Net Working Capital;

(iv) less the payments to be made at Closing to the Phantom Plan Participants pursuant to the Phantom Plan Payment Agreement (including any related withholding pursuant to Section 2.4 and the Phantom Plan Payment Agreement);

(v) plus the total cash payments (including checks) received on the date of this Agreement in connection with the exercise of the Options;

(vi) plus the Net Working Capital Adjustment Amount (if Net Working Capital is greater than the Net Working Capital Target);

less the Net Working Capital Adjustment Amount (if Net Working Capital is less than the Net Working Capital Target).

The Purchase Price shall be subject to adjustment in accordance with Sections 2.6 and 2.7 and Article IX.

(b) The Purchase Price shall be paid as follows: (i) an amount equal to the Escrowed Amount will be deposited with the Escrow Agent to be held pursuant to the Escrow Agreement and (ii) the remaining Purchase Price will be paid to the Sellers, pro rata based on the number of shares held by each as set forth on Annex I-A.

Section 2.3. The Closing. The purchase and sale of the Shares (the “Closing”) shall take place on the date hereof at the offices of Bingham McCutchen LLP, One Federal Street, Boston MA 02110, immediately after the completion of the Services Business Transfer pursuant to the Services Business Transfer Agreement, subject to the satisfaction or waiver of each of the conditions set forth in Articles VII and VIII hereof (other than those conditions which can be satisfied only at the Closing, but subject to the satisfaction or waiver of such conditions at Closing), or at such other time and place as may be agreed to by the parties hereto (with the Sellers’ Representative acting for all the Sellers).

Section 2.4. Closing Deliveries and Payments.

(a) Buyer Closing Deliveries and Payments. Upon the terms and subject to the conditions set forth in this Agreement, the Buyer shall deliver or cause to be delivered at the Closing the payments set forth in Annex IV hereto (the “Funding Schedule”), including:

•

the Escrowed Amount to be deposited with the Escrow Agent pursuant to Section 2.2(b);

•

the portion of the Purchase Price to be paid to each Shareholder pursuant to Section 2.2;

•

the Closing Debt Amount referenced in Section 2.2(a)(ii);

•<

ARTICLE 10 Amendments

ARTICLE 11 Massachusetts Control Share Acquisition Act