MERCURY COMPUTER SYSTEMS INC, 424B4, 1998-01-30

MERCURY COMPUTER SYSTEMS INC
424B4, 1998-01-30
ELECTRONIC COMPONENTS & ACCESSORIES

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<PAGE> 1
FILED PURSUANT TO RULE 424B(4)
FILE NO. 333-41139

PROSPECTUS
- --------------------------------------------------------------------------------

3,500,000 Shares

[LOGO: MERCURY COMPUTER SYSTEMS, INC.-- The Ultimate Performance Machine]

Common Stock
- --------------------------------------------------------------------------------

Of the 3,500,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby, 2,000,000 shares are being sold by Mercury Computer
Systems, Inc. ("Mercury" or the "Company") and 1,500,000 shares are being sold
by certain stockholders of the Company (the "Selling Stockholders"). The Company
will not receive any of the proceeds from the sale of shares of Common Stock by
the Selling Stockholders. See "Principal and Selling Stockholders."

Prior to this offering (the "Offering"), there has been no public market for the
Common Stock of the Company. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The Common Stock
has been approved for inclusion in The Nasdaq Stock Market's National Market
(the "Nasdaq National Market") under the symbol "MRCY."

SEE "RISK FACTORS" ON PAGES 6 TO 14 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
==========================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
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<S> <C> <C> <C> <C>
Per Share......................... $10.50 $0.735 $9.765 $9.765
- ----------------------------------------------------------------------------------------------------------
Total(3).......................... $36,750,000 $2,572,500 $19,530,000 $14,647,500
==========================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses payable by the Company, estimated to be $750,000.

(3) The Company and the Selling Stockholders have granted to the several
Underwriters 30-day over-allotment options to purchase, in the aggregate, up
to 525,000 additional shares of the Common Stock on the same terms and
conditions as set forth above. If all such additional shares are purchased
by the Underwriters, the total Price to Public will be $42,262,500, the
total Underwriting Discounts and Commissions will be $2,958,375, the total
Proceeds to Company will be $21,782,297 and the total Proceeds to Selling
Stockholders will be $17,521,828. See "Underwriting."
- --------------------------------------------------------------------------------

The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares of Common Stock to the
Underwriters is expected to be made through the facilities of The Depository
Trust Company, New York, New York, on or about February 4, 1998.

PRUDENTIAL SECURITIES INCORPORATED COWEN & COMPANY

January 29, 1998
<PAGE> 2
MERCURY designs, manufactures and markets high performance real-time digital
signal processing computer systems that transform sensor generated data into
information which can be displayed as images for human interpretation or
subjected to additional computer analysis. The applications served by Mercury's
products typically are computation intensive and require I/O capacity and
interprocessor bandwidth which are not available on a general purpose PC or
workstation.

DEFENSE ELECTRONICS

MEDICAL IMAGING

SHARED STORAGE
[Photos of Mercury products, applications and
users thereof and output generated thereby.]

[LOGO: MERCURY COMPUTER SYSTEMS, INC.-- The Ultimate Performance Machine]

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 3

DEFENSE ELECTRONICS
- -----------------------------
- -----------------------------

[PICTURE OF AIRPLANE]

MERCURY'S systems are embedded
into air, sea and land-based
platforms for processing radar,
sonar and signal intelligence
applications. These applications
allow a military commander to
"see" the battle space through
natural barriers such as clouds,
darkness, water or foliage, so
that the position and strength
of the enemy can be determined.

[PICTURE OF MERCURY
Due to the environmental COMPUTER SYSTEM]
constraints of these
applications, MERCURY'S
systems are frequently
confined in limited spaces,
and they are designed to
generate a minimum amount of
heat.

MERCURY provides high performance embedded
computer systems to the defense electronics
market, and works closely with defense
contractors to complete a design which matches
[AERIAL the specified requirements of a military
PHOTOGRAPH] application.

<PAGE> 4
MEDICAL IMAGING
-----------------------------
-----------------------------

MERCURY'S systems are embedded within several [DRAWING OF
modalities of diagnostic medical imaging devices, MRI MACHINE]
including magnetic resonance imaging, computed
tomography and positron emission tomography. These
machines are used to allow a physician to "see"
within the human body instead of performing
invasive surgery.

MERCURY'S systems provide the
medical imaging industry with a
[PICTURE OF MERCURY customized solution using an
COMPUTER SYSTEM] architecture that accommodates
upgrades as new technology becomes
available. Medical imaging machine
suppliers are able to design
systems that satisfy a broad range
of price/performance requirements
and meet the needs of global
markets, all with the same Mercury
architecture.

MERCURY'S experienced team of
system and application engineers
works closely with its customers to
meet their design requirements. The [MEDICAL DIAGNOSTIC
Company believes that this IMAGES]
collaboration leads to faster
time-to-market and competitive
advantages for Mercury's customers.

<PAGE> 5

================================================================================

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including the financial statements and notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that (i) the Underwriters' over-allotment options will
not be exercised, (ii) all outstanding shares of Series A Convertible Preferred
Stock, par value $.01 per share, will be converted into Common Stock upon the
closing of this Offering and (iii) the Company's Restated Articles of
Organization will be amended upon the closing of this Offering to reduce the
number of authorized shares of Preferred Stock, par value $.01 per share, from
2,000,000 to 1,000,000 shares and to eliminate all shares of Series A
Convertible Preferred Stock. The Company's fiscal year begins on July 1 and ends
on June 30 of each year. See "Description of Capital Stock" and "Underwriting."

Mercury designs, manufactures and markets high performance, real-time
digital signal processing computer systems that transform sensor generated data
into information which can be displayed as images for human interpretation or
subjected to additional computer analysis. These multicomputer systems are
heterogeneous and scalable, allowing them to accommodate several microprocessor
types and to scale from a few to hundreds of microprocessors within a single
system. Mercury's system architecture is specifically designed for digital
signal processing applications which are typically computation intensive and
require I/O capacity and interprocessor bandwidth not available on a general
purpose PC or workstation. The two primary markets for Mercury's products are
defense electronics and medical diagnostic imaging. Both of these markets have
computing needs which benefit from the unique system architecture developed by
the Company. Mercury's computer systems are generally used on real world signal
data to enable a military commander to "see" the battle space through natural
barriers such as clouds, darkness, water or foliage, so that the position and
strength of the enemy can be determined, or to enable a physician to "see"
within the body instead of performing invasive surgery.

During the past three fiscal years, the majority of the Company's revenues
has been generated from sales of its products to the defense electronics market,
generally for use in intelligence gathering electronic warfare systems. The
Company's activities in this area have focused on the proof of concept,
development and deployment of advanced military applications in radar, sonar and
airborne surveillance. The Company has established relationships with many of
the major prime contractors to the worldwide defense industry, including
Lockheed Martin Corporation, Hughes Aircraft Company, Raytheon/E-Systems, Inc.,
Raytheon/TI Systems, Inc., Northrop Grumman Corporation, MIT/Lincoln Laboratory,
GEC Marconi Limited, Ericsson Microwave Systems AB, MATRA Systemes &
Information, Mitsubishi Heavy Industries, Ltd. and a prime contractor owned by
the Israeli Ministry of Defense.

Medical diagnostic imaging is the other primary market currently served by
the Company. Mercury's computer systems are embedded in magnetic resonance
imaging ("MRI"), computed tomography ("CT") and positron emission tomography
("PET") machines. Mercury has supplied computer systems for use in several of
General Electric Medical Systems, Inc.'s medical diagnostic imaging systems
since 1987, and has established relationships with Siemens Medical Systems,
Inc., Toshiba Corp. and Elscint, Inc. The major medical imaging manufacturers
are currently developing the next generation of MRI, CT and digital x-ray
machines, which are expected to provide better performance at lower cost.
Mercury has recently secured design wins on programs with certain of the major
medical imaging manufacturers for their next generation MRI, CT and digital
x-ray machines. The Company believes that the available market in 1998 for
digital signal processing systems and upgrades for the MRI, CT and digital x-ray
markets is expected to be an aggregate of approximately $123 million.

================================================================================

3
<PAGE> 6

developed by Mercury which allows for high interprocessor bandwidth and I/O
capacity. The Company uses its proprietary application specific integrated
circuits ("ASICs") to integrate microprocessors, memory and related components
into the RACEway Interconnect to provide optimum system performance. The Company
uses industry standard microprocessors, such as Intel Corporation's i860,
Motorola, Inc.'s PowerPC, Texas Instruments Incorporated's C80 and Analog
Devices, Inc.'s SHARC, in the same system. The Company believes that the RACEway
Interconnect and its proprietary ASICs, working together with a group of mixed
microprocessors in the same system, allow the most efficient use of space and
power with an optimal price/performance ratio.

Since July 1996, Mercury has targeted the shared storage market for
introduction of a new product which draws on the Company's core competencies in
systems engineering and the development of real-time software. In fiscal 1997,
Mercury introduced SuiteFusion, its first shared storage product designed to
meet the needs of the broadcast and post-production industry. SuiteFusion is an
open, scalable software application that allows work groups to share commodity,
fibre channel attached disk arrays, eliminating the need for an expensive,
intermediate file server. Early end users include Turner Broadcasting Systems
Inc.'s CNN Interactive, Nickelodeon's Blue's Clues television show and Hughes
Aircraft (through a subsidiary) for use at the U.S. Army National Training
Center. The Company believes that the shared storage market includes a number of
distinct applications, such as digital video editing, electronic computer aided
design, webcasting, cable advertising insertion and pre-press.

The Company's executive offices are located at 199 Riverneck Road,
Chelmsford, Massachusetts 01824, and its telephone number is (978) 256-1300. The
Company was incorporated in Massachusetts in 1981.

THE OFFERING

Common Stock Offered by the Company..... 2,000,000 shares

Common Stock Offered by the Selling
Stockholders............................ 1,500,000 shares

Common Stock to be Outstanding after the
Offering................................ 9,868,223 shares(1)

Use of Proceeds by the Company.......... For working capital and other
general corporate purposes,
including construction of
additional office space. See "Use
of Proceeds."

Proposed Nasdaq National Market
Symbol.................................. MRCY
- ---------------
(1) Excludes 1,095,923 shares of Common Stock issuable upon exercise of
outstanding stock options under the Company's stock option plans at October
31, 1997, with a weighted average exercise price of $4.89 per share, of
which 447,559 shares were exercisable as of such date at a weighted average
exercise price of $3.45 per share. See "Management -- Stock Option and Stock
Purchase Plans."

RISK FACTORS

Investors should consider the risk factors involved in connection with an
investment in the Common Stock and the impact to investors from various events
that could adversely affect the Company's business. See "Risk Factors."

RECENT DEVELOPMENTS

The Company's operations generated revenues, net income and diluted net
income per common share of $20.6 million, $2.0 million and $0.23, respectively,
during the three months ended December 31, 1997, compared to revenues, net
income and diluted net income per common share of $15.1 million, $688,000 and
$0.08, respectively, during the three months ended December 31, 1996. Diluted
net income per common share for both periods has been calculated in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per Share."

4
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $38,632 $41,727 $54,323 $58,300 $64,574 $13,038 $19,039
Cost of revenues................. 11,972 16,285 21,221 24,688 22,034 4,538 6,661
------- ------- ------- ------- ------- ------- -------
Gross profit................... 26,660 25,442 33,102 33,612 42,540 8,500 12,378
Operating expenses:
Selling, general and
administrative.............. 10,785 12,911 15,798 16,927 22,631 4,726 6,645
Research and development....... 5,619 7,254 8,586 9,776 12,837 2,405 3,381
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 16,404 20,165 24,384 26,703 35,468 7,131 10,026
------- ------- ------- ------- ------- ------- -------
Income from operations........... 10,256 5,277 8,718 6,909 7,072 1,369 2,352
Interest income (expense), net... (94) 55 240 548 560 136 231
Other income (expense), net...... (44) (64) 22 (77) (88) (23) 83
------- ------- ------- ------- ------- ------- -------
Income before income taxes....... 10,118 5,268 8,980 7,380 7,544 1,482 2,666
Provision for income taxes....... 2,487 1,153 2,636 2,952 2,933 576 1,060
------- ------- ------- ------- ------- ------- -------
Net income....................... $ 7,631 $ 4,115 $ 6,344 $ 4,428 $ 4,611 $ 906 $ 1,606
======= ======= ======= ======= ======= ======= =======
Net income per common share...... $ 1.02 $ 0.50 $ 0.77 $ 0.54 $ 0.57 $ 0.11 $ 0.20
======= ======= ======= ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding(1)................. 7,492 8,295 8,256 8,264 8,157 8,191 8,174
======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................... $28,653 $ 47,433
Total assets.......................................................... 47,905 66,685
Convertible preferred stock........................................... 1,200 --
Total stockholders' equity............................................ 35,111 53,891
</TABLE>

- ---------------

(1) See Note B of Notes to Consolidated Financial Statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute net income per common share.

(2) Reflects (i) the conversion of all outstanding shares of the Company's
Series A Convertible Preferred Stock into 2,556,792 shares of Common Stock
upon completion of this Offering and (ii) the sale by the Company of
2,000,000 shares of Common Stock offered hereby at an initial public
offering price of $10.50 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses.

5
<PAGE> 8

RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information set forth in this Prospectus, in
connection with an investment in the shares of Common Stock offered hereby.

When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Factors
that could cause or contribute to such differences include, but are not limited
to, those described below, under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Prospectus.

DEPENDENCE ON DEFENSE ELECTRONICS BUSINESS; UNCERTAINTY ASSOCIATED WITH
GOVERNMENT CONTRACTS. Sales of the Company's computer systems to the defense
electronics market accounted for approximately 81% of the Company's revenues in
fiscal 1997, compared to approximately 72% of the Company's revenues in fiscal
1996. Reductions in government spending on programs that incorporate the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, the Company's
government contracts and subcontracts are subject to special risks, such as:
delays in funding; ability of the government agency to unilaterally terminate
the prime contract; reduction or modification in the event of changes in
government policies or as the result of budgetary constraints or political
changes; increased or unexpected costs under fixed price contracts; and other
factors that are not under the control of the Company. In addition,
consolidation among defense industry contractors has resulted in fewer
contractors with increased bargaining power relative to the Company. No
assurance can be given that such increased bargaining power will not adversely
affect the Company's business, financial condition or results of operations in
the future.

The Company's contracts with the U.S. and foreign governments and their
prime and subcontractors are subject to termination either upon default by the
Company or at the convenience of the government. Termination for convenience
provisions generally entitle the Company to recover costs incurred, settlement
expenses and profit on work completed prior to termination. In addition to the
right of the government to terminate, government contracts are generally
conditioned upon the continuing availability of legislative appropriations.
Funds are usually appropriated for a given program each fiscal year even though
contract performance may take more than one fiscal year. Consequently, at the
outset of a major program, the contract is usually partially funded, and
additional monies normally are incrementally committed to the contract by the
procuring agency from appropriations made for future fiscal years. No assurance
can be given that the Company will realize the revenue expected from performing
under such contracts. Because the Company contracts to supply goods and services
to U.S. and foreign governments it is also subject to other risks, including
contract suspensions, protests by disappointed bidders of contract awards which
can result in the reopening of the bidding process, changes in governmental
policies or regulations or other political factors.

DEPENDENCE ON KEY CUSTOMERS. The Company is dependent on a small number of
customers for a large portion of its revenues. In fiscal 1997, Lockheed Martin
and Hughes Aircraft accounted for 22% and 10%, respectively, of the Company's
revenues, and sales to 20 customers accounted for more than 80% of the Company's
fiscal 1997 revenues. In fiscal 1996, Lockheed Martin, GE Medical and Hughes
Aircraft accounted for 19%, 16% and 12%, respectively, of the Company's
revenues, and sales to 20 customers accounted for more than 80% of the Company's
fiscal 1996 revenues. The Company's largest customer in the medical imaging
market is GE Medical, which accounted for 72% of the Company's aggregate sales
to the medical imaging market in fiscal 1997, compared to 69% of sales to the
medical imaging market in fiscal 1996. Customers in the defense electronics
market generally purchase the Company's products in connection with government
programs that have a limited duration, leading to fluctuating sales to any
particular customer in the defense electronics market from year to year. By
contrast, many customers in the medical imaging market

6
<PAGE> 9

historically have purchased the Company's products over a number of years for
use in successive generations of medical imaging devices, although there can be
no assurance that such past behavior will continue in the future. A significant
diminution in the sales to or loss of any of the Company's major customers would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company's revenues are largely
dependent upon the ability of its customers to develop and sell products that
incorporate the Company's products. No assurance can be given that the Company's
customers will not experience financial or other difficulties that could
adversely affect their operations and, in turn, the results of operations of the
Company. See "Business -- Markets and Customers."

FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced
fluctuations in its results of operations in large part due to the sale by the
Company of its computer systems in relatively large dollar amounts to a
relatively small number of customers. Operating results also have fluctuated due
to competitive pricing programs and volume discounts, the loss of customers,
market acceptance of the Company's products, product obsolescence and general
economic conditions. In addition, the Company, from time to time, has entered
into contracts to engineer a specific solution based on modifications to the
Company's standard products (a "development contract"). The Company's gross
margins from development contract revenues are typically lower than the
Company's gross margins from standard product revenues. The Company intends to
continue to enter into development contracts and anticipates that the gross
margins associated with development contract revenues will continue to be lower
than its gross margins on standard product revenues. The Company expects
research and development expenses to continue to increase as the Company
continues to develop products to serve its markets, all of which are subject to
rapidly changing technology, frequent product performance improvements and
evolving industry standards. The ability to deliver superior technological
performance on a timely and cost effective basis is a critical factor in
securing design wins for future generations of defense electronics and medical
imaging systems. Significant research and development spending by the Company
does not ensure that the Company's computer systems will be designed into a
customer's system. Because future production orders are usually contingent upon
securing a design win, the Company's operating results may fluctuate due to
either obtaining or failing to obtain design wins for significant customer
systems.

The Company's quarterly results may be subject to fluctuations resulting
from the foregoing factors, as well as a number of other factors, including the
timing of significant orders, delays in completion of internal product
development projects, delays in shipping the Company's computer systems and
software programs, delays in acceptance testing by customers, a change in the
mix of products sold to the defense electronics and medical imaging markets,
production delays due to quality problems with outsourced components, shortages
of components, the timing of product line transitions and declines in quarterly
revenues from old generations of products following announcement of replacement
products containing more advanced technology. Another factor contributing to
fluctuations in quarterly results is the fixed nature of the Company's
expenditures on personnel, facilities and marketing programs. The Company's
expense levels for personnel, facilities and marketing programs are based, in
significant part, on the Company's expectations of future revenues on a
quarterly basis. If actual quarterly revenues are below management's
expectations, results of operations likely will be adversely affected. As a
result of the foregoing factors, the Company's operating results, from time to
time, may be below the expectations of public market analysts and investors,
which could have a material adverse effect on the price of the Company's Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

DEPENDENCE ON SUPPLIERS. Several components used in the Company's products
are currently obtained from sole source suppliers. Mercury is dependent on LSI
Logic Corporation for four custom designed ASICs, on Analog Devices for its
SHARC processors, on International Business Machines Corporation for ball grid
array packaging, on Motorola for its PowerPC processors and on Intel for its
i860 processors. IBM may terminate its contract with the Company without cause
upon thirty days notice and may cease offering products to the Company upon
sixty days notice. Analog Devices may discontinue or modify any product upon 180
days notice and LSI Logic may discontinue any product upon 180 days notice. If
LSI Logic, Analog Devices, IBM, Motorola or Intel were to limit or reduce the
sale of such components to the Company, or if these or other suppliers to the
Company were to experience financial difficulties or other problems which

7
<PAGE> 10

prevented them from supplying the Company with the necessary components, such
events could have a material adverse effect on the Company's business, financial
condition and results of operations. These sole source suppliers are subject to
quality and performance issues, materials shortages, excess demand, reduction in
capacity and other factors that may disrupt the flow of goods to the Company or
its customers and thereby adversely affect the Company's business and customer
relationships. The Company has no guaranteed supply arrangements with its
suppliers and there can be no assurance that its suppliers will continue to meet
the Company's requirements. If the Company's supply arrangements are
interrupted, there can be no assurance that the Company would be able to find
another supplier on a timely or satisfactory basis. Any shortage or interruption
in the supply of any of the components used in the Company's products, or the
inability of the Company to procure these components from alternate sources on
acceptable terms could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
severe shortages of components will not occur in the future. Such shortages
could increase the cost or delay the shipment of the Company's products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Significant increases in the prices of
these components would also materially adversely affect the Company's financial
performance since the Company may not be able to adjust product pricing to
reflect the increase in component costs. The Company could incur set-up costs
and delays in manufacturing should it become necessary to replace any key
vendors due to work stoppages, shipping delays, financial difficulties or other
factors and, under certain circumstances, these costs and delays could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing and Testing."

DEPENDENCE UPON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company is
largely dependent upon the skills and efforts of its senior management,
particularly James R. Bertelli, its President and Chief Executive Officer, as
well as its managerial, sales and technical employees. None of the senior
management or other key employees of the Company is subject to any employment
contract or noncompetition agreement. The Company maintains key-man life
insurance on Mr. Bertelli and certain other senior managers. The loss of
services of any of its executives or other key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's future success will depend to a significant extent on
its ability to attract, train, motivate and retain highly skilled technical
professionals, particularly project managers, engineers and other senior
technical personnel. The Company believes that there is a shortage of, and
significant competition for, technical development professionals with the skills
and experience necessary to perform the services offered by the Company. The
Company's ability to maintain and renew existing engagements and obtain new
business depends, in large part, on its ability to hire and retain technical
personnel with the skills that keep pace with continuing changes in industry
standards, technologies and client preferences. The inability to hire additional
qualified personnel could impair the Company's ability to satisfy its growing
client base, requiring an increase in the level of responsibility for both
existing and new personnel. There can be no assurance that the Company will be
successful in retaining current or future employees.

DEPENDENCE ON MEDICAL IMAGING MARKET; POTENTIAL ADVERSE EFFECT OF HEALTH
CARE REFORM. Sales of the Company's computer systems to the medical imaging
market accounted for approximately 11% of the Company's revenues in fiscal 1997,
compared to approximately 23% of revenues in fiscal 1996. These customers are
original equipment manufacturers ("OEMs") of medical imaging devices and, as a
result, any change in the demand for such devices which renders any of the
Company's products unnecessary or obsolete, or any change in the technology in
such devices, could have a material adverse effect on the Company's business,
financial condition and results of operations. Such OEM customers, the end-users
of their products and the health care industry generally are subject to
extensive federal, state and local regulation in the U.S. as well as in other
countries. Changes in applicable health care laws and regulations or new
interpretations of existing laws and regulations could have a material adverse
effect on such customers or end-users. There can be no assurance that future
health care or budgetary legislation or other changes in the administration or
interpretation of governmental health care programs both in the U.S. and abroad
will not have a material adverse effect on the Company's business, financial
condition or results of operations.

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<PAGE> 11

RISK OF ENTRY INTO NEW MARKETS. The Company's expansion strategy includes
developing new products and entering new markets. The Company's ability to
compete in new markets will depend upon a number of factors including, without
limitation, the Company's ability to create demand for its products in such
markets, its ability to manage its growth effectively, the quality of its
products, its ability to respond to changes in its customers' businesses by
updating existing products and introducing, in a timely fashion, products which
meet the needs of its customers and the ability of the Company to respond
rapidly to technological change. The failure of the Company to do any of the
foregoing could result in a material adverse effect on its business, financial
condition and results of operations. In addition, the Company may face
competition in these new markets from various companies which may have
substantially greater research and development resources, marketing and
financial resources, manufacturing capability and customer support organizations
than those of the Company.

The Company has recently expanded into the shared storage market and has
invested, and continues to invest, significant resources in the development of
products geared towards that market. The Company has initially focused on
providing software products tailored for the post-production and broadcast
segments of the entertainment industry, introducing in fiscal 1997 SuiteFusion,
a middleware application that enables workgroups to share files. The market for
providing digital and other products to the entertainment industry includes
competitors with greater financial and other resources than the Company. No
assurance can be given that the Company will be able to successfully compete in
this market, or that it will be able to meet the technical specifications
imposed by its customers or potential customers. In addition, the success of the
Company's shared storage software product depends, in large part, on the
post-production and broadcast industry shifting from traditional linear,
tape-based technologies toward newer non-linear, disk-based digital
technologies. Linear, tape-based technologies remain pervasive in this industry
and there can be no assurance that its participants will adopt non-linear,
disk-based digital technologies, or that, if adopted, the Company's products
will not be obsolete, uncompetitive or incompatible. The occurrence of any of
the foregoing could adversely affect the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company markets and
sells its products in certain international markets, and the Company has
established offices in the United Kingdom, the Netherlands, Japan and France.
The Company's international revenues, which are comprised of export sales to
foreign markets from the United States and sales by foreign subsidiaries, were
approximately 12% of the Company's revenues in fiscal 1997, as compared to
approximately 20% in fiscal 1996. If revenues generated by foreign activities
are not adequate to offset the expense of establishing and maintaining these
foreign subsidiaries and activities, the Company's business, financial condition
and results of operations could be materially adversely affected. In addition,
there are certain risks inherent in transacting business internationally, such
as changes in applicable laws and regulatory requirements, export and import
restrictions, export controls relating to technology, tariffs and other trade
barriers, less favorable intellectual property laws, difficulties in staffing
and managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates, expatriation controls and potential adverse tax consequences, any of
which could adversely impact the success of the Company's international
activities. In the recent past, the financial markets in Asia have experienced
significant turmoil. There can be no assurance that such turmoil in the Asian
financial markets will not negatively affect the sales by the Company to that
region. A portion of the Company's revenues from sales to foreign entities,
including foreign governments, is in the form of foreign currencies. The Company
has no hedging or similar foreign currency contracts, and fluctuations in the
value of foreign currencies could adversely impact the profitability of the
Company's foreign operations. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's future
international activities and, consequently, on the Company's business, financial
condition or results of operations.

TECHNOLOGICAL CHANGES; RISK OF DESIGN-IN PROCESS. The Company's future
success will depend in part on its ability to enhance its current products and
to develop new products on a timely and cost-effective basis in order to respond
to technological developments and changing customer needs. The defense
electronics market, in particular, demands constant technological improvements
as a means of gaining military advantage.

9
<PAGE> 12

Military planners historically have funded significantly more design projects
than actual deployments of new equipment, and those systems which are deployed
tend to contain the components of the subcontractors selected to participate in
the design process. In order to participate in the design of new defense
electronics systems, the Company must be able to demonstrate its ability to
deliver superior technological performance on a timely and cost-effective basis.
There can be no assurance that the Company will be able to secure an adequate
number of defense electronics design wins in the future, that the equipment in
which the Company's products are intended to function eventually will be
deployed in the field, or that the Company's products will be included in such
equipment if it eventually is deployed.

Customers in the medical imaging market also seek technological
improvements through product enhancements and new generations of products. The
Company believes that medical imaging machines in which the Company's computers
are installed have a long product life cycle. Medical equipment OEMs
historically have selected certain suppliers whose products have been included
in the OEMs' machines for a significant portion of the products' life cycle.
There can be no assurance that the Company will be selected to participate in
the future design of any medical imaging equipment, or that, if selected, the
Company will generate any revenues for such design work. Failure to participate
in future designs of medical imaging equipment could have a material adverse
effect on the Company's business, financial condition and results of operations.

The design-in process is typically lengthy and expensive, and there can be
no assurance that the Company will be able to continue to meet the product
specifications of its customers in a timely and adequate manner. In addition,
any failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, or any significant delay in product
developments or introductions, could have a material adverse effect on the
Company's business, financial condition and results of operations. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing products on a timely basis. If the Company is unable to
design, develop or introduce competitive new products on a timely basis, its
future operating results would be adversely affected. There can be no assurance
that the Company will be successful in developing new products or enhancing its
existing products on a timely or cost-effective basis, or that such new products
or product enhancements will achieve market acceptance.

COMPETITION. The markets for the Company's products are highly competitive
and are characterized by rapidly changing technology, frequent product
performance improvements and evolving industry standards. Competition typically
occurs at the design stage, where the customer evaluates alternative design
approaches, including those from internal development organizations. A design
win usually ensures a customer will purchase the product until their next
generation system is developed. Occasionally, the Company's computer systems
compete with computer systems from workstation vendors, all of whom have
substantially greater research and development resources, long term guaranteed
supply capacity, marketing and financial resources, manufacturing capability and
customer support organizations than those of the Company. The Company believes
that its future ability to compete effectively will depend, in part, upon its
ability to continue to improve product and process technologies and develop new
technologies in order to maintain the performance advantages of products and
processes relative to competitors, to adapt products and processes to
technological changes, to identify and adopt emerging industry standards and to
adapt to customer needs.

The principal bases for selection in sales of digital signal processing
systems to the defense electronics industry are performance (measured primarily
in terms of processing speed, I/O capacity and interprocessor bandwidth,
processing density per cubic foot, power consumption and heat dissipation),
systems engineering support, overall quality of products and associated
services, use of industry standards, ease of use and price. Competitors in the
defense electronics industry include a relatively small number of companies that
design, manufacture and market digital signal processor ("DSP") board level
products and in-house design teams employed by prime defense contractors.
In-house design efforts historically have provided a significant amount of
competition to the Company. However, competition from in-house design teams has
diminished in significance in recent years due to the increasing use of
commercial off-the-shelf ("COTS") products and the trend toward greater use of
outsourcing. Despite this recent change, there can be no assurance that in-house
developments will not re-emerge as a major competitive force in the future.
Prime contractors are much larger than Mercury and have substantially more
resources to invest in research and development. Increased use of

10
<PAGE> 13

in-house design teams by defense contractors in the future may have a material
adverse effect on the Company's business, financial condition and results of
operations.

In the medical imaging industry the principal bases for selection are
performance (measured primarily in terms of processing speed, I/O capacity and
interprocessor bandwidth and power consumption), price, systems engineering
support, overall quality of products and associated services, use of industry
standards and ease of use. Competitors in the medical imaging market include
in-house design teams, a small number of companies that design, manufacture and
market DSP board level products and workstation manufacturers. Workstations have
become a competitive factor primarily in the market for low-end MRI and CT
machines and, to date, have not been a significant factor in the
high-performance market, Mercury's primary focus. There can be no assurance that
workstation manufacturers will not attempt to penetrate the high-performance
market for medical imaging machines. Workstation manufacturers typically have
greater resources than Mercury and their entry into markets historically
targeted by Mercury may have a material adverse effect on the Company's
business, financial condition and results of operations.

Due to the emerging nature of the markets for the Company's shared storage
technology, its competitive factors are not yet clearly defined. The Company
currently is focusing its efforts in this area on the broadcast and
post-production industry, where the Company believes there is currently only one
directly competitive product. As this market develops, the Company anticipates
that other companies will begin offering additional competitive products. New
competitors may have significantly greater marketing and financial resources,
better access to individuals making purchasing decisions, superior products and
superior services than those offered by the Company. The Company believes that
the primary impediment to future sales of shared storage products to the
post-production and broadcast industry is the need to transform entrenched
operating modes, such as those associated with linear tape based technologies,
to accommodate new modes of operation such as those associated with non-linear,
disk-based digital technology. However, there can be no assurance that industry
participants will adopt such new technologies or that, if adopted, the Company's
products will not be obsolete, uncompetitive or incompatible.

Some of the Company's competitors have greater financial and other
resources than the Company, and the Company may be operating at a cost
disadvantage compared to manufacturers who have greater direct buying power from
component suppliers or who have lower cost structures. There can be no assurance
that the Company will be able to compete successfully in the future with any of
these sources of competition. In addition, there can be no assurance that
competitive pressures will not result in price erosion, reduced margins, loss of
market share or other factors, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Competition."

LIMITED PROTECTION OF PROPRIETARY RIGHTS; POTENTIAL INFRINGEMENT OF THIRD
PARTY RIGHTS. The Company relies on a combination of patent, copyright,
trademark and trade secret laws to establish and protect its rights in its
products and proprietary technology. In addition, the Company currently requires
its employees and consultants to enter into nondisclosure and assignment of
invention agreements to limit use of, access to and distribution of its
proprietary information. There can be no assurance that the Company's means of
protecting its proprietary rights in the U.S. or abroad will be adequate. The
laws of some foreign countries may not protect the Company's proprietary rights
as fully or in the same manner as do the laws of the U.S. Also, despite the
steps taken by the Company to protect its proprietary rights, it may be possible
for unauthorized third parties to copy aspects of the Company's products,
reverse engineer, develop similar technology independently or otherwise obtain
and use information that the Company regards as proprietary. There can be no
assurance that others will not develop technologies similar or superior to the
Company's technology or design around the proprietary rights owned by the
Company. In addition, there can be no assurance that others will not assert
claims of infringement in the future or that, if made, such claims will not be
successful. Litigation to determine the validity of any claims, whether or not
such litigation is determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from daily operations. In the event of any
adverse ruling in any litigation regarding intellectual property, the Company
may be required to pay substantial damages, discontinue the sale of infringing
products, expend significant resources to develop non-infringing technology or
obtain licenses to infringing or substituted technology. The failure to develop,
or license on acceptable

11
<PAGE> 14

terms, a substitute technology could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Intellectual Property."

POTENTIAL ACQUISITIONS. In the normal course of its business, the Company
evaluates potential acquisitions of businesses, products and technologies that
could complement or expand the Company's business. In the event the Company were
to identify an appropriate acquisition candidate, there is no assurance that the
Company would be able to successfully negotiate the terms of any such
acquisition, finance such acquisition and integrate such acquired business,
products or technologies into the Company's existing business and operations.
Furthermore, the integration of an acquired business could cause a diversion of
management time and resources. In addition, there can be no assurance that any
acquisition of new technology will lead to the successful development of new
products, or that any such new products, if developed, will achieve market
acceptance or prove to be profitable. There can be no assurance that a given
acquisition, when consummated, would not materially adversely affect the
Company's business, financial condition or results of operations. If the Company
proceeds with one or more significant acquisitions in which the consideration
consists of cash, a substantial portion of the Company's available cash
(including the net proceeds of the Offering) could be used to consummate the
acquisitions. If the Company consummates one or more significant acquisitions in
which the consideration consists of stock, or is financed with the net proceeds
of the issuance of stock, stockholders of the Company could suffer a significant
dilution of their interests in the Company. See "Use of Proceeds."

TAX AUDIT. On December 12, 1997, the Internal Revenue Service ("IRS")
concluded an audit of the Company's tax returns for the years ended June 30,
1992 through June 30, 1995, and issued a formal report reflecting proposed
adjustments with respect to the years under audit. The proposed IRS adjustments
primarily relate to the disallowance of research and experimental tax credits
claimed by the Company, as well as the treatment of certain other items. The
total deficiency attributable to the proposed adjustments is $4.2 million,
including penalties and interest of $1.6 million through the date of the report.
The Company is in the process of responding to this report by appealing the
proposed adjustments to the Appeals Division of the IRS. While the Company does
not believe that the final outcome of the IRS audit will have a material adverse
effect on the Company's financial condition or results of operations, no
assurance can be given as to the final outcome of the audit, the amount of any
final adjustments or the potential impact of such adjustments on the Company's
financial condition or results of operations.

YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications used in manufacturing, product development, financial business
systems and various administrative functions. To the extent that these software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year "2000," some level of modification or even possibly
replacement of such source code or applications will be necessary. The Company
is still in the preliminary stages of analyzing its software applications and,
to the extent they are not fully "Year 2000" compliant, there can be no
assurance that the costs necessary to update software, or potential systems
interruptions, would not have a material adverse effect on the Company's
business, financial condition or results of operations.

SIGNIFICANT INFLUENCE BY EXISTING STOCKHOLDERS. Upon completion of the
Offering, the current officers, directors and their affiliates and five percent
beneficial owners will beneficially own approximately 32.3% of the outstanding
shares of the Common Stock of the Company (30.9% if the Underwriters'
over-allotment options are exercised in full). Accordingly, such persons, if
they act together, likely will have significant influence over the Company
through their ability to control the election of directors and all other matters
that require action by the Company's stockholders, irrespective of how other
stockholders may vote. Such persons will have the ability to exert significant
influence over the business, policies and affairs of the Company and could
prevent or delay a change in control of the Company, which may be favored by a
majority of the remaining stockholders. The ability to prevent or delay a change
in control of the Company also may have an adverse effect on the market price of
the Common Stock. Under the Massachusetts General Laws, the current officers,
directors and their affiliates and five percent beneficial owners will not have
the ability to block a business combination. More specifically, such persons
will not have the requisite percentage of shares of the Company, acting alone as
a group, to (i) give a bidder the power to vote its shares at any stockholders'
meeting, including a meeting

12
<PAGE> 15

to consider a bid, in accordance with Chapter 110D of the Massachusetts General
Laws, or (ii) to approve or ratify a business combination with an interested
stockholder in accordance with Chapter 110F of the Massachusetts General Laws
(as such terms are defined therein). See "Management -- Executive Officers and
Directors," "Principal and Selling Stockholders" and "Description of Capital
Stock."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market for the Common Stock will develop or,
if developed, be sustained upon completion of the Offering. The initial public
offering price has been determined by negotiations between the Company and the
representatives of the Underwriters based on a number of factors, including
prevailing market conditions, market valuations of other companies engaged in
activities similar to those of the Company, estimates of the business potential
and prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products by the Company or its competitors, developments or
disputes with respect to proprietary rights, general trends in the industry,
overall market conditions, changes in earnings estimates by analysts and other
factors. In addition, the stock market historically has experienced extreme
price and volume fluctuations, which have particularly affected the market price
of securities of many high technology companies and which at times have been
unrelated or disproportionate to the operating performance of such companies.
These market fluctuations may adversely affect the market price of the Common
Stock. See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have a total of 9,868,223 shares of Common Stock outstanding. Of
these shares, the 3,500,000 shares of Common Stock offered hereby (4,025,000
shares if the Underwriters' over-allotment options are exercised in full) will
be freely tradeable without restriction or registration under the Securities Act
by persons other than "affiliates" of the Company, as defined under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining shares
of Common stock outstanding will be "restricted securities" as defined by Rule
144 promulgated under the Securities Act. Upon completion of the Offering, the
Company will have options outstanding to purchase 1,095,923 shares of Common
Stock. In addition, options for the purchase of 244,166 shares will remain
available for issuance under the Company's Stock Option Plans, assuming no
exercise of options after October 31, 1997. See "Management -- Stock Option
Plans" and "Shares Eligible for Future Sale."

Under Rule 144 (and subject to the conditions thereof, including volume
limitations) all 6,364,023 restricted shares (6,069,673 restricted shares if the
Underwriters' over-allotment options are exercised in full) will become eligible
for sale after the Offering. The Company, its executive officers and directors,
the Selling Stockholders and certain other stockholders have agreed that,
subject to certain exceptions, they will not, without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any other securities
convertible into, or exercisable or exchangeable for, shares of Common Stock or
other similar securities of the Company for a period of 180 days from the date
of this Prospectus. After such 180-day period, this restriction will expire and
shares permitted to be sold under Rule 144 would be eligible for sale, provided
that the Company shall have been subject to the reporting requirements of the
Exchange Act for at least 90 days and the relevant holding period under Rule 144
shall have expired. Prudential Securities Incorporated may, in its sole
discretion, at any time and without prior notice, release all or any portion of
the shares of Common Stock subject to such agreements. No predictions can be
made of the effect, if any, that the sale or availability for sale of additional
shares of Common Stock will have on the market price of the Common Stock.
Nevertheless, sales of substantial amounts of such shares in the public market,
or the perception that such sales could occur, could materially and adversely
affect the market price of the Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity securities.
See "Shares Eligible for Future Sale."

ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK. Certain
provisions of the Company's Restated Articles of Organization (the "Charter")
and Amended and Restated Bylaws (the "Bylaws") and certain provisions of
Massachusetts law could have the effect of making it more difficult for a third
party to

13
<PAGE> 16

acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that investors might be
willing to pay in the future for the Company's Common Stock. These provisions
permit the issuance of "blank check" preferred stock by the Board of Directors
without stockholder approval, require super-majority approval to amend certain
provisions in the Charter and Bylaws and impose various procedural and other
requirements that could make it more difficult for Stockholders to effect
certain corporate actions. In addition, the Company is subject to Chapters 110D
and 110F of the Massachusetts General Laws, which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder unless either (i) the interested stockholder
obtains the approval of the board of directors prior to becoming an interested
stockholder, (ii) the interested stockholder acquires 90% of the outstanding
voting stock of the Company at the time he becomes an interested stockholder or
(iii) the business combination is approved by both the Company's board of
directors and two-thirds of the outstanding voting stock of the Company
(excluding shares held by the interested stockholder) at an annual or special
meeting of stockholders, and not by written consent. The application of such
provisions also could have the effect of delaying or preventing a change of
control in the Company. The Board of Directors is divided into three "staggered"
classes, with each class serving for a term of three years. Dividing the Board
of Directors in this manner increases the difficulty of removing incumbent
members and could discourage a proxy contest or the acquisition of a substantial
block of the Company's Common Stock. See "Description of Capital Stock --
Certain Articles of Organization, Bylaws and Statutory Provisions Affecting
Stockholders" and "Management."

IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in the
Offering will experience an immediate and substantial dilution in the net
tangible book value of the Common Stock of $5.15 per share based upon an initial
public offering price of $10.50. To the extent outstanding options to purchase
shares of the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."

NO PRESENT INTENTION TO PAY DIVIDENDS; RESTRICTION ON PAYMENT OF
DIVIDENDS. The Company has never declared or paid cash dividends on its Common
Stock and intends to retain any earnings for future growth. The Company
therefore does not anticipate that any cash dividends will be declared or paid
in the foreseeable future. In addition, the Company's credit facility limits the
payment of cash dividends without the consent of the lender to fifty percent of
the Company's year-to-date net income during any fiscal year. See "Dividend
Policy."

14
<PAGE> 17

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $18,780,000 after
deducting the underwriting discounts and commissions and estimated offering
expenses. The Company intends to use a portion of the net proceeds of the
Offering to fund construction of an additional 91,000 square feet of office
space on vacant land adjacent to its headquarters. The Company used internally
generated funds to acquire this parcel in November 1997. The Company anticipates
that construction and development of the additional office space will cost
approximately $9.0 million, that it will break ground in April 1998 and that it
will complete construction in approximately 12 months after construction begins.
Once the new office space is completed, the Company plans to transfer the
building and the underlying real estate to an unaffiliated third party pursuant
to a sale and leaseback transaction. No assurance can be made that the cost of
construction and development will not exceed such estimate, or that the Company
will be able to consummate a sale and leaseback transaction with respect to
such property. Mercury intends to use the balance of the net proceeds for
working capital and general corporate purposes. A portion of the proceeds of the
Offering may be used to pay amounts arising out of an audit by the IRS of the
Company's tax returns for the years ended June 30, 1992 through June 30, 1995.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." In addition, the Company may use a portion of the net
proceeds of this Offering for acquisitions of complementary businesses,
technologies or products, although there are currently no commitments or
agreements with respect to any material acquisition. Pending such uses, the
Company intends to invest the net proceeds in short term, investment grade,
interest-bearing securities. The Company will not receive any proceeds from the
sale of shares of Common Stock by the Selling Stockholders. See
"Business -- Facilities" and "Principal and Selling Stockholders."

DIVIDEND POLICY

The Company has never declared or paid cash dividends on shares of its
Common Stock and does not expect to declare or pay cash dividends on its Common
Stock in the foreseeable future. The Company currently intends to retain any
earnings for future growth. In addition, the Company's credit facility limits
the payment of cash dividends without the consent of its lender to fifty percent
of the Company's year-to-date net income in any fiscal year. See "Risk
Factors -- No Present Intention to Pay Dividends; Restriction on Payment of
Dividends," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," and Note E of Notes
to Consolidated Financial Statements.

15
<PAGE> 18

CAPITALIZATION

The following table sets forth as of September 30, 1997: (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
reflecting the conversion of all outstanding shares of Series A Convertible
Preferred Stock into 2,556,792 shares of Common Stock and (iii) the pro forma
capitalization of the Company as adjusted to give effect to the sale of the
2,000,000 shares of Common Stock offered by the Company hereby after deducting
the underwriting discounts and commissions and estimated offering expenses.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000,000 shares
authorized actual, 1,000,000 shares authorized pro
forma and as adjusted; 1,000,000 shares designated
Series A Convertible Preferred Stock actual, no shares
designated pro forma and as adjusted; 852,264 shares
of Series A Convertible Preferred Stock issued and
outstanding actual, no shares issued or outstanding
pro forma and as adjusted............................. $ 1,200 -- --
Common Stock, $.01 par value; 25,000,000 shares
authorized; 5,269,181 shares issued and outstanding
actual, 7,825,973 shares issued and outstanding pro
forma and 9,825,973 shares issued and outstanding as
adjusted(1)........................................... 53 $ 78 $ 98
Additional paid-in capital............................... 5,846 7,021 25,781
Retained earnings........................................ 28,358 28,358 28,358
Cumulative translation adjustment........................ (21) (21) (21)
Subscriptions and related parties notes receivable....... (325) (325) (325)
------- ------- -------
Total stockholders' equity.......................... 35,111 35,111 53,891
------- ------- -------
Total capitalization............................. $35,111 $35,111 $53,891
======= ======= =======
</TABLE>

- ---------------
(1) Excludes 1,095,923 shares of Common Stock issuable upon exercise of
outstanding stock options under the Company's stock option plans at October
31, 1997, with a weighted average exercise price of $4.89 per share, of
which 447,559 shares were exercisable as of such date at a weighted average
exercise price of $3.45 per share. See "Management -- Stock Option and Stock
Purchase Plans."

16
<PAGE> 19

DILUTION

Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of the Common
Stock from the initial public offering price. The pro forma net tangible book
value of the Company as of September 30, 1997 was $36.3 million or $4.37 per
share. Pro forma net tangible book value per share is determined by dividing the
net tangible book value of the Company (tangible assets less liabilities) by the
pro forma number of shares of the Company's Common Stock outstanding and
adjusting for stock options exercisable as of September 30, 1997. Without taking
into account any changes in net tangible book value subsequent to September 30,
1997, other than to give effect to the receipt of the net proceeds of the sale
of the 2,000,000 shares of Common Stock offered hereby after deducting the
underwriting discounts and commissions and estimated offering expenses, and the
application of the net proceeds therefrom, the pro forma net tangible book value
of the Common Stock as of September 30, 1997 would have been $55.0 million, or
$5.35 per share. This represents an immediate and substantial dilution in pro
forma net tangible book value of $5.15 per share to new investors purchasing
shares in the Offering. The following table illustrates the per share dilution
as of September 30, 1997:

<TABLE>
<S> <C> <C>
Initial public offering price................................. $10.50
Pro forma net tangible book value at September 30, 1997..... $4.37
Increase attributable to new investors...................... 0.98
-----
Pro forma net tangible book value after the Offering.......... 5.35
------
Dilution per share to new investors........................... $ 5.15
======
</TABLE>

The following table sets forth, on an as adjusted basis as of September 30,
1997, after giving effect to the conversion of all outstanding shares of Series
A Convertible Preferred Stock into Common Stock, the differences between
existing Stockholders and purchasers of Common Stock in the Offering and, before
the deduction of underwriting discounts and commissions and estimated offering
expenses with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)........ 8,292,752 80.6% $ 7,611,364 26.6% $ 0.92
New investors(1)................... 2,000,000 19.4 21,000,000 73.4 10.50
---------- ------- ----------- -------
Total......................... 10,292,752 100.0% $28,611,364 100.0%
========= ===== ========== =====
</TABLE>

- ---------------
(1) Does not reflect the sale of 1,500,000 shares of Common Stock by the Selling
Stockholders in the Offering. Assumes the exercise of options to purchase
466,779 shares of Common Stock which were exercisable as of September 30,
1997 at a weighted average exercise price of $3.24 per share. See
"Management -- Stock Option and Stock Purchase Plans."

(2) The total consideration excludes a $1,000,000 contingent liability
associated with the Series B Convertible Preferred Stock which was
reclassified to additional paid-in capital when the obligation expired
during the fiscal year ended June 30, 1995. See Note G to Notes to
Consolidated Financial Statements.

The foregoing tables assume no exercise of the Underwriters' over-allotment
options or the stock options granted after September 30, 1997. At October 31,
1997, there were 1,095,923 shares of Common Stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $4.89 per
share. To the extent that outstanding options are exercised in the future, there
will be further dilution to new investors. See "Management-Stock Option and
Stock Purchase Plans" and Note G of Notes to Consolidated Financial Statements.

17
<PAGE> 20

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below as of and for the
years ended June 30, 1995, 1996 and 1997 are derived from the consolidated
financial statements of the Company included elsewhere in this Prospectus which
have been audited by Coopers & Lybrand L.L.P., independent accountants. The
selected consolidated financial data as of and for the years ended June 30, 1993
and 1994 are derived from financial statements of the Company, also audited by
Coopers & Lybrand L.L.P., not included in this prospectus. The selected
consolidated financial data as of and for the three months ended September 30,
1996 and September 30, 1997, are derived from unaudited financial statements
that have been prepared on the same basis as the audited financial statements
and which, in the opinion of management, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's financial position and results of operations. The financial data for
the three months ended September 30, 1997, are not necessarily indicative of the
results for the full year. The historical results are not necessarily indicative
of the results of operations to be expected in the future. The following
financial data is qualified in its entirety by, and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $38,632 $41,727 $54,323 $58,300 $64,574 $13,038 $19,039
Cost of revenues................ 11,972 16,285 21,221 24,688 22,034 4,538 6,661
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 26,660 25,442 33,102 33,612 42,540 8,500 12,378
Operating expenses:
Selling, general and
administrative............. 10,785 12,911 15,798 16,927 22,631 4,726 6,645
Research and development...... 5,619 7,254 8,586 9,776 12,837 2,405 3,381
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 16,404 20,165 24,384 26,703 35,468 7,131 10,026
------- ------- ------- ------- ------- ------- -------
Income from operations.......... 10,256 5,277 8,718 6,909 7,072 1,369 2,352
Interest income................. 105 69 278 561 582 136 233
Interest expense................ (199) (14) (38) (13) (22) -- (2)
Other income (expense), net..... (44) (64) 22 (77) (88) (23) 83
------- ------- ------- ------- ------- ------- -------
Income before income taxes...... 10,118 5,268 8,980 7,380 7,544 1,482 2,666
Provision for income taxes...... 2,487 1,153 2,636 2,952 2,933 576 1,060
------- ------- ------- ------- ------- ------- -------
Net income...................... $ 7,631 $ 4,115 $ 6,344 $ 4,428 $ 4,611 $ 906 $ 1,606
======= ======= ======= ======= ======= ======= =======
Net income per common share..... $ 1.02 $ 0.50 $ 0.77 $ 0.54 $ 0.57 $ 0.11 $ 0.20
======= ======= ======= ======= ======= ======= =======
Weighted average number of
common and common
equivalent shares
outstanding................ 7,492 8,295 8,256 8,264 8,157 8,191 8,174
======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $11,258 $14,454 $20,156 $23,554 $27,547 $28,653
Total assets.................... 17,185 22,926 33,543 33,264 44,848 47,905
Convertible preferred stock..... 1,200 1,200 1,200 1,200 1,200 1,200
Total stockholders' equity...... 12,682 16,690 24,003 28,529 33,322 35,111
</TABLE>

- ---------------

(2) Gives effect to the conversion of all outstanding shares of the Company's
Series A Convertible Preferred Stock into 2,556,792 shares of Common Stock
upon completion of this Offering.

18
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. Except for
the historical information contained herein, the discussions in this Prospectus
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and in the section entitled "Risk Factors" as
well as those discussed elsewhere in this Prospectus.

OVERVIEW

During the past three fiscal years, the majority of the Company's revenues
has been generated from sales of its products to the defense electronics market,
generally for use in intelligence gathering electronic warfare systems. The
Company's activities in this area have focused on the proof of concept,
development and deployment of advanced military applications in radar, sonar and
airborne surveillance. Medical diagnostic imaging is the other primary market
currently served by the Company. Mercury's computer systems are embedded in MRI,
CT and PET machines. The remaining component of revenues is derived from
computer systems used in such commercial applications as baggage scanning,
seismic analysis and automatic testing equipment, and from sales of Mercury's
recently introduced SuiteFusion shared storage product and related products and
services.

Mercury uses a direct sales force to sell its computer systems to the
defense electronics markets in the U.S., Japan, the United Kingdom and France.
Defense electronics sales to other countries are achieved through distributors.
The Company also uses a direct sales force to sell its computer systems to the
U.S. and international medical imaging markets. The Company uses various
distribution channels for sales of shared storage products to the broadcast and
post-production industry. The Company sells these products to OEMs, value added
re-sellers and end-users. Over the past three fiscal years, the Company has
expanded its sales force to support growing revenues and has made significant
expenditures to recruit additional technical and professional staff, to invest
in information technology and to improve the Company's financial, administrative
and management infrastructure.

Revenues include amounts attributable to both products, which include
development contracts, and services such as maintenance, training and
engineering consulting. Revenues from maintenance, training and engineering
consulting services generally have not constituted a material portion of total
revenues. The Company generally records product revenues upon shipment to the
customer, provided that no significant vendor obligation exists, and accrues for
associated warranty costs at the same time. For certain development contracts,
revenues are recognized using the percentage-of-completion accounting method.
Revenues from maintenance, training and engineering consulting services are
recognized ratably over the applicable contract period or as the services are
performed.

Cost of revenues includes the cost of materials, component assembly,
internal labor and related overhead. Cost of revenues also can include
engineering and other technical labor and related overhead incurred in
development and engineering consulting contracts.

Gross profit as a percentage of revenues ("gross margin") varies from
period to period depending upon numerous variables including the mix of revenues
from hardware, software, development and engineering consulting contracts; the
mix of revenues among the markets served by the Company; the cost of raw
materials; the cost of outsourced services and labor costs; operational
efficiencies; actual production volume

19
<PAGE> 22

compared to planned volume; and the mix of applications for which the Company's
computer systems are sold. Historically, the Company's gross margins on service
revenues have been lower than on product revenues. In addition, the Company's
gross margins from development contract revenues are typically lower than the
Company's gross margins from standard product revenues. The Company intends to
continue to enter into development contracts and anticipates that the gross
margins associated with development contract revenues will continue to be lower
than its gross margins on standard product revenues.

Mercury has made significant investments in research and development in an
effort to maintain its technology leadership in digital signal processing and to
create new software products for the shared storage market. Mercury invested
$8.6 million, $9.8 million and $12.8 million in fiscal years 1995, 1996 and
1997, respectively, in development activities associated with the Company's key
technology competencies as well as in activities that are targeted at developing
new technologies and products. The Company expects research and development
expenses to continue to increase as the Company continues to develop products to
serve its markets, all of which are subject to rapidly changing technology,
frequent product performance improvements and evolving industry standards. The
ability to deliver superior technological performance on a timely and cost
effective basis is a critical factor in securing design wins for future
generations of defense electronics and medical imaging systems. Significant
research and development spending by the Company does not ensure that the
Company's computer systems will be designed into a customer's system. Because
future production orders are usually contingent upon securing a design win, the
Company's operating results may fluctuate due to either obtaining or failing to
obtain design wins for significant customer systems.

On December 12, 1997, the IRS concluded an audit of the Company's tax
returns for the years ended June 30, 1992 through June 30, 1995, and issued a
formal report reflecting proposed adjustments with respect to the years under
audit. The proposed IRS adjustments primarily relate to the disallowance of
research and experimental tax credits claimed by the Company, as well as the
treatment of certain other items. The total deficiency attributable to the
proposed adjustments is $4.2 million, including penalties and interest of $1.6
million through the date of the report. The Company is in the process of
responding to this report by appealing the proposed adjustments to the Appeals
Division of the IRS. While the Company does not believe that the final outcome
of the IRS audit will have a material adverse effect on the Company's financial
condition or results of operations, no assurance can be given as to the final
outcome of the audit, the amount of any final adjustments or the potential
impact of such adjustments on the Company's financial condition or results of
operations.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenues.

<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED
JUNE 30, SEPTEMBER 30,
------------------------- ---------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................... 39.1 42.3 34.1 34.8 35.0
----- ----- ----- ----- -----
Gross profit....................................... 60.9 57.7 65.9 65.2 65.0
Operating expenses:
Selling, general and administrative.............. 29.1 29.0 35.0 36.3 34.8
Research and development......................... 15.8 16.8 19.9 18.4 17.8
----- ----- ----- ----- -----
Total operating expenses................. 44.9 45.8 54.9 54.7 52.6
----- ----- ----- ----- -----
Income from operations............................. 16.0 11.9 11.0 10.5 12.4
Other income (expense), net........................ 0.5 0.8 0.7 0.9 1.6
----- ----- ----- ----- -----
Income before income taxes......................... 16.5 12.7 11.7 11.4 14.0
Provision for income taxes......................... 4.8 5.1 4.6 4.5 5.6
----- ----- ----- ----- -----
Net income......................................... 11.7% 7.6% 7.1% 6.9% 8.4%
===== ===== ===== ===== =====
</TABLE>

20
<PAGE> 23

Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996

Revenues

Total revenues increased 46% from $13.0 million during the three months
ended September 30, 1996 to $19.0 million during the three months ended
September 30, 1997. Revenues from defense electronics, medical imaging and other
commercial markets increased, as described below.

Defense electronics revenues increased 37% from $11.0 million or 84.9% of
total revenues during the three months ended September 30, 1996 to $15.1 million
or 79.6% of total revenues during the three months ended September 30, 1997. The
increase in revenues was due primarily to increased unit demand for defense
electronics products.

Medical imaging revenues increased 58% from $1.4 million or 10.8% of total
revenues during the three months ended September 30, 1996 to $2.2 million or
11.7% of total revenues during the three months ended September 30, 1997. The
increase in revenues was due primarily to the doubling of sales to the largest
medical imaging customer.

Other revenues increased 190% from $569,000 or 4.4% of total revenues
during the three months ended September 30, 1996 to $1.7 million or 8.7% of
total revenues during the three months ended September 30, 1997. This increase
in other revenues was due primarily to an increase in unit demand from new and
existing customers.

Cost of Revenues

Cost of revenues increased 47% from $4.5 million during the three months
ended September 30, 1996 to $6.7 million during the three months ended September
30, 1997 but was consistent as a percentage of total revenues at approximately
35.0%. A decline in material costs was offset by increases in manufacturing
quality costs and costs related to development contracts.

Selling, General and Administrative

Selling, general and administrative expenses increased 41% from $4.7
million during the three months ended September 30, 1996 to $6.6 million during
the three months ended September 30, 1997. Selling, general and administrative
expenses as a percentage of total revenues were 36.3% during the three months
ended September 30, 1996 and 34.8% during the three months ended September 30,
1997. The increase reflects the hiring of additional sales and administrative
personnel, increased commissions and the development of the Company's financial,
administrative and management systems to support the Company's growth.

Research and Development

Research and development expenses, excluding capitalized software
expenditures, increased 41% from $2.4 million during the three months ended
September 30, 1996 to $3.4 million during the three months ended September 30,
1997. Research and development expenses as a percentage of total revenues were
18.4% during the three months ended September 30, 1996 and 17.8% during the
three months ended September 30, 1997. The increase in research and development
expenses reflects increased investments in the Company's core technological
competencies, as well as in new medical and shared storage technologies and
products.

Income from Operations

Income from operations increased 72% from $1.4 million during the three
months ended September 30, 1996 to $2.4 million during the three months ended
September 30, 1997. Included in income from operations during the three months
ended September 30, 1997 were $38,000 in revenues and approximately $700,000 in
direct expenses related to the shared storage business. These include direct
expenses from marketing and engineering activities primarily related to
compensation, trade shows and prototype development. There were no revenues or
expenses related to the shared storage business during the three months ended
September 30, 1996.

21
<PAGE> 24

Interest Income

The Company earned $136,000 in interest income during the three months
ended September 30, 1996 and $233,000 during the three months ended September
30, 1997. The increase was due primarily to the significant increase in average
balances of cash and investments.

Provision for Income Taxes

The Company's provision for income taxes was $576,000 during the three
months ended September 30, 1996 and $1.1 million during the three months ended
September 30, 1997. The Company's effective tax rate increased slightly from 39%
during the three months ended September 30, 1996 to 40% during the three months
ended September 30, 1997.

Year Ended June 30, 1997 Compared to Year Ended June 30, 1996

Revenues

Total revenues increased 11% from $58.3 million during the year ended June
30, 1996 to $64.6 million during the year ended June 30, 1997. The increase was
due primarily to increased unit demand in the defense electronics business and
the introduction of shared storage hardware and software during the year ended
June 30, 1997.

Defense electronics revenues increased 25% from $41.8 million or 71.7% of
total revenues during the year ended June 30, 1996 to $52.2 million or 80.9% of
total revenues during the year ended June 30, 1997. The increase was due
primarily to increased unit demand for defense electronics products.

Medical imaging revenues decreased 48% from $13.3 million or 22.7% of total
revenues during the year ended June 30, 1996 to $6.9 million or 10.7% of total
revenues during the year ended June 30, 1997. The decrease in revenues was due
primarily to a reduction in product prices, discontinuation of certain products
by one customer and the acceleration of purchasing at the end of the year ended
June 30, 1996 by two of the Company's medical imaging customers.

Other revenues increased 67% from $3.2 million or 5.6% of total revenues
during the year ended June 30, 1996 to $5.4 million or 8.4% of total revenues
during the year ended June 30, 1997. The increase in revenues was due primarily
to the introduction of shared storage hardware and software during the year
ended June 30, 1997.

Cost of Revenues

Cost of revenues declined 11% from $24.7 million during the year ended June
30, 1996 to $22.0 million during the year ended June 30, 1997. Cost of revenues
as a percentage of total revenues decreased from 42.3% during the year ended
June 30, 1996 to 34.1% during the year ended June 30, 1997. This decrease was
due primarily to the inclusion in the year ended June 30, 1996, of a domestic
defense electronics development contract which yielded significantly lower gross
margins than the gross margins historically achieved by the Company.

Selling, General and Administrative

Selling, general and administrative expenses increased 34% from $16.9
million during the year ended June 30, 1996 to $22.6 million during the year
ended June 30, 1997. Selling, general and administrative expenses as a
percentage of total revenues were 29.0% during the year ended June 30, 1996 and
35.0% during the year ended June 30, 1997. The increase reflects the hiring of
additional sales and administrative personnel, increased commissions and the
development of the Company's financial and administrative systems to support the
Company's growth.

Research and Development

Research and development expenses, excluding capitalized software
expenditures, increased 31% from $9.8 million during the year ended June 30,
1996 to $12.8 million during the year ended June 30, 1997. Research and
development expenses as a percentage of total revenues were 16.8% during the
year ended

22
<PAGE> 25

June 30, 1996 and 19.9% during the year ended June 30, 1997. The increase
reflects greater investment in the Company's core competencies, as well as in
new medical and shared storage technologies and products.

Income from Operations

Income from operations increased 2% from $6.9 million during the year ended
June 30, 1996 to $7.1 million during the year ended June 30, 1997. Included in
income from operations during the year ended June 30, 1997 were $2.1 million in
hardware and software revenues and $3.6 million in direct expenses related to
the shared storage business. These include direct expenses from marketing and
engineering activities, primarily related to compensation, trade shows and
prototype development and direct costs related to the sale of the product,
including certain hardware costs. There were no revenues or expenses related to
the shared storage business during the year ended June 30, 1996.

Interest Income

The Company earned $561,000 in interest income during the year ended June
30, 1996 and $582,000 during the year ended June 30, 1997. This increase in
interest income was due to the increase in average balances of cash and
investments, partially offset by a decrease in average interest rates.

Provision for Income Taxes

The Company's provision for income taxes was $3.0 million during the year
ended June 30, 1996 and $2.9 million during the year ended June 30, 1997. The
Company's effective tax rate was 40% during the year ended June 30, 1996 and 39%
during the year ended June 30, 1997.

Year Ended June 30, 1996 Compared to Year Ended June 30, 1995

Revenues

Total revenues increased 7% from $54.3 million during the year ended June
30, 1995 to $58.3 million during the year ended June 30, 1996. The increase in
revenues was due primarily to the increase in unit demand for both the defense
electronics and medical imaging products.

Defense electronics revenues increased 2% from $40.9 million or 75.3% of
total revenues during the year ended June 30, 1995 to $41.8 million or 71.7% of
total revenues during the year ended June 30, 1996. The relatively modest
increase in defense electronics revenues was due primarily to a large
international contract fulfilled in 1995.

Medical imaging revenues increased 41% from $9.4 million or 17.3% of total
revenues during the year ended June 30, 1995 to $13.3 million or 22.7% of total
revenues during the year ended June 30, 1996. The increase was primarily due to
the acceleration of purchasing at the end of the year ended June 30, 1996 by two
of the Company's medical imaging customers.

Other revenues decreased 20% from $4.0 million or 7.4% of total revenues
during the year ended June 30, 1995 to $3.2 million or 5.6% of total revenues
during the year ended June 30, 1996. The decrease was primarily due to lower
demand associated with the Company's other commercial products and services.

Cost of Revenues

Cost of revenues increased 16% from $21.2 million during the year ended
June 30, 1995 to $24.7 million during the year ended June 30, 1996. Cost of
revenues as a percentage of total revenues, increased from 39.1% during the year
ended June 30, 1995 to 42.3% during the year ended June 30, 1996. The increase
was due primarily to the inclusion in the year ended June 30, 1996 of a domestic
defense electronics development contract which yielded significantly lower gross
margins than the gross margins historically achieved by the Company.

Selling, General and Administrative

Selling, general and administrative expenses increased 7% from $15.8
million during the year ended June 30, 1995 to $16.9 million during the year
ended June 30, 1996. Selling, general and administrative expenses as a
percentage of total revenues were 29.1% during the year ended June 30, 1995 and
29.0% during the year ended June 30, 1996. The increase was due primarily to the
hiring of additional sales and administrative personnel to support the Company's
growth.

23
<PAGE> 26

Research and Development

Research and development expenses, excluding capitalized software
expenditures, increased 14% from $8.6 million during the year ended June 30,
1995 to $9.8 million during the year ended June 30, 1996. Research and
development expenses as a percentage of total revenues were 15.8% during the
year ended June 30, 1995 and 16.8% during the year ended June 30, 1996. The
increase was due primarily to the hiring of additional software and hardware
engineers to develop and enhance the features and functionality of the Company's
products.

Income from Operations

Income from operations decreased 21% from $8.7 million during the year
ended June 30, 1995 to $6.9 million during the year ended June 30, 1996.

Interest Income

The Company earned $278,000 in interest income during the year ended June
30, 1995 and $561,000 during the year ended June 30, 1996. The increase was
primarily due to the significant increase in average balances of cash and
investments.

Provision for Income Taxes

The Company's provision for income taxes was $2.6 million during the year
ended June 30, 1995 and $3.0 million during the year ended June 30, 1996. The
Company's effective tax rate was 29% during the year ended June 30, 1995 and 40%
during the year ended June 30, 1996. The significantly lower tax rate during the
year ended June 30, 1995 was due primarily to the utilization of tax credits
during that year.

24
<PAGE> 27

QUARTERLY RESULTS OF OPERATIONS

The following table presents selected consolidated financial information
for each of the Company's last nine fiscal quarters. However, in the opinion of
the Company's management, this information reflects all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present this
information when read in conjunction with the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1996 1996 1996 1996 1997 1997 1997
--------- -------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $13,501 $14,521 $15,175 $15,103 $13,038 $15,106 $17,154 $19,276 $19,039
Cost of revenues............ 5,723 7,117 5,991 5,857 4,538 5,128 5,356 7,012 6,661
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................ 7,778 7,404 9,184 9,246 8,500 9,978 11,798 12,264 12,378
Operating expenses:
Selling, general and
administrative........... 3,776 4,249 4,191 4,711 4,726 5,577 5,737 6,591 6,645
Research and development... 2,143 2,352 2,473 2,808 2,405 3,420 3,759 3,253 3,381
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 5,919 6,601 6,664 7,519 7,131 8,997 9,496 9,844 10,026
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from operations...... 1,859 803 2,520 1,727 1,369 981 2,302 2,420 2,352
Other income (expense),
net........................ 137 145 68 121 113 144 23 192 314
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes...................... 1,996 948 2,588 1,848 1,482 1,125 2,325 2,612 2,666
Provision for income
taxes...................... 798 379 1,035 740 576 437 904 1,016 1,060
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.................. $ 1,198 $ 569 $ 1,553 $ 1,108 $ 906 $ 688 $ 1,421 $ 1,596 $ 1,606
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per common
share...................... $ 0.15 $ 0.07 $ 0.19 $ 0.13 $ 0.11 $ 0.08 $ 0.17 $ 0.20 $ 0.20
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of
common and common
equivalent shares
outstanding................ 8,257 8,261 8,263 8,266 8,191 8,140 8,148 8,162 8,174
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

The following table sets forth selected consolidated financial information
as a percentage of total revenues for each of the Company's last nine fiscal
quarters.

<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1996 1996 1996 1996 1997 1997 1997
--------- -------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............ 42.4 49.0 39.5 38.8 34.8 33.9 31.2 36.4 35.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit................ 57.6 51.0 60.5 61.2 65.2 66.1 68.8 63.6 65.0
Operating expenses:
Selling, general and
administrative........... 28.0 29.3 27.6 31.2 36.3 37.0 33.5 34.1 34.8
Research and development... 15.8 16.2 16.3 18.6 18.4 22.6 21.9 16.9 17.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............ 43.8 45.5 43.9 49.8 54.7 59.6 55.4 51.0 52.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from operations...... 13.8 5.5 16.6 11.4 10.5 6.5 13.4 12.6 12.4
Other income (expense),
net........................ 1.0 1.0 0.4 0.8 0.9 0.9 0.2 1.0 1.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes...................... 14.8 6.5 17.0 12.2 11.4 7.4 13.6 13.6 14.0
Provision for income
taxes...................... 5.9 2.6 6.8 4.9 4.5 2.8 5.3 5.3 5.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income.................. 8.9% 3.9% 10.2% 7.3% 6.9% 4.6% 8.3% 8.3% 8.4%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

The Company has experienced fluctuations in its results of operations in
large part due to the sale by the Company of its computer systems in relatively
large dollar amounts to a relatively small number of customers. Operating
results also have fluctuated due to competitive pricing programs and volume
discounts, the loss of customers, market acceptance of the Company's products,
product obsolescence and general economic conditions. In addition, the Company,
from time to time, has entered into development contracts. The Company's gross
margins from development contract revenues are typically lower than the
Company's gross margins from standard product revenues. The Company intends to
continue to enter into development

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contracts and anticipates that its gross margins associated with development
contract revenues will continue to be lower than its gross margins on standard
product revenues.

LIQUIDITY AND CAPITAL RESOURCES

During the past five fiscal years, the Company has funded its operations to
date primarily from cash generated from operations. As of September 30, 1997,
the Company had cash and cash equivalents of approximately $16.0 million and
working capital of $28.7 million. During the three months ended September 30,
1996, the Company generated approximately $843,000 in cash from operations
compared to $2.0 million generated during the three months ended September 30,
1997. During the year ended June 30, 1996, the Company generated approximately
$4.3 million in cash from operations compared to $9.2 million generated during
the year ended June 30, 1997. The increases in cash generated from operations
were due to improved operating results, higher percentage of non-cash expenses
within total expenses and better management of the Company's inventory and
receivables. The Company's days sales outstanding was 71 days and 58 days at
June 30, 1997 and September 30, 1997, respectively.

The Company has a line of credit agreement with a commercial bank on which
the Company can borrow up to $6.0 million at an interest rate equal to the prime
rate or, at the election of the Company, two and one quarter percentage points
above the London InterBank Offered Rate. As of September 30, 1997, there was no
outstanding borrowing on this line of credit.

The Company used approximately $1.4 million in investing activities for
computers, furniture and equipment during the three months ended September 30,
1997, compared to $567,000 during the three months ended September 30, 1996.
During the year ended June 30, 1997, the Company invested approximately $4.0
million, which consisted primarily of $3.5 million for the investment in
computers, furniture and equipment and $550,000 for capitalized software,
compared to $3.3 million during the year ended June 30, 1996, which consisted of
$2.9 million for computers, furniture and equipment and $371,000 for capitalized
software. No software development costs were capitalized during the three months
ended September 30, 1997.

The Company intends to use a portion of the net proceeds of the Offering to
fund construction of additional 91,000 square feet of office space on vacant
land adjacent to its headquarters. The Company used internally generated funds
to acquire this parcel in November, 1997. The Company anticipates that
construction and development of the additional office space will cost
approximately $9.0 million, that it will break ground in April 1998 and that it
will complete construction and development in approximately 12 months after
construction begins. Once the new office space is completed, the Company plans
to transfer this parcel to an unaffiliated third party pursuant to a sale
leaseback transaction. No assurances can be made that the cost of construction
will not exceed such estimate, or that the Company will be able to consummate a
sale and leaseback transaction with respect to such property. The Company does
not expect to realize a profit or loss from the sale of the finished building.
See "Use of Proceeds" and "Business -- Facilities."

A portion of the proceeds of the Offering may be used to pay amounts
arising out of an audit by the IRS of the Company's tax returns for the years
ended June 30, 1992 through June 30, 1995. Mercury believes that the net
proceeds of the Offering, together with available cash, cash generated from
operations and the

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Company's line of credit, will be sufficient to provide for the Company's
working capital and capital expenditure requirements for the foreseeable future
and any final adjustments resulting from the IRS audit described above. If the
Company acquires one or more businesses or products, the Company's capital
requirements could increase substantially. In the event of such an acquisition
or in the event that any unanticipated circumstances arise which significantly
increase the Company's capital requirements, there can be no assurance that
necessary additional capital will be available on terms acceptable to the
Company, if at all.

RECENT ACCOUNTING PRONOUNCEMENTS

See Notes B and G to the Company's Consolidated Financial Statements for a
description of the impact on the Company of recent accounting pronouncements.

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BUSINESS

OVERVIEW

Mercury designs, manufactures and markets high performance, real-time
digital signal processing computer systems that transform sensor generated data
into information which can be displayed as images for human interpretation or
subjected to additional computer analysis. These multicomputer systems are
heterogeneous and scalable, allowing them to accommodate several different
microprocessor types and to scale from a few to hundreds of microprocessors
within a single system. Mercury's system architecture is specifically designed
for digital signal processing applications which are typically computation
intensive and require I/O capacity and interprocessor bandwidth not available on
a general purpose PC or workstation. The two primary markets for Mercury's
products are defense electronics and medical diagnostic imaging. Both of these
markets have computing needs which benefit from the unique system architecture
developed by the Company. Mercury's computer systems are generally used on real
world signal data to enable a military commander to "see" the battle space
through natural barriers such as clouds, darkness, water or foliage, so that the
position and strength of the enemy can be determined, or to enable a physician
to "see" within the body instead of performing invasive surgery.

During the past three fiscal years, the majority of the Company's revenues
have been generated from sales of its products to the defense electronics
market, generally for use in intelligence gathering electronic warfare systems.
The Company's activities in this area have focused on the proof of concept,
development and deployment of advanced military applications in radar, sonar and
airborne surveillance. The Company has established relationships with many of
the major prime contractors to the worldwide defense industry, including
Lockheed Martin, Hughes Aircraft, Raytheon/E-Systems, Raytheon/TI Systems,
Northrop Grumman, MIT/Lincoln Laboratory, GEC Marconi, Ericcson, MATRA,
Mitsubishi and a prime contractor owned by the Israeli Ministry of Defense.

Medical diagnostic imaging is the other primary market currently served by
the Company. Mercury's computer systems are embedded in MRI, CT and PET
machines. Mercury has supplied computer systems for use in several of GE
Medical's medical diagnostic imaging systems since 1987, and has established
relationships with Siemens Medical, Toshiba and Elscint. The major medical
imaging manufacturers are currently developing the next generation of MRI, CT
and digital x-ray machines, which are expected to provide better performance at
lower cost. Mercury has recently secured design wins on programs with certain of
the major medical imaging manufacturers for their next generation MRI, CT and
digital x-ray machines.

Mercury's computer systems are designed to process continuous streams of
data from sensors attached to radar, sonar, medical imaging equipment and other
devices. The resulting image is transmitted to the battlefield commander, pilot,
technician or physician in order to assist in the decision making or diagnostic
process. Due to the nature of the applications in which many of Mercury's
computer systems are embedded, they are frequently confined in limited spaces
and therefore are designed to generate a minimum amount of heat. The Company
employs the RACEway Interconnect, an industry standard system area network
developed by Mercury, which allows for high interprocessor bandwidth and I/O
capacity. The Company uses its proprietary ASICs to integrate microprocessors,
memory and related components into the RACEway Interconnect to provide optimum
system performance. The Company uses industry standard processors, such as
Intel's i860, Motorola's PowerPC, Texas Instruments' C80 and Analog Devices'
SHARC, in the same system. The Company believes that the RACEway Interconnect
and its proprietary ASICs, working together with a group of mixed
microprocessors in the same system, allow the most efficient use of space and
power with an optimal price/performance ratio.

Since July 1996, Mercury has targeted the emerging shared storage market
for introduction of a new product which draws on the Company's core competencies
in systems engineering and the development of real-time software. In fiscal
1997, Mercury introduced SuiteFusion, its first shared storage product designed
to meet the needs of the broadcast and post-production industry. SuiteFusion is
an open, scalable software application that allows work groups to share
commodity, fibre channel attached disk arrays, eliminating the need for an
expensive, intermediate file server. Early end-users include Turner
Broadcasting's CNN

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Interactive, Nickelodeon's Blue's Clues television show and Hughes Aircraft
(through a subsidiary) for use at the U.S. Army National Training Center. The
Company believes that the shared storage market includes a number of distinct
applications, such as digital video editing, electronic computer aided design,
webcasting, cable advertising insertion and pre-press.

INDUSTRY BACKGROUND

Defense Electronics

Digital signal processing computer systems are embedded into air, sea and
land-based platforms for processing radar, sonar and signal intelligence
applications. These applications allow a military commander to "see" the battle
space through natural barriers such as clouds, darkness, water or foliage, so
that the position and strength of the enemy can be determined. The Electronic
Industry Association (the "EIA") in its October 1997 annual forecast of the
defense electronics market predicted an increase in military electronics
purchases over the next ten years, while predicting a decline in total defense
spending over the same period. The EIA also predicted that, beginning in 1998,
United States military spending on electronics and information systems will
increase by $7.4 billion from $51.5 billion to $58.9 billion over the next ten
years. The Company believes that an important factor underlying this anticipated
growth is a continuing desire by military commanders for increased battle space
information, which can be obtained through radar, sonar, signal intelligence and
image intelligence systems. Military commanders also need more powerful
computers with similar attributes in order to conduct battle simulations and
mission planning tasks utilizing today's complex weapons systems.

Another important trend in the defense electronics marketplace is the
movement away from so-called "stove pipe" systems designed by prime contractors
with special purpose hardware specifically for a single application, largely
without regard to cost. The market is moving toward the use of systems which
incorporate selected COTS hardware and software components in order to save
money and development time. Recent Department of Defense ("DoD") leaders and
federal regulations have mandated widespread use of COTS components in defense
electronics applications. All of Mercury's computer systems are eligible for use
in defense electronics applications as COTS components.

Medical Imaging

The principal modalities of medical diagnostic imaging systems include MRI,
CT, digital x-ray, PET, SPECT (single photon emission computed tomography) and
ultrasound devices. The Company believes that the available market in 1998 for
digital signal processing computer systems in the aggregate for the MRI, CT and
digital x-ray markets is expected to be an aggregate of approximately $123.0
million. Although demand for medical imaging equipment has been sluggish in
recent years due primarily to cost containment pressures and consolidation in
the health care industry, the Company believes that demand for medical
diagnostic imaging equipment will increase modestly over the next three years.
The Company believes that this increase will be primarily due to the
introduction of next generation devices, together with the anticipated future
development by the major medical imaging manufacturers of new markets for their
diagnostic equipment in countries located in Asia, South America and Eastern
Europe. The Company believes medical imaging equipment manufacturers will
continue to replace in-house designed digital signal processing systems with
commercially available systems designed by the Company and others.

This industry's demand is driven in part by the need to provide physicians
with rapid, sharp and clear images of areas of a patient's body suspected to be
diseased or injured, while using the least intrusive means. These images provide
a significant diagnostic tool for the physician, who can more readily understand
the patient's malady and prescribe appropriate corrective action. In order to
provide such images, medical imaging machines must be capable of processing a
continuous stream of data on a real-time basis. A parallel concern in the health
care industry is the need to reduce costs. Hospitals, in particular, continue to
be under significant pressure to contain costs and, at the same time, maintain
quality of care. Such pressures are forcing hospitals to be as technologically
efficient as possible. Toward this end, hospitals seek to reduce the required
period of time a patient must spend in its medical imaging machines, which has
the added benefit of increasing the total number of patients who can be
diagnosed with this expensive equipment during a given period of time. One

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way to reduce patient time in medical imaging machines and improve image quality
is to utilize more powerful signal processing computers, such as those supplied
by Mercury.

STRATEGY

Mercury's objective is to be the leader in each of its markets by
developing and delivering architecturally superior systems, developing and
maintaining close working relationships with its customers, adopting and
deploying total quality management and extending key technology competencies to
new markets where Mercury can provide solutions based on its core competencies.

Develop and Deliver Architecturally Superior Systems. Mercury intends to
continue to develop architecturally superior systems comprised of both hardware
and software commercially available off-the-shelf components, which minimize
recurring and non-recurring costs, as well as proprietary components, which
enable production of standards-based, highly scalable systems. The Company's
growth and leadership in its primary markets has been due in part to investments
in a sustainable architecture that can rapidly evolve to take advantage of the
latest developments in semiconductor technology. Rapid evolution is accomplished
by defining a set of building blocks that can evolve separately. In this way the
architecture can be refreshed by upgrading one hardware and/or software building
block (such as a new microprocessor) with only minimal effect, if any, to the
other building blocks.

Develop and Maintain Close Working Relationships with Customers. By
developing close working relationships with its customers, the Company intends
to continue to identify and pursue new product opportunities. To fulfill these
opportunities, the Company frequently develops variations of its standard
products pursuant to contracts with particular customers in order to satisfy the
customers' needs on a cost effective basis.

Adopt and Deploy Total Quality Management. The Company is deploying Total
Quality Management ("TQM") as an overarching managerial approach to improve and
enhance business processes within the Company. An integral part of TQM is
increasing the Company's ability to discover and understand customers' unique
needs in the context of their environments and to set benchmarked performance
targets for each customer. By implementing TQM, the Company expects to be able
to enhance its development process and deliver better value by responding to
customer specific needs. When fully deployed, the Company believes that TQM will
significantly enhance its business processes and competitiveness.

Extend Key Technology Competencies to New Markets. The Company is
constantly seeking new markets where solutions can be provided based on its core
competencies. The Company's entry into the shared storage market evolved from
Mercury's work in real time operating systems, and its systems engineering skill
set in solving bandwidth limitations for applications requiring extremely high
data throughput. The Company initially targeted its new software product,
SuiteFusion, to meet the shared storage needs of the broadcast and
post-production industry. Mercury is currently evaluating other opportunities in
the shared storage market, such as electronic computer aided design, webcasting,
cable advertising insertion and pre-press.

MARKETS AND CUSTOMERS

Defense Electronics

Mercury provides high performance embedded computer systems as standard
products to the defense electronics market by using commercial and selected
rugged components and by working closely with defense contractors to complete a
design which matches the specified requirements of military applications. The
Company engages in frequent, detailed communication with the end-users of
Mercury's systems, military executives and program managers in government and
defense contractors regarding the technical capabilities of Mercury's advanced
signal processing computers and the successful incorporation of its computers in
numerous military programs.

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The chart set forth below lists certain of Mercury's customers in the
defense electronics industry, including government contractors and government
research laboratories and the type of applications for which Mercury believes
its customers are using its products.

- --------------------------------------------------------------------------------
SELECTED DEFENSE CUSTOMERS AND APPLICATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CUSTOMER LOCATION APPLICATION
------------------------------------ ------------ ----------------------------------------
<S> <C> <C>
U.S. BASED PRIME CONTRACTORS AND GOVERNMENT LABS
HUGHES
- Hughes Danbury Optical.......... CA & MA Electro-Optics, Infrared
- Missile Systems Co.............. AZ Radar, Simulation
- Sensor & Communication
Systems........................ CA Radar, Electro-Optics, Infrared
LOCKHEED MARTIN
- Advanced Development Co......... CA Mission Planning
- Electronic & Missile Co......... FL Infrared, Electro-Optics, Radar
- Federal Systems, Manassas....... VA Sonar
- Government Electronic Systems... NJ Radar
- Missiles & Space................ CA Image Intelligence
- Ocean Radar & Sonar............. NY Radar, Sonar
- Sanders......................... NH Electronic Warfare, Signal Intelligence
- Tactical Defense Systems........ AZ Radar
NORTHROP GRUMMAN
- ESID............................ NY Radar
- ESSD............................ MD Radar
- Melbourne....................... FL Radar
- Norden Systems.................. NY & CT Radar, Sonar
RAYTHEON
- Electronic Systems.............. MA & RI Radar, Sonar, Infrared
- E-Systems....................... TX Signal Intelligence, Ground Stations
- TI Systems...................... TX Radar, Electro-Optics
GOVERNMENT LABS
- Air Force Defense Lab........... NY Radar
- Army Research Lab............... MD Ground Penetrating Radar
- MIT/Lincoln Labs................ MA Radar
- National Severe Storms Labs..... OK Weather Radar
- Naval Research Labs............. DC Radar, Sonar
- Naval Undersea Warfare
Command........................ RI & WA Sonar
- Sandia Labs..................... NM Radar
INTERNATIONAL AGENCIES AND PRIME CONTRACTORS
Chun San Institute................ Taiwan Radar
Department of National Defense.... Canada Radar, Sonar
Elbit............................. Israel Radar, Sonar
Ericsson.......................... Sweden Radar
FOA............................... Sweden Foliage Penetrating Radar
GEC Marconi....................... U.K. Radar
Israeli Ministry of Defense....... Israel SAR
MATRA............................. France Radar, Sonar
Mitsubishi Heavy Industries....... Japan Radar, Simulation
Nippon Avionics................... Japan Radar
Thomson SINTRA.................... France Sonar
TNO -- Physics and Electronics
Laboratory..................... Netherlands Acoustic Signal Processing
</TABLE>
- --------------------------------------------------------------------------------

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Mercury's computer systems have been or are being integrated into various
programs in the defense electronics market. For example, Mercury is under
contract to supply, or has supplied, computer systems to the following
contractors:

- Northrop Grumman for use in the tactical endurance synthetic aperture
radar ("SAR") systems aboard the Predator, a medium-altitude unmanned
aerial vehicle ("UAV") which has been deployed in Bosnia.

- Northrop Grumman for the SAR systems on board the Dark Star high
altitude UAV, which is currently under development.

- Hughes Aircraft for the SAR systems on the Global Hawk high altitude
endurance UAV, which is currently under development.

- Raytheon/E-Systems for the delivery of computer systems (including
development systems) for use in an electronic signal intelligence
application on board the RC-135 aircraft as part of an upgrade program.

- Raytheon/TI Systems for the delivery of computer systems (including
development systems) for use in the SAR on board the P3 Orion
anti-submarine surveillance aircraft as part of an upgrade program.

- Lockheed Martin, the U.S. Army Research Laboratory and FOA, the Swedish
defense research institute, for proof of concept in foliage and/or
ground penetrating radars.

- Lockheed Martin for use in the development, integration and testing of
the sonar subsystem for the New Attack Submarine and Atlantic Aerospace
Electronics Corporation for the combat sonar system used in the Los
Angeles Class submarine, which are currently under development.

- Northrop Grumman/ESSD and MIT/Lincoln Laboratory for use in developing
algorithms for space time adaptive processing, a type of advanced radar
system. The prototype computer system for this application uses
approximately 1,000 microprocessors, and Mercury believes it is the most
powerful commercial real-time embedded computer ever built, with peak
performance in excess of 100 gigaflops.

- Ericsson for the use of Mercury's standard commercial processors in
radar systems on board surveillance aircraft and to build MILSPEC
versions for the radar system on the SAAB Gripen fighter aircraft.

Mercury employs industry specialist managers to monitor the defense
programs of each major branch of the United States armed services and additional
managers based in Europe and Japan to keep abreast of developments in their
respective regions. This approach provides relevant information to Mercury
regarding major military procurements worldwide. Mercury maintains sales and
technical support groups to service defense industry participants in six branch
offices in the United States, and through Mercury's subsidiary offices or
distributors in 12 other countries. At Mercury's headquarters in Chelmsford,
Massachusetts, a group of systems engineers specializing in radar, sonar and
surveillance problems provides support on an as-needed basis to the remote
offices to assist in securing inclusion in targeted military programs.

Medical Imaging

Mercury strives to provide a superior combination of high performance and
competitively priced embedded computer systems to the medical imaging market.
The Company focuses on establishing strong relationships with its customers, the
medical equipment manufacturers. By maintaining frequent, in-depth
communications with its customers and working closely with their engineering
groups, the Company is able to understand their needs and provide appropriate
solutions. In addition, the Company intends to continue its efforts to install
its computer systems in place of alternative designs created by the in-house
design teams employed by the medical imaging equipment manufacturers.

The Company currently is working closely with major medical equipment
companies to design the next generation of MRI, CT and digital x-ray systems,
which the Company believes will lead to faster time-to-market and competitive
advantages for the medical equipment companies that use Mercury's computer

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systems for inclusion in their imaging machines. Mercury's industrial PC class
hardware system provides the medical imaging industry with increased performance
densities at lower costs and an architecture that accommodates performance
upgrades as new technology becomes available. Integrating the high-bandwidth
RACEway Interconnect system area network within the PCI environment results in
highly scalable systems. This allows medical equipment suppliers to design
systems that can satisfy a broad range of price/performance requirements and
meet the needs of global markets, all with the same Mercury architecture.

Mercury's medical OEM customers consist of the leading manufacturers of
diagnostic imaging equipment. They include GE Medical, headquartered in
Wisconsin, GE Medical Systems Europe in France, GE Yokugawa Medical Systems in
Japan, Toshiba in Japan, Siemens Medical in Germany and Elscint in Israel. These
companies have adopted Mercury's PCI or VME computer systems as part of their
developments in either MRI, CT, PET or digital x-ray systems and, in the case of
some companies, multiple types of systems. The Company has supplied GE Medical
with computer systems for use in three successive generations of MRI machines
from 1987 through the present, as well as for use in other GE Medical equipment,
such as PET. In addition, GE Medical and Siemens Medical, the two leading global
suppliers of medical imaging equipment, have recently awarded contracts to
Mercury to design the signal processing system for the next generations of
certain of their medical diagnostic equipment.

The Company is building a system based on Analog Devices' SHARC DSP
processor to fulfill a design win in CT. The Company also is building a system
based on the Texas Instruments' C80 signal processing chip to fulfill a design
win in digital x-ray. The Company believes that the principal reason for its
medical imaging design wins is Mercury's experienced team of systems and
applications engineers who work closely with the medical equipment designers and
with the Company's product development engineers. This joint design effort
frequently precedes the first production orders by approximately two to three
years. However, once selected, the production contracts typically continue for
the life of the medical imaging system. In addition, the equipment manufacturers
typically offer computer system upgrades to their customers, potentially
resulting in additional sales of Mercury products.

Shared Storage

The Company believes that the shared storage market includes a number of
distinct applications, such as digital video editing, electronic computer aided
design, webcasting, cable advertising insertion and pre-press. In fiscal 1997,
Mercury introduced SuiteFusion, its first shared storage software product
designed to meet the digital video editing needs of the broadcast and
post-production industry. Companies in the broadcast and post-production
industry have begun to use non-linear, disk-based technology, and are becoming
aware of the significant productivity gains that can be achieved by networking
multiple editing stations together in a real-time, high-bandwidth, shared
storage workgroup. However, these applications produce extremely large volumes
of digital data that must be transmitted, stored, and manipulated in order to
produce a high-quality finished product. Mercury's SuiteFusion is designed to
choreograph the interactions between workstations and disks to keep files intact
in such a high-performance, shared-storage environment.

Early end-users of SuiteFusion include Turner Broadcasting's CNN
Interactive in Atlanta, Georgia, Hughes Aircraft (through a subsidiary), for use
at the U.S. Army National Training Center in Fort Irwin, California, and
Nickelodeon's Blue's Clues television show in New York, New York. CNN is using
Mercury's software to improve efficiency in editing and producing features for
Internet broadcasts; the U.S. Army uses SuiteFusion to help capture, edit and
play back live simultaneous training exercises; and Nickelodeon's creative
design artists are able to share animation and graphics files.

In addition, Mercury has signed OEM distribution agreements with several
industry leaders, including Avid Technology, Inc., the worldwide leader in
digital non-linear editing systems, PathLight in the serial storage architecture
networking environment, and MountainGate Data Systems, Inc. in the fiber channel
storage market. The Company also has approximately 10 non-exclusive distributor
agreements with video-editing resellers in the United States and Canada.

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KEY TECHNOLOGY COMPETENCIES

Many of Mercury's customers share a common requirement: the need to process
high-volume, real-time data streams. Whether from an antenna in a defense
application, a medical scanner or a video camera, the computer must have the
ability to process incoming data as quickly as it is received. Data rates can
range from a few to several hundreds of megabytes per second (or several billion
bits per second). The ability to process this continuous flow of high-bandwidth
data is a fundamental difference between the majority of computing systems in
the world (such as personal computers, workstations and servers) and the
computers built by Mercury.

Mercury has developed a set of core technical strengths specifically
targeted to, and defined by, the application areas of signal, image and media
processing. These technical strengths are pivotal to Mercury's success in the
real-time market segments of the defense electronics and medical imaging
industries and have resulted in the following developments and capabilities:

Heterogeneous Switched-Fabric Interconnects. Mercury connects different
microprocessor types (RISC, DSP and specialized computing devices) and I/O
devices in a bus-less, high-bandwidth manner based on multi-stage switches in
its system area network. Among the engineering developments which distinguish
Mercury's systems are the RACEway Interconnect built using the six-port RACEway
crossbar chip which supports high bandwidth point-to-point data transfers and
fibre channel chassis-to-chassis extensions for RACEway in large system
configurations.

Heterogeneous Processor Integration. Mercury has developed several ASICs
which integrate standard microprocessors and special purpose mathematics and
graphics processors into a single heterogenous environment. Mercury develops
systems consisting of different microprocessor types with a single-system
software model. Mercury's processor independent software offers a consistent set
of software tools and interfaces, which can drive a heterogeneous mix of
microprocessor types, such as Motorola's PowerPC processor, Analog Devices'
SHARC DSP processor and Texas Instruments' C80 processor.

Performance Density. The Company has been using high performance packaging
technology such as multi-chip modules and ball grid arrays in its systems since
the early 1990's. The Company's thermal analysis expertise allows it to design
products that optimize the dissipation of heat from the system in order to meet
the environmental constraints imposed by many of its customers' applications.
The Company's modular hardware and software building blocks allow it to design
systems that best meet the application's specific data profiles. All together,
these attributes combine to deliver the maximum performance in processing,
reliability and bandwidth in the smallest possible space.

Scalable Software. Mercury's software has been designed to scale to more
than one thousand processors in real-time environments while maintaining a
high-bandwidth capability. Regardless of the number of processors, the Company's
software provides the same programming environment for a software developer
working with Mercury's computer systems, allowing faster time-to-market and
lower life cycle maintenance costs for its customers.

Optimized Algorithm Development. Mercury specializes in algorithm
development for single and multi-processor implementations. The Company believes
that using the mathematical algorithms in Mercury's scientific algorithm library
significantly increases the performance of customers' applications, reduces
development time and minimizes life cycle support costs.

System Engineering Expertise. Mercury has established a core competency in
providing total system solutions to its customers. The Company has the knowledge
and technical staff to act as an extension of the customer's engineering
organization in order to fashion solutions to some of the world's most demanding
real-time, signal processing applications. Mercury has partnered with its
customers to understand and resolve the challenging problems encountered in
applications as diverse as radar, sonar and signal intelligence for the
military, and diagnostic imaging for MRI, CT, PET and digital x-ray in the
medical imaging market. The Company also provides an integration and development
service to meet the demands of its customers with advanced applications which
cannot be satisfied with standard products. This service combines the variety of

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standard products with custom hardware and software to meet the specific
configuration demands of an application.

Leverage and Create Standards. Mercury uses existing standards where
applicable and has been successful in developing new standards. For example,
Mercury adheres to VME and PCI standard bus interfaces and form factors. The
RACEway Interconnect system area network that Mercury developed was adopted as
an ANSI/VITA standard in 1995, and since then has been adopted by several
companies offering products and services for embedded real-time applications.

PRODUCTS

HARDWARE PRODUCTS

Mercury offers three classes of systems for the Company's target markets.
Each class of products is scalable to meet the full range of requirements in
signal processing applications.

High Performance Class. For the highest-performance applications, Mercury
offers a family of high performance systems for the most compute intensive and
I/O capacity and interprocessor bandwidth demanding applications in the defense
electronics market. These applications include space time adaptive processing,
ground-penetrating and foliage-penetrating radar and synthetic aperture radar.
These high-performance systems, known as MultiPort, can scale to over a thousand
processors and today include compute modules based on the SHARC and PowerPC
processors.

VME Class. The VME bus has been the traditional standard for many embedded
applications. Mercury's VME systems each have a RACEway Interconnect port.
Systems contain modules based on the SHARC, PowerPC and i860 processors and can
scale to several hundred processors. The VME-based systems and components are
primarily used in the defense market where backward and forward compatibility is
required for the long system life cycles of military equipment. This class of
RACE Series systems meets the computing speed, bandwidth and scaleability
requirements of many of today's medium performance radar, sonar and signal
intelligence applications. Advanced and future radar systems are more likely to
use the high performance class systems.

Industrial PC Class. Based on the PCI bus standard, these systems use the
RACEway Interconnect to provide the extended bandwidth required for real-time
applications. Currently Mercury provides compute modules based on the SHARC and
TI C80 processors. These systems scale to hundreds of processors and are
primarily directed to the medical imaging market, which is moving from VME to
PCI based designs.

SOFTWARE PRODUCTS

Mercury has developed a comprehensive line of signal processing software
products for the defense and medical imaging markets. Certain of Mercury's
software products are included in a heterogeneous development software package
that enables customers to develop application software that will run on Mercury
hardware. The development software package includes the MC/OS operating system,
scientific algorithm libraries, debugging tools and compilers. License fees
range from $10,000 to $50,000 based on the number of seats chosen by the user
for its application, ranging from a single user license to a project license.

Set forth below are certain signal processing software products offered by
the Company.

MC/OS Version 4. The MC/OS runtime operating environment allows maximum
use of the RACE heterogeneous multi-computer architecture in a single-system
model incorporating a consistent set of system and application programming
interfaces, and a common development environment. MC/OS is supported on the high
performance, VME and industrial PC classes of Mercury hardware systems. MC/OS is
included in Mercury's development software package.

Scientific Algorithm Library (SAL). Mercury's scientific algorithm library
consists of more than 400 assembly language routines developed by Mercury's
programmers and optimized for execution on Mercury's RACE architecture,
permitting extensive code reusability. The library encompasses a comprehensive
selection

35
<PAGE> 38

of functions including vector processing and data conversion commonly performed
by digital signal processing applications. SAL is included in Mercury's
development software package.

Parallel Application System (PAS). PAS is a set of high performance
libraries which form a complete programming environment for developing parallel
applications in a distributed memory multicomputer system. The libraries speed
the development of advanced applications using many processors in parallel. PAS
is included in Mercury's development software package.

SuperVision. SuperVision is a state-of-the-art debugging tool for
observation and control of embedded, real-time multicomputing systems.
SuperVision speeds application development by selectively monitoring individual
and large groups of processors, while simultaneously performing detailed
process-level debugging. SuperVision is sold separately.

PeakWare for RACE. PeakWare for RACE is a visual component programming
tool, jointly developed with MATRA, that allows the developer to use diagrams to
express the interconnection of software components. Jointly mapping the
application and the RACE system configuration accelerates the overall
development process. From the graphical input, PeakWare for RACE generates the C
code for interprocessor communication and builds executable and ready-to-deploy
application code. PeakWare for RACE is sold separately.

Mercury also has developed software products for specific shared storage
applications in the broadcast and post-production industry. Set forth below is
the first such software product commercially introduced by the Company.

SuiteFusion. SuiteFusion is an open, scalable software application that
allows various desktop computer systems to simultaneously access large shared
files. Written in JAVA, this highly portable code is supported on both Macintosh
and Windows-based PC desktops. While SuiteFusion is directed initially to the
creative and design departments within the broadcast and post-production
industry, the Company believes it has potential applicability in several shared
storage markets.

ENGINEERING, RESEARCH AND DEVELOPMENT

The Company's engineering, research and development efforts are focused on
developing new products as well as enhancing existing products. Mercury's
research and development goal is to fully exploit and maintain the Company's
technological lead in the high performance, real-time, signal processing
industry. In addition to the central engineering organization which focuses on
Mercury's two principal markets, the Company has an engineering team developing
SuiteFusion and its derivatives for the shared storage market and another
engineering team developing systems for the digital television requirements of
the future.

Mercury is involved with researchers from other companies and government
organizations to develop new signaling technologies using fiber optics. This has
the potential for providing more bandwidth per line than conventional techniques
and is directed at the 21(st) century challenges of the next generation of
advanced signal processing systems. Similar cooperative developments are
underway to develop open software solutions for code portability. This research
is focused on developing generic applications which can be targeted to Mercury's
products through the use of industry standard tools with Mercury-specific
libraries. Some of these research areas benefit from cost sharing through DARPA
grants in those areas where the DoD will obtain benefit from the development.

As of September 30, 1997, the Company had 32% of all its employees, or 104
people, primarily engaged in engineering, research and development, including
hardware and software architects, design engineers and engineers with expertise
in developing medical, defense and shared storage software systems. During
fiscal years 1995, 1996 and 1997, the Company's total research and development
costs were approximately $8.6 million, $9.8 million, and $12.8 million,
respectively.

CUSTOMER SUPPORT AND INTEGRATION

As of September 30, 1997, Mercury's Customer Services Group included 37
people engaged in a full range of support functions, including training,
technical program management, integration and design services,

36
<PAGE> 39

host porting services and the traditional maintenance and support services. The
Company has invested in the range of tools, analyzers, simulators, instruments
and workstations to provide a rapid response to both development and customer
support requirements. Within the Customer Services Group, the solutions systems
department has developed many custom interfaces, reviewed customers' designs,
developed special hardware and software components and provided program
management on behalf of defense and medical customers. The capabilities of this
group enable the Company to respond to the demanding individuality of many
programs and have resulted in Mercury being selected for both development, high
volume production and deployed programs.

MANUFACTURING AND TESTING

Mercury's strengths include the design, development and testing of products
which meet the exacting technology and quality expectations of the Company's
defense electronics and medical imaging customers. Board assembly is outsourced
to a number of electronic contract manufacturers. The supplier typically inserts
most of the components into a printed circuit board, solders the connections,
conducts preliminary testing and returns the boards to Mercury. The Company
conducts final assembly, burn-in and system level testing.

Mercury utilizes Optimal Supply Chain Management to provide highly flexible
manufacturing solutions which can be tailored to the specific needs of the
Company's customers, while maintaining the highest level of quality and control
of product assembly. This standard is maintained through demanding Quality
Assurance and Reliability Programs, such as Statistical Process Control, which
are integrated throughout the manufacturing process.

The Company's outsourcing strategy provides maximum flexibility to respond
to customer requirements and schedule adjustments, with minimal asset investment
by Mercury. This outsourcing strategy also provides multiple sources of supply,
both to support the breadth and complexity of Mercury's product lines, as well
as to ensure continuity of supply. By outsourcing assembly to electronic
contract manufacturers, Mercury is able to focus its manufacturing efforts on
designing more reliable products, designing more efficient methods of building
its products, systems integration, testing and supply chain management.

Mercury's manufacturing approach is based on a highly integrated process
that takes a product from concept through production. All products are required
to meet specified standards of performance, quality, reliability and safety. The
Company manufactures both commercial and ruggedized versions of its computer
systems. Extensive testing is a fundamental part of the Company's process.
Computer Integrated Manufacturing, Concurrent Engineering, Material Requirements
Planning and Just-In-Time techniques are also integrated into manufacturing
operations as part of an on-time delivery philosophy. Mercury has been ISO 9001
certified since 1995.

Several components used in the Company's products are currently obtained
from sole source suppliers. Mercury is dependent on LSI Logic for four custom
designed ASICs, on Analog Devices for its SHARC processors, on IBM for ball grid
array packaging, on Motorola for its PowerPC processors and on Intel for its
i860 processors. IBM may terminate its contract with the Company without cause
upon thirty days notice and may cease offering products to the Company upon
sixty days notice. In addition, Analog Devices may discontinue or modify any
product upon 180 days notice and LSI Logic may discontinue any product upon 180
days notice. If LSI Logic, Analog Devices, IBM, Motorola or Intel were to limit
or reduce the sale of such components to the Company, or if these or other
suppliers to the Company were to experience financial difficulties or other
problems which prevented them from supplying the Company with the necessary
components, such events could have a material adverse effect on the Company's
business, financial condition and results of operations. These sole source
suppliers are subject to quality and performance issues, materials shortages,
excess demand, reduction in capacity and other factors that may disrupt the flow
of goods to the Company or its customers and thereby adversely affect the
Company's business and customer relationships. The Company has no guaranteed
supply arrangements with its suppliers and there can be no assurance that its
suppliers will continue to meet the Company's requirements. If the Company's
supply arrangements are interrupted, there can be no assurance that the Company
would be able to find another supplier on a timely or satisfactory basis. Any
shortage or interruption in the supply of any of the components used in the
Company's

37
<PAGE> 40

products, or the inability of the Company to procure these components from
alternate sources on acceptable terms could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that severe shortages of components will not occur in the
future. Such shortages could increase the cost or delay the shipment of the
Company's products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Significant increases
in the prices of these components would also materially adversely affect the
Company's financial performance since the Company may not be able to adjust
product pricing to reflect the increase in component costs. The Company could
incur set-up costs and delays in manufacturing should it become necessary to
replace any key vendors due to work stoppages, shipping delays, financial
difficulties or other factors and, under certain circumstances, these costs and
delays could have a material adverse effect on the Company's business, financial
condition and results of operations.

COMPETITION

The markets for the Company's products are highly competitive and are
characterized by rapidly changing technology, frequent product performance
improvements and evolving industry standards. Competition typically occurs at
the design stage, where the customer evaluates alternative design approaches,
including those from internal development organizations. A design win usually
ensures a customer will purchase the product until their next generation system
is developed. Occasionally, the Company's computer systems compete with computer
systems from workstation vendors, all of whom have substantially greater
research and development resources, long term guaranteed supply capacity,
marketing and financial resources, manufacturing capability and customer support
organizations than those of the Company. The Company believes that its future
ability to compete effectively will depend, in part, upon its ability to
continue to improve product and process technologies and develop new
technologies in order to maintain the performance advantages of products and
processes relative to competitors, to adapt products and processes to
technological changes, to identify and adopt emerging industry standards and to
adapt to customer needs.

The principal bases for selection in sales of digital signal processing
systems to the defense electronics industry are performance (measured primarily
in terms of processing speed, I/O capacity and interprocessor bandwidth,
processing density per cubic foot, power consumption and heat dissipation),
systems engineering support, overall quality of products and associated
services, use of industry standards, ease of use and price. Competitors in the
defense electronics industry include a relatively small number of companies that
design, manufacture and market DSP board level products and in-house design
teams employed by prime defense contractors. In-house design efforts
historically have provided a significant amount of competition to the Company.
However, competition from in-house design teams has diminished in significance
in recent years due to the increasing use of COTS products and the trend toward
greater use of outsourcing. Despite this recent change, there can be no
assurance that in-house developments will not re-emerge as a major competitive
force in the future. Prime contractors are much larger than Mercury and have
substantially more resources to invest in research and development. Increased
use of in-house design teams by defense contractors in the future may have a
material adverse effect on the Company's business, financial condition and
results of operations.

38
<PAGE> 41

and post-production industry, where the Company believes there is currently only
one directly competitive product. As this market develops, the Company
anticipates that other companies will begin offering additional competitive
products. New competitors may have significantly greater marketing and financial
resources, better access to individuals making purchasing decisions, superior
products and services than those offered by the Company. The Company believes
that the primary impediment to future sales of shared storage products to the
post-production and broadcast industry is the need to transform entrenched
operating modes, such as those associated with linear tape based technologies,
to accommodate new modes of operation such as those associated with non-linear,
disk-based digital technology. However, there can be no assurance that industry
participants will adopt such new technologies or that, if adopted, the Company's
products will not be obsolete, uncompetitive or incompatible.

Some of the Company's competitors have greater financial and other
resources than the Company, and the Company may be operating at a cost
disadvantage compared to manufacturers who have greater direct buying power from
component suppliers or who have lower cost structures. There can be no assurance
that the Company will be able to compete successfully in the future with any of
these sources of competition. In addition, there can be no assurance that
competitive pressures will not result in price erosion, reduced margins, loss of
market share or other factors, that could have a material adverse effect on the
Company's business, financial condition and results of operations.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company relies on a combination of patent, copyright, trademark and
trade secret laws to establish and protect its rights in its products and
proprietary technology. In addition, the Company currently requires its
employees and consultants to enter into nondisclosure and assignment of
invention agreements to limit use of, access to and distribution of, proprietary
information. There can be no assurance that the Company's means of protecting
its proprietary rights in the U.S. or abroad will be adequate. The laws of some
foreign countries may not protect the Company's proprietary rights as fully or
in the same manner as do the laws of the U.S. Also, despite the steps taken by
the Company to protect its proprietary rights, it may be possible for
unauthorized third parties to copy or reverse engineer aspects of the Company's
products, develop similar technology independently or otherwise obtain and use
information that the Company regards as proprietary. There can be no assurance
that others will not develop technologies similar or superior to the Company's
technology or design around the proprietary rights owned by the Company.
Although the Company is not aware that its products infringe on the proprietary
rights of third parties, there can be no assurance that others will not assert
claims of infringement in the future or that, if made, such claims will not be
successful. Litigation to determine the validity of any claims, whether or not
such litigation is determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from daily operations. In the event of any
adverse ruling in any litigation regarding intellectual property, the Company
may be required to pay substantial damages, discontinue the sale of infringing
products, expend significant resources to develop non-infringing technology or
obtain licenses to use infringing or substituted technology. The failure to
develop, or license on acceptable terms, a substitute technology could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company holds two issued United States patents covering aspects of the
RACE architecture and the SuperVision debugging tool. In addition, the Company
has two pending United States patent applications covering additional aspects of
the RACE architecture and the Company's Parallel Application System. The Company
may file additional patent applications seeking protection for other proprietary
aspects of its technology in the future. Patent positions frequently are
uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patents from pending patent applications or from any future
patent application will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. Since patent applications are secret
until patents are issued in the United States or corresponding applications are
published in international countries, and

39
<PAGE> 42

since publication of discoveries in the scientific or patent literature often
lags behind actual discoveries, the Company cannot be certain that it was the
first to make the inventions covered by each of its pending patent applications
or that it was the first to file patent applications for such inventions. In
addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its products
either in the United States or in international markets.

BACKLOG

As of September 30, 1997, the Company had a backlog of orders aggregating
approximately $25.7 million. The Company includes in its backlog customer orders
for products and services for which it has accepted signed purchase orders with
assigned delivery dates within twelve months. Orders included in backlog may be
canceled or rescheduled by customers without penalty. A variety of conditions,
both specific to the individual customer and generally affecting the customer's
industry, may cause customers to cancel, reduce or delay orders that were
previously made or anticipated. The Company cannot assure the timely replacement
of canceled, delayed or reduced orders. Significant or numerous cancellations,
reductions or delays in orders by a customer or group of customers could
materially adversely affect the Company's business, financial condition and
results of operations. Backlog should not be relied upon as indicative of the
Company's revenues for any future period.

EMPLOYEES

At September 30, 1997, the Company employed a total of 323 persons,
including 104 in research and development, 120 in sales, marketing and customer
support, 51 in manufacturing and 48 in finance and administration. Eight of the
Company's employees are located in Europe, four in Japan and the remainder in
the U.S. None of the Company's employees are represented by a labor organization
and the Company believes that its relations with employees are good. Competition
for qualified personnel in the engineering fields is intense and the Company is
aware that much of its future success will depend on its continued ability to
attract and retain qualified personnel. The Company seeks to attract new
employees by offering competitive compensation packages, including salary,
bonus, stock options and employee benefits. There can be no assurance, however,
that the Company will be successful in retaining its key employees or that it
will be able to attract skilled personnel for the development of its business.

FACILITIES

The Company's headquarters consist of approximately 96,000 square feet of
office space under lease in Chelmsford, Massachusetts. The Company intends to
use a portion of the net proceeds of the Offering to fund construction of
additional 91,000 square feet of office space on vacant land adjacent to its
headquarters. The Company used internally generated funds to acquire this parcel
in November 1997. The Company anticipates that construction and development of
the additional office space will cost approximately $9.0 million, that it will
break ground in April 1998 and that it will complete construction in
approximately 12 months after construction begins. Once the new office space is
completed, the Company plans to transfer the building and the underlying real
estate to an unaffiliated third party pursuant to a sale and leaseback
transaction. The Company has not yet identified a counterparty for this sale and
leaseback transaction. While the Company believes it should be able to identify
such a party within a reasonably limited period of time, there can be no
assurance that the Company will be able to successfully consummate such
transaction on commercially acceptable terms, if at all. If the Company is not
able to successfully consummate a sale and leaseback transaction, the Company
would retain this property and would not have use of the money invested therein.
See "Use of Proceeds."

The Company also maintains offices near Los Angeles and San Jose,
California, and in Dallas, Texas, Chanhassen, Minnesota, Madison, Wisconsin and
Vienna, Virginia and has international offices in the United Kingdom, France and
Japan.

LEGAL PROCEEDINGS

To the Company's knowledge, other than the IRS audit described elsewhere in
this Prospectus, there are no pending legal proceedings which are material to
the Company or its business to which it is a party or to which any of its
properties is subject. See "Risk Factors -- Tax Audit."

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<PAGE> 43

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- -------------------------------------------------------
<S> <C> <C>
James R. Bertelli........... 57 President, Chief Executive Officer, Director and
Co-Founder
Donald Barry................ 52 Vice President and Director of Medical Business Group
Vincent A. Mancuso.......... 50 Vice President and Director of Government Electronics
Group
G. Mead Wyman............... 57 Vice President, Chief Financial Officer and Treasurer
Gordon B. Baty(1)(2)........ 58 Director
Albert P. Belle Isle(2)..... 53 Director
R. Schorr Berman(1)(2)...... 49 Director
Sherman N. Mullin........... 62 Director
Melvin Sallen(1)............ 69 Director
</TABLE>

- ---------------
(1) Member of Compensation Committee

(2) Member of Audit Committee

MR. BERTELLI co-founded the Company in 1981, and has served as the
Company's President, Chief Executive Officer and a Director since that time.
Prior to founding the Company, Mr. Bertelli founded a manufacturer's
representative organization after a brief period at Analogic Corporation in
sales management positions. Prior to that, Mr. Bertelli served as a marketing
manager for Digital Equipment Corporation's telephone industry products group.
After a tour of duty in the Army Signal Corps, he began his high-tech career
with RCA Corporation as a computer systems analyst, and later moved into
computer sales with RCA and Univac.

DR. BARRY has been Vice President and Director of Medical Business Group of
the Company since 1992. Prior to that he served as General Manager at Picker
International, Inc., Chief Operating Officer at ESA, Inc. and Director of
International Marketing at American Motors Corp.

MR. MANCUSO joined the Company in January 1997 as Vice President and
Director of Government Electronics Group. Before joining Mercury, Mr. Mancuso
was Director of Federal Sales at Siemens Pyramid Information Systems, Inc., a
computer hardware firm formerly known as Pyramid Technology Corporation from
1995 to 1996. From 1993 to 1995, he was Vice President of consulting at Federal
Sources, Inc., an information services company. From 1991 to 1992, he was Vice
President and General Manager at Government Technology Services, Inc., Advanced
Systems Division. Mr. Mancuso served nineteen years at Hewlett Packard in
various sales and marketing positions.

MR. WYMAN has been Vice President, Treasurer and Chief Financial Officer of
the Company since November 1996. Prior to joining Mercury, Mr. Wyman was Chief
Financial Officer at Dataware Technologies, Inc., a software design firm, from
1992 to 1996. Previously, he was a general partner at Hambrecht and Quist
Venture Partners, and was the first Chief Financial Officer at Lotus Development
Corporation. Mr. Wyman has also held senior financial management positions at
Prime Computer Inc. and Millipore Corporation.

DR. BATY has been a Director of the Company since 1983. Dr. Baty has been a
partner of First Stage Capital, Limited Partnership, a venture capital firm,
since 1986. Dr. Baty was the founder and Chief Executive Officer of Icon
Corporation, Context Corporation and Wormser Engineering, Inc. Dr. Baty is also
a Director of Novitron International, Inc. and numerous private companies.

DR. BELLE ISLE has been a Director of the Company since 1986. Dr. Belle
Isle, who is an independent investor in technology based companies, was
President of Custom Silicon, Inc., a semiconductor company, has

41
<PAGE> 44

also served as a Vice President of Wang Laboratories, Inc. and in various
technical and business management positions during fifteen years with the
General Electric Company.

MR. BERMAN has been a Director of the Company since 1993. Mr. Berman is
President and Chief Executive Officer of MDT Advisers, Inc., a venture capital
firm. Mr. Berman is also a director of Arch Communications Group, Inc. and
numerous private companies.

MR. MULLIN has been a Director of the Company since 1994. Mr. Mullin served
as President of Lockheed Advanced Development Co., a defense contractor, from
1990 through 1994. Mr. Mullin currently serves as an ad-hoc adviser to the U.S.
Air Force Scientific Advisory Board.

MR. SALLEN has been a Director of the Company since 1990 and since 1991 has
served as a consultant to the Company in the area of Japanese Strategies and
Sales. Mr. Sallen served as Senior Vice President of Analog Devices, Inc. from
1966 through 1992. Since 1992, Mr. Sallen has served as President of Komon
International, Inc., an international consulting company. Mr. Sallen is also a
director of Tech On Line, Inc. and Copley Controls Corporation.

Set forth below are certain of the Company's additional key employees:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ---- -------------------------------------------------------
<S> <C> <C>
Robert C. Frisch............ 43 Vice President, Chief Technical Officer and Co-Founder
John K. Nitzsche............ 62 Vice President, Special Products Development and
Co-Founder
Bruce A. Beck............... 47 Vice President and Director of Digital Video Products
David L. Bertelli........... 53 Vice President, Organization Development
Steven M. Chasen............ 42 Vice President, Customer Services
Barry S. Isenstein.......... 41 Vice President, Advanced Technologies Group
Mark R. LaForest............ 38 Vice President and Director of Engineering
Robert Perry................ 51 Vice President of Manufacturing Operations
Gary Olin................... 48 Director of Strategic Marketing
Steven Patterson............ 39 Director of Systems Engineering
Graham Smith................ 57 Director of International Sales
</TABLE>

MR. FRISCH co-founded the Company in 1981 and serves as the Company's Vice
President and Chief Technical Officer. Mr. Frisch served as the principal
hardware architect and designer for the Company's core hardware products and is
also working on enhancing the current RACE architecture.

MR. NITZSCHE co-founded the Company in 1981 and serves part time as the
Company's Vice President of Special Products Development.

MR. BECK joined the Company in 1994 as Vice President and Director of
Digital Video Products. Prior to joining the Company, Mr. Beck was the Vice
President of World Wide Sales at BBN Communications, a telecommunications
consulting firm, from 1993 until 1994 and the Managing Director of DMR
Consulting Group Inc., a technology consulting company, from 1989 through 1993.

MR. DAVID BERTELLI joined the Company in 1987 as Vice President of
Organization Development.

MR. CHASEN joined the Company in 1990 as Vice President of Customer
Services when the Company acquired Numerix Corporation where Mr. Chasen was the
Director of Service and Support.

MR. ISENSTEIN joined the Company in 1984 and serves as Vice President of
the Advanced Technologies Group.

MR. LAFOREST joined the Company in 1992 and serves as the Company's Vice
President and Director of Engineering.

MR. PERRY joined the Company in October 1997 as the head of the Company's
manufacturing operations. From April 1995 through October 1997, Mr. Perry was
Program Manager for SCI Systems, a contract manufacturing company. Prior to
that, he held a managerial position at Digital Equipment Corporation, a computer
equipment supplier, from 1976 through March 1995.

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<PAGE> 45

MR. OLIN joined the Company in July 1995 as Director of Strategic
Marketing. Prior to joining the Company, he worked from February 1995 until July
1995 at Wang Laboratories, a network and desktop services company, as World Wide
Marketing Director. Previously, Mr. Olin was employed at Bull World Wide
Information Systems, an information technology company, from 1987 through 1994.

MR. PATTERSON joined the Company in 1990 as Director of Systems Engineering
when the Company acquired Numerix Corporation where he had been the Director of
Hardware Engineering and Product Marketing Manager.

MR. SMITH joined the Company in 1988 and serves as Director of
International Sales.

ELECTION AND COMPENSATION OF DIRECTORS

Each director of the Company holds office until his successor has been duly
elected and qualified. Officers of the Company are elected by the Board of
Directors of the Company at each annual meeting of the Board of Directors and
serve at its discretion. The Company's Board of Directors is divided into three
classes, with three-year staggered terms. Dr. Belle Isle and Mr. Sallen are
Class I directors, Dr. Baty and Mr. Mullin are Class II directors and Messrs.
Bertelli and Berman are Class III directors. The terms of the Class I, Class II
and Class III directors expire in 1998, 1999 and 2000, respectively.

The Company's non-employee directors currently receive $2,500 annually plus
$500 per meeting attended as compensation for service on the Board of Directors,
plus reimbursement for reasonable expenses incurred in connection with
attendance at Board and committee meetings. Committee members receive $300 for
attending a meeting not held on the same day as a meeting of the Board of
Directors.

The Company has in effect its 1993 Stock Option Plan for Non-employee
Directors, pursuant to which the Company's non-employee directors are eligible
to receive options to purchase shares of the Company's Common Stock if and when
granted by the Compensation Committee. See "-- Stock Options and Stock Purchase
Plans."

COMMITTEES OF THE BOARD

The Board of Directors has a standing Audit Committee and Compensation
Committee. The members of the Audit Committee are Dr. Baty, Dr. Belle Isle and
Mr. Berman. The Audit Committee reviews the scope of the Company's engagement of
its independent public accountant and their reports. The Audit Committee also
meets with the financial staff of the Company to review accounting procedures
and reports. The Compensation Committee is composed of Dr. Baty and Messrs.
Berman and Sallen. The Compensation Committee is authorized to review and make
recommendations to the Board of Directors regarding the salaries and bonuses to
be paid executive officers and to administer the Stock Option Plans.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

During fiscal 1997, Dr. Baty and Messrs. Berman and Sallen served as the
Compensation Committee of the Company's Board of Directors. During fiscal 1997,
no interlocking relationship existed between any member of the Company's
Compensation Committee and any other member of the Company's Board of Directors.
See "Certain Transactions."

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<PAGE> 46

EXECUTIVE COMPENSATION

Summary Compensation Table. The following table sets forth the
compensation earned by the Company's Chief Executive Officer and each of the
Company's three other most highly compensated executive officers (collectively,
the "Named Executive Officers") during the year ended June 30, 1997:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------
ANNUAL COMPENSATION SECURITIES
----------------------------------------------- UNDERLYING ALL OTHER
OTHER ANNUAL OPTIONS/ COMPEN-
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) SARS (#) SATION ($)
- ------------------------------------- ---------- --------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
James R. Bertelli, President and
Chief Executive Officer............ $260,000 $112,300 $6,000(1) 22,290 $ 32,869(2)(3)
G. Mead Wyman, Vice President,
Treasurer and Chief Financial
Officer(4)......................... 100,000 56,434 -- 80,000 3,529(2)(3)
Donald Barry, Vice President and
Director of Medical Business
Group.............................. 111,000 64,020 -- 2,000 2,160(2)
Vincent A. Mancuso, Vice President,
Government Electronics Group(5).... 55,000 75,000 -- 25,000 1,400(2)
</TABLE>

- ---------------
(1) Represents automobile allowance.

(2) Represents $3,150 and $2,519 matching contributions by the Company into the
participant's 401(k) plan for the benefit of Messrs. Bertelli and Wyman,
respectively.

(3) Represents $29,719 and $1,010 premiums paid by the Company for split dollar
life insurance policies for the benefit of Messrs. Bertelli and Wyman,
respectively.

(4) Reflects salary earned from November 1996, when the Company hired Mr. Wyman,
through June 30, 1997.

(5) Reflects salary earned from January 1997, when the Company hired Mr.
Mancuso, through June 30, 1997.

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<PAGE> 47

OPTION GRANTS, EXERCISES AND HOLDINGS

Option Grants. The following table sets forth certain information regarding
options granted to the Named Executive Officers during the year ended June 30,
1997. The Company issued no SARs during the year ended June 30, 1997.

<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
--------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK
SECURITIES OPTION/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTION/SARS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED (#) FISCAL YEAR (%) ($/SHARE) DATE 5% ($) 10% ($)
- ---------------------------- ----------- ---------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
James R. Bertelli(2)........ 17,129 3.3% $4.00 07/30/06 $ 43,089 $109,197
5,161 1.0 4.00 12/02/06 12,983 32,908
G. Mead Wyman(3)............ 80,000 15.2 4.00 01/27/07 201,247 569,997
Donald Barry(4)............. 1,500 0.3 4.00 07/30/06 3,774 9,163
500 0.1 4.00 09/19/06 1,258 3,188
Vincent A. Mancuso(5)....... 25,000 4.8 4.00 01/27/07 62,890 159,675
</TABLE>

- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would exist for
the respective options granted. These gains are based on the assumed rates
of annual compound stock price appreciation of 5% and 10% from the date the
option was granted over the full option term. These assumed annual compound
rates of stock price appreciation are mandated by the rules of the
Commission and do not represent the Company's estimate or projection of
future Common Stock prices.

(2) Options to purchase 11,035 of these shares were exercisable at June 30,
1997. The remaining options vest as to 2,581 shares on December 2, 1998, as
to 2,674 shares on July 31, 1998 and as to 6,000 shares in increments of
2,000 shares on July 30 in each of 1997, 1998 and 1999, as long as Mr.
Bertelli's employment has not been terminated.

(3) Options with respect to 40,000 of these shares vest in equal 20% increments
on December 2, 1997, and the four succeeding anniversaries thereof, as long
as Mr. Wyman's employment has not been terminated. Options with respect to
the remaining 40,000 shares vest based on the achievement of certain
performance criteria, and in all events on the seventh anniversary of the
option grant date, as long as Mr. Wyman's employment has not been
terminated.

(4) Options to purchase 910 shares were exercisable at June 30, 1997. The
remaining options vest as to 250 shares on August 1, 1998, as to 360 shares
on December 19, 1998 and as to 480 shares in equal increments of 120 shares
on July 30 in each of 1997, 1998, 1999 and 2000, as long as Mr. Barry's
employment has not been terminated.

(5) This option vests in equal 20% increments on the first five anniversaries of
January 27, 1997, as long as Mr. Mancuso's employment has not been
terminated.

45
<PAGE> 48

Option Exercises and Holdings. The Named Executive Officers did not
exercise any options during the year ended June 30, 1997. The following table
sets forth certain information regarding exercise of options held at June 30,
1997, by each of the Named Executive Officers.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END($)(1)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James R. Bertelli.................... 11,035 11,255 $71,728 $ 73,157
G. Mead Wyman........................ -- 80,000 -- 520,000
Donald Barry......................... 8,910 3,090 61,915 21,085
Vincent A. Mancuso................... -- 25,000 -- 162,500
</TABLE>

- ---------------
(1) Value is based on the difference between the option exercise price and the
initial public offering price of $10.50 per share, multiplied by the number
of shares of Common Stock underlying the option. No market existed for the
Common Stock prior to this offering.

STOCK OPTION AND STOCK PURCHASE PLANS

Stock Option Plans

The Company has in effect its 1997 Stock Option Plan (the "1997 Plan"),
1993 Stock Option Plan for Non-Employee Directors (the "1993 Plan"), 1991 Stock
Option Plan (the "1991 Plan") and 1982 Stock Option Plan (the "1982 Plan," and
with the 1997 Plan, the 1993 Plan and the 1991 Plan, the "Stock Option Plans").
The Company's stock option plans are designed to attract, retain and motivate
key employees and directors. The Compensation Committee of the Board of
Directors (the "Compensation Committee") is responsible for the administration
and interpretation of the Stock Option Plans and is authorized to grant options
thereunder to all eligible employees and directors of the Company, except that
no director who is not also an employee of the Company is eligible to receive
incentive stock options (as defined in Section 422 of the Internal Revenue Code)
("Incentive Options") and only directors who are not employees of the Company
are eligible to receive options under the 1993 Plan. The Compensation Committee
has full power to select, from among the persons eligible for awards under the
1982 Plan, the 1991 Plan and the 1997 Plan, the individuals to whom awards will
be granted, to make any combination of awards to participants, and to determine
the specific terms of each award, subject to the provisions of the Stock Option
Plans. Under the 1993 Plan, each non-employee director of the Company received
on or about September 30 in each of 1994, 1995, 1996 and 1997, and will receive
on or about September 30, 1998, that number of shares of Common Stock equal to
one percent of the net income of the Company for the most recent fiscal year
ending prior to the grant divided by the per share fair market value of the
Company Stock on the first day of such fiscal year divided by the number of
non-employee directors in office at the time of the grant. Options granted under
the Stock Option Plans vest and become exercisable in accordance with option
agreements evidencing such grants. Incentive Options may be granted only to
officers or other employees of the Company, including members of the Board of
Directors who are also employees of the Company or its subsidiaries. Options
which do not qualify as Incentive Options, "Non-Qualified Options" may be
granted or issued to officers or other employees of the Company, directors and
to consultants and other key persons who provide services to the Company
(regardless of whether they are also employees).

The exercise price of each option granted under the Stock Option Plans is
determined by the Compensation Committee but, in the case of Incentive Options,
may not be less than 100% of the fair market value of the underlying shares on
the date of grant. No Incentive Option may be granted under the Stock Option
Plans to any employee of the Company or any subsidiary who owns at the date of
grant shares of stock representing in excess of 10% of the combined voting power
of all classes of stock of the Company or a parent or a subsidiary unless the
exercise price for stock subject to such option is at least 110% of the fair
market value of such stock at the time of grant and the option term does not
exceed five years.

46
<PAGE> 49

Options may be made exercisable in installments, and the exercisability of
options may be accelerated by the Compensation Committee. Upon exercise of
options, the option exercise price must be paid in full (i) in cash or by
certified or bank check or other instrument acceptable to the Compensation
Committee, (ii) if the applicable option agreement permits, by delivery of
shares of Common Stock of the Company owned by the optionee having a fair market
value equal in amount to the exercise price of the options being exercised or
(iii) any combination of (i) and (ii), provided, however that payment of the
exercise price by delivery of shares of Common Stock of the Company owned by
such optionee may be made only to the extent such payment, in whole or in part,
would not result in a charge to earnings for financial accounting purposes.

As of October 31, 1997, options to purchase 342,601 shares of Common Stock
were outstanding under the 1997 Plan, of which 16,801 were then exercisable. As
of October 31, 1997, options to purchase 32,482 shares of Common Stock were
outstanding under the 1993 Plan, of which options to purchase 23,008 shares were
then exercisable. As of October 31, 1997 options to purchase 579,890 shares of
Common Stock were outstanding under the 1991 Plan, of which options to purchase
266,800 shares were then exercisable. As of October 31, 1997, options to
purchase 140,950 shares of Common Stock were outstanding under the 1982 Plan,
all of which were then exercisable.

Options granted under the Company's stock option plans are not transferable
by the optionee except by will, by the laws of descent and distribution or
pursuant to a qualified domestic relations order. Options are exercisable only
while the optionee remains in the employ of the Company or for a short period of
time thereafter. Options which are exercisable following termination of
employment are exercisable only to the extent that the optionee was entitled to
exercise such options on the date of termination of his or her employment.

Under the 1997 Plan, 575,000 shares were reserved for issuance upon
exercise of stock options as of October 31, 1997. Under the Company's 1993 Plan,
50,000 shares of Common Stock were reserved for exercise upon exercise of stock
options as of October 31, 1997. Under the 1991 Plan, 700,000 shares of Common
Stock were reserved for exercise upon exercise of stock options as of October
31, 1997. Under the Company's 1982 Stock Option Plan, 144,700 shares were
reserved for issuance upon exercise of stock options as of October 31, 1997.

Employee Stock Purchase Plan

The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
for employees of the Company was adopted by the Board of Directors on November
6, 1997 and by the Stockholders on December 18, 1997. The 1997 Purchase Plan
authorizes the issuance of a maximum of 250,000 shares of Common Stock pursuant
to the exercise of nontransferable options granted to participating employees.

The 1997 Purchase Plan is administered by the Compensation Committee. All
employees of the Company whose customary employment is 20 hours or more per week
and have been employed by the Company for at least six months are eligible to
participate in the 1997 Purchase Plan. Employees who own 5% or more of the
Company's stock and directors who are not employees of the Company may not
participate in the 1997 Purchase Plan. To participate in the 1997 Purchase Plan
an employee must authorize the Company in writing to deduct an amount (not less
than 1% nor more than 10% of a participant's base compensation not to exceed
$25,000 per year) from his or her pay commencing on January 1 and July 1, of
each year (each a "Purchase Period"). On the first day of each Purchase Period,
the Company grants to each participating employee an option to purchase up to
that number of shares of Common Stock, the fair market value of which on the
date of grant is equal to $25,000. The exercise price for the option for each
Purchase Period is the lesser of 85% of the fair market value of the Common
Stock on the first or last business day of the Purchase Period. The fair market
value will be the closing selling price of the Common Stock as quoted on the
Nasdaq National Market. If an employee is not a participant on the last day of
the Purchase Period, such employee is not entitled to exercise his or her
option, and the amount of his or her accumulated payroll deduction will be
refunded to the employee. Shares acquired by employees pursuant to the Purchase
Plan may not be transferred for three months following the date of acquisition.
An employee's rights under the 1997 Purchase

47
<PAGE> 50

Plan terminate upon his or her voluntary withdrawal from the Plan at any time or
upon termination of employment.

Common Stock for the 1997 Purchase Plan will be made available either from
authorized but unissued shares of Common Stock or from shares of Common Stock
reacquired by the Company, including shares repurchased in the open market.

LIMITATION OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by the Massachusetts General Laws, the Company has included in
its Charter a provision to eliminate the personal liability of its directors for
monetary damages for breach or alleged breach of their fiduciary duties as
directors, subject to certain exceptions. In addition, the Bylaws of the Company
provide that the Company is required to indemnify its officers and directors
under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and the Company is required to
advance expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. At present, the
Company is not aware of any pending or threatened litigation or proceeding
involving a director, officer, employee or agent of the Company in which
indemnification would be required or permitted. The Company believes that its
Charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.

CERTAIN TRANSACTIONS

The Company has loaned James R. Bertelli, President of the Company, an
aggregate of $200,000, of which $150,000 accrues interest at an annual rate of
9.75% and $50,000 accrues interest at an annual rate of 10.5%. In addition, the
Company has loaned Albert Belle Isle, a Director of the Company, an aggregate of
$125,000, of which $100,000 accrues interest at an annual interest rate of 8%
and $25,000 accrues interest at 9.25%. The notes evidencing such obligations of
Mr. Bertelli and Dr. Belle Isle are payable in full on the earlier of December
31, 1999, or 181 days following the consummation of an initial public offering
of the Company's Common Stock.

The Company has granted Memorial Drive Trust, Mr. Bertelli, President and
Chief Executive Officer of the Company, and certain other stockholders certain
rights with respect to the registration of the Company's securities. See
"Description of Capital Stock -- Registration Rights of Certain Holders."

48
<PAGE> 51

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of October 31, 1997 and as adjusted
to reflect the sale of the Common Stock offered hereby by, for (i) each person
who is known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each of the Company's directors, (iii) each of the
Selling Stockholders, (iv) each Named Executive Officer and (v) all directors
and executive officers as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
------------------- SHARES TO BE SOLD -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT IN OFFERING NUMBER PERCENT
- ------------------------------------------- --------- ------- ----------------- --------- -------
<S> <C> <C> <C> <C> <C>
Memorial Drive Trust(2).................... 2,879,786 36.6% 425,000 2,454,786 24.9%
Massachusetts Mutual Life Insurance
Company(3)............................... 1,000,000 12.7 212,500 787,500 8.0
Data General Corporation(4)................ 655,067 8.3 280,500 374,567 3.8
First Stage Capital Limited
Partnership(5)........................... 375,000 4.8 318,750 56,250 *
James R. Bertelli(6)....................... 437,119 5.5 -- 437,119 4.4
Donald Barry(7)............................ 11,030 * -- 11,030 *
Vincent A. Mancuso......................... -- * -- -- *
G. Mead Wyman(8)........................... 44,000 * -- 44,000 *
Gordon Baty(9)............................. 490,653 6.2 318,750 171,903 1.7
Albert P. Belle Isle(10)................... 48,228 * -- 48,228 *
R. Schorr Berman(11)....................... 2,889,514 36.7 425,000 2,464,514 25.0
Sherman N. Mullin(12)...................... 6,649 * -- 6,649 *
Melvin Sallen(13).......................... 23,649 * -- 23,649 *
All directors and executive officers as a
group (nine persons)(16)................. 3,950,842 49.8 743,750 3,207,092 32.3
OTHER SELLING STOCKHOLDERS
Robert Frisch(14).......................... 176,000 2.2 21,250 154,750 1.6
John Nitzsche.............................. 291,000 3.7 85,000 206,000 2.1
Kathryn Bertelli(15)....................... 301,500 3.8 10,200 291,300 3.0
Susan L. Ansin............................. 140,000 1.8 29,750 110,250 1.1
Patrick B. Maraghy, Trustee(17)............ 360,000 4.6 91,800 268,200 2.7
Other Selling Stockholders each owning less
than 1% of the Common Stock before the
Offering (18 parties)(18)................ 314,629 4.0 25,250 289,379 2.9
</TABLE>

- ---------------
* Less than one percent

(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission (the "Commission") and includes general
voting power or investment power with respect to securities. Shares of
Common Stock subject to options and warrants currently exercisable or
exercisable within sixty (60) days of October 31, 1997 are deemed
outstanding for computing the percentage of the person holding such
options, but are not deemed outstanding for computing the percentage of any
other person. Except as otherwise specified below, the persons named in the
table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them. Unless
otherwise indicated, the address of each of the beneficial owners
identified is 199 Riverneck Road, Chelmsford, MA 01824.

(2) The address of this beneficial owner is MDT Advisers, Inc., 125 Cambridge
Park Drive, Cambridge, MA, attention R. Schorr Berman. Includes 2,036,910
shares issuable upon conversion of Series A Convertible Preferred Stock of
the Company. Shares are held of record by MD Co., a partnership organized
by Memorial Drive Trust to hold securities on behalf of Memorial Drive
Trust.

49
<PAGE> 52

(3) Includes 500,000 shares held of record by MassMutual Corporate Investors.
The address of these beneficial owners is 1295 State Street, Springfield,
MA 01111.

(4) The address of this beneficial owner is 4400 Computer Drive, Westborough,
MA 01580. Includes 306,816 shares issuable upon conversion of Series A
Convertible Preferred Stock of the Company.

(5) The address of this beneficial owner is c/o First Stage Capital Limited
Partnership, 101 Main Street, Cambridge, MA 02142.

(6) Includes options to purchase 17,319 shares exercisable within sixty days of
October 31, 1997.

(7) Consists of options to purchase 11,030 shares exercisable within sixty days
of October 31, 1997.

(8) Includes options to purchase 8,000 shares exercisable within sixty days of
October 31, 1997.

(9) Includes 375,000 shares owned by First Stage Capital Limited Partnership,
as to which Mr. Baty may be deemed beneficial owner and as to which Mr.
Baty disclaims beneficial ownership except to the extent of his direct
pecuniary interest. Includes options to purchase 7,228 shares exercisable
within sixty days of October 31, 1997. Mr. Baty is a general partner of
First Stage Capital Limited Partnership.

(10) Includes options to purchase 7,228 shares exercisable within sixty days of
October 31, 1997.

(11) Includes options to purchase 7,228 shares exercisable within sixty days of
October 31, 1997. Includes 2,879,786 shares owned by MD Co., as to which
Mr. Berman may be deemed beneficial owner and as to which Mr. Berman
disclaims beneficial ownership except to the extent of his direct pecuniary
interest. Mr. Berman is President of MDT Advisors, Inc., which manages the
investments of MD Co. See note (2) above.

(12) Includes options to purchase 5,399 shares exercisable within sixty days of
October 31, 1997.

(13) Includes options to purchase 5,399 shares exercisable within sixty days of
October 31, 1997.

(14) Includes options to purchase 20,000 shares exercisable within sixty days of
October 31, 1997.

(15) Includes 270,000 shares held of record by Kathryn Bertelli 1995 Irrevocable
Trust, of which Ms. Bertelli serves as a trustee, 1,500 shares held as
custodian for Heidi Bertelli and 30,000 shares held of record by Kathryn
Bertelli.

(16) Includes options to purchase 68,831 shares exercisable within sixty days of
October 31, 1997.

(17) Includes 210,000 shares held as a Trustee of Lawrence J. Ansin 1990
Revocable Trust -- Trust A-2, 75,000 shares held as a Trustee of Gregory
David Ansin 1992 Irrevocable Trust and 75,000 shares held as a Trustee of
Lisa Ansin 1988 Irrevocable Trust.

(18) Includes options to purchase 22,504 shares exercisable within sixty days of
October 31, 1997.

50
<PAGE> 53

DESCRIPTION OF CAPITAL STOCK

Effective upon the closing of the Offering, the Company's authorized
capital stock will consist of 25,000,000 shares of Common Stock and 1,000,000
shares of Preferred Stock, par value $.01 per share and will have 9,868,223
shares of Common Stock outstanding, assuming no exercise of options after
October 31, 1997. As of October 31, 1997, an aggregate of 5,311,431 shares of
Common Stock were held of record by 148 stockholders, and 852,264 shares of
Preferred Stock were outstanding and held of record by three stockholders. All
shares of Preferred Stock will be converted into Common Stock upon the
completion of this offering at the rate of three shares of Common Stock for each
share of Preferred Stock. Copies of the Charter and Bylaws have been filed as
exhibits to the Registration Statement and are incorporated by reference herein.

COMMON STOCK

All outstanding shares of Common Stock are, and the Common Stock offered
hereby will be, fully paid and nonassessable. The holders of Common Stock are
entitled to one vote for each share held of record on all matters voted upon by
Stockholders and may not cumulate votes. Subject to the rights of holders of any
future series of undesignated preferred stock which may be designated, each
share of the outstanding Common Stock is entitled to participate equally in any
distribution of net assets made to the Stockholders in the liquidation,
dissolution or winding up of the Company and is entitled to participate equally
in dividends as and when declared by the Board of Directors. There are no
redemption, sinking fund, conversion or preemptive rights with respect to the
shares of Common Stock. All shares of Common Stock have equal rights and
preferences.

PREFERRED STOCK

Upon the completion of this Offering, all of the outstanding Preferred
Stock will be converted into Common Stock. After the completion of this
Offering, the Board of Directors will have the authority, without further
stockholder approval, to issue 1,000,000 shares of preferred stock where defined
in one or more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series. The issuance of preferred stock,
while potentially providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of, and the voting and other rights of the
holders of the Common Stock. No shares of preferred stock will be outstanding
immediately following the completion of this Offering. The Company has no
present plans to issue any shares of Preferred Stock. See "Risk
Factors -- Anti-takeover Provisions; Possible Issuance of Preferred Stock."

REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders of 6,505,264 shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain rights with respect to
the registration of such shares under the Securities Act. These rights are
provided under the terms of certain agreements, by and among the Company and the
holders of the Registrable Securities. No shares being registered for the
account of Selling Stockholders are being registered pursuant to these
registration rights. Upon consummation of the Offering and subject to certain
limitations in the applicable agreements, holders of 5,078,794 shares of
Registrable Securities may request registration under the Securities Act of all
or part of their Registrable Securities, six months after the effective date of
the Offering. If the Company registers any of its Common Stock either for its
own account or for the account of other security holders, the holders of
5,078,794 shares of Registerable Securities are entitled to include their shares
of Common Stock in the registration, subject to pro rata cutback. All
registration expenses must be borne by the Company and all selling expenses
relating to Registrable Securities must be borne by the holders of the
securities being registered. In addition, certain holders of Registrable
Securities may request registration under the Securities Act of all or part of
their Registrable Securities on Form S-3 if use of such form becomes available
to the Company.

51
<PAGE> 54

Pursuant to a Stock Purchase Agreement, dated as of January 20, 1984, among
the Company and certain of its stockholders, (i) Memorial Drive Trust and other
investors (together, the "Investors") purchased an aggregate of 852,264 shares
of the Company's Series A Convertible Preferred Stock for an aggregate
consideration of $1,200,000; and (ii) the Investors received so-called "demand"
registration rights, and the Investors, James R. Bertelli, a director and
President of the Company, Gordon Baty, a director of the Company, and certain
other stockholders of the Company received so-called "piggyback" registration
rights.

Pursuant to a Debenture Agreements, dated December 21, 1987, between the
Company and each of Massachusetts Mutual Life Insurance Company and MassMutual
Corporate Investors (together "Massachusetts Mutual"), Massachusetts Mutual
received so-called "demand" and "piggyback" registration rights. Under these
Debenture Agreements, the Company sold to Massachusetts Mutual $3,000,000 in
principal amount of convertible debentures. On March 1, 1993, these debentures
were converted into 1,000,000 shares of Common Stock which are covered by the
registration rights described above.

No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales, will have on the
prevailing market price for the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock and could impair the
Company's future ability to obtain capital through an offering of equity
securities. See "Risk Factors -- Shares Eligible for Future Sale."

CERTAIN ARTICLES OF ORGANIZATION, BYLAWS AND STATUTORY PROVISIONS AFFECTING
STOCKHOLDERS

Classified Board and Other Matters. The Board of Directors will be divided
into three classes, each of which, after a transitional period, will serve until
the third annual meeting of stockholders after their election, with one class
being elected each year. Since the classification of directors has already been
established, investors purchasing Common Stock in the Offering will not have an
opportunity to vote on the classification. Under the Massachusetts General Laws,
in the case of a corporation having a classified Board, Stockholders may remove
a director only for cause. The Bylaws require that stockholders provide the
Clerk of the Company 60 days advance notice prior to the date set forth in the
Bylaws for an annual meeting of Stockholders or special meeting in lieu thereof
for the purpose of any director nominations or within ten (10) days notice after
notice of a special meeting not in lieu of annual meeting. The Bylaws provide
that special meetings of stockholders of the Company may be called only by the
Board of Directors, the President or 30% in interest of the stockholders. The
Bylaws as well as applicable provisions of the Massachusetts General Laws,
provide that no action required or permitted to be taken at any annual or
special meeting of the stockholders of the Company may be taken without a
meeting, unless the unanimous consent of stockholders entitled to vote thereon
is obtained. The affirmative vote of the holders of at least 80% of the combined
voting power of then outstanding voting stock of the Company will be required to
alter, amend or repeal the foregoing provisions; provided, however, that if any
proposal to alter any of the foregoing provisions receives the affirmative vote
of a majority of the directors, then such proposal shall require only the
affirmative vote of the holders of a majority of the outstanding voting stock of
the Company. Such supermajority voting provisions diminish the likelihood that a
potential acquiror would make an offer for the Common Stock, impede a
transaction favorable to the interest of the stockholders or increase the
difficulty of removing a number of Board of Directors or management. See "Risk
Factors -- Anti-Takeover Provisions; Possible Issuance of Preferred Stock."

Chapters 110D and 110F of Massachusetts General Laws. The Company is
subject to the provisions of Chapter 110F of the Massachusetts General Laws, an
anti-takeover law. In general, this statute prohibits a publicly held
Massachusetts corporation with sufficient ties to Massachusetts from engaging in
a "business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person becomes an
interested stockholder, unless either (i) the interested stockholder obtains the
approval of the board of directors prior to becoming an interested stockholder,
(ii) the interested stockholder acquires 90% of the outstanding voting stock of
the corporation (excluding shares held by certain affiliates of the corporation)
at the time he becomes an interested stockholder or (iii) the business
combination is approved by both the board of directors and two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at an annual or special meeting of stockholders, not by
written consent. An interested stockholder is a person who, together with
affiliates and associates, owns 5% or

52
<PAGE> 55

more of the Corporation's outstanding voting stock or who is an affiliate at any
time within the prior three years did own 5% or more of the corporation's voting
stock. Voting control obtained by means of a revocable proxy will not trigger
the implications of Chapter 110F of the Massachusetts General Laws. A "business
combination" includes mergers, stock and asset sales and other transactions
resulting in a financial benefit to the stockholder. The Company may at any time
amend its Articles of Organization or Bylaws to elect not to be governed by
Chapter 110F, by vote of the holders of a majority of its voting stock, but such
an amendment would not be effective for twelve months and would not apply to a
business combination with any person who became an interested stockholder prior
to the date of the amendment.

The Company is also subject to the provisions of Chapter 110D of the
Massachusetts General Laws, entitled "Regulation of Control Share Acquisitions."
This statute provides, in general, that any stockholder who acquires 20% or more
of the outstanding voting stock of a corporation subject to this statute may not
vote that stock unless the stockholders of the corporation so authorize. Voting
control obtained by means of a revocable proxy will not trigger the implications
of Chapter 110D of the Massachusetts General Laws. In addition, Chapter 110D
permits a corporation to provide in its articles of organization or bylaws that
the corporation may redeem (for fair value) all the shares thereafter acquired
in a control share acquisition if voting rights for those shares were not
authorized by the stockholders or if no control share acquisition statement was
delivered. The Charter includes a provision which permits the Company to effect
such redemptions. See "Risk Factors."

Directors Liability. The Charter provides that no director shall be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for (i) any breach of the
directors's duty of loyalty to the Company or its Stockholders; (ii) acts or
omissions which has been adjudicated not to be in good faith or to have involved
intentional misconduct; (iii) acts covered by Massachusetts General Laws,
Chapter 156B, Section 61, which imposes personal liability upon directors voting
for distributions to stockholders which are prohibited by a company's Articles
of Organization or for which a company has insufficient funds to make legally;
(iv) acts covered by Massachusetts General Laws, Chapter 156B, Section 62, which
imposes personal liability for directors in the event Company loans to its
officers and directors are not repaid; or (v) any transaction from which such
director derives improper personal benefit. The effect of this provision is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. The limitations
summarized above, however, do not affect the ability of the Company or its
stockholders to seek non-monetary based remedies, such as an injunction or
rescission, against a director for breach of his fiduciary duty nor would such
limitations limit liability under the federal securities laws. The Bylaws
provide that the Company shall, to the full extent permitted by the
Massachusetts General Laws as currently in effect, indemnify and advance
expenses to each of its currently acting and former directors, officers,
employees and agents arising in connection with their acting in such capacities.

TRANSFER AGENT AND REGISTRAR

Boston EquiServe Limited Partnership will serve as the transfer agent and
registrar for the Common Stock.

53
<PAGE> 56

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
9,868,223 shares of Common Stock, assuming no exercise of options after October
31, 1997. Of these shares, the 3,500,000 shares offered hereby (4,025,000 shares
if the Underwriters' over-allotment options are exercised in full) will be
freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 described below. The remaining 6,364,023 shares of Common
Stock (6,069,673 shares if the Underwriters' over-allotment options are
exercised in full) outstanding upon closing of the Offering are "restricted
securities" as that term is defined in Rule 144. Of the remaining 6,364,023
shares (6,069,673 shares if the Underwriters' over-allotment options are
exercised in full), 6,132,118 shares are subject to lock-up agreements
(described below).

Upon completion of the Offering, 2,231,063 shares, including shares subject
to the lock-up restrictions described below, will become eligible for immediate
sale pursuant to Rule 144(k) and, beginning 90 days after commencement of the
Offering, an additional 4,107,410 shares, including shares subject to the
lock-up restrictions described below, will become eligible for sale pursuant to
Rule 144 or Rule 701 under the Securities Act ("Rule 701"). The 25,250 remaining
shares held by existing stockholders will become eligible for sale at various
times over a period of less than one year. In addition, 463,517 shares of Common
Stock subject to outstanding vested stock options could also be sold, subject in
some cases to compliance with certain volume limitations as described below.
Upon expiration of the lock-up agreements, an aggregate of 2,241,026 shares will
become immediately eligible for sale without restriction pursuant to Rule 144(k)
or Rule 701 (described below), and approximately 3,924,311 additional shares
will be eligible for sale subject to the timing, volume, and manner of sale
restrictions of Rule 144.

In general, under Rule 144, as recently amended, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate from whom
such shares were purchased) is entitled to sell in "brokers' transactions" or to
market makers, within any three-month period commencing 90 days after the date
of this Prospectus, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding
(approximately 98,640 shares immediately after the completion of the Offering)
or (ii) generally, the average weekly trading volume in the Common Stock during
the four calendar weeks preceding the required filing of a Form 144 with respect
to such sale. Sales under Rule 144 are subject to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner other
than an affiliate from whom such shares were purchased), is entitled to sell
such shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Under Rule 701,
persons who purchase shares upon exercise of options granted prior to the
effective date of the Offering are entitled to sell such shares 90 days after
the effective date of the Offering in reliance on the resale provisions of Rule
701, which are similar to the resale provisions of Rule 144, except such persons
do not have to comply with the holding period requirements of Rule 144 and, in
the case of non-affiliates, such persons do not have to comply with the public
information, volume limitation or notice provisions of Rule 144.

Pursuant to the lock-up agreements, the Company, its executive officers and
directors, the Selling Stockholders and certain other stockholders have agreed
that, subject to certain limited exceptions, they will not, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or any securities convertible into, or exercisable or exchangeable for, any
shares of Common Stock, or other similar securities of the Company for a period
of 180 days from the date of this Prospectus, except that such agreements do not
prevent the Company from granting additional options under the Stock Option
Plans or from issuing shares pursuant to the 1997 Purchase Plan. After such 180
day period, this restriction will expire and shares permitted to be sold under
Rule 144 will be eligible for sale. Prudential Securities Incorporated may, in
its sole discretion, at any time and

54
<PAGE> 57

without prior notice, release all or any portion of the shares of Common Stock
subject to such lock-up agreements.

The holders of an aggregate of 6,505,264 shares of Common Stock or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights of Certain Holders."

The Company currently intends to file one or more registration statements
on Form S-8 with the Commission in order to register the 1,719,700 shares of
Common Stock subject to the Stock Option Plans and the 1997 Purchase Plan.

Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.

55
<PAGE> 58

UNDERWRITING

The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Cowen & Company are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth opposite
their respective names:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Prudential Securities Incorporated........................................ 1,180,000
Cowen & Company........................................................... 1,180,000
BancAmerica Robertson Stephens............................................ 80,000
Bear, Stearns & Co. Inc................................................... 80,000
BT Alex. Brown Incorporated............................................... 80,000
Donaldson, Lufkin & Jenrette Securities Corporation....................... 80,000
A.G. Edwards & Sons, Inc.................................................. 80,000
Goldman, Sachs & Co....................................................... 80,000
Hambrecht & Quist LLC..................................................... 80,000
NationsBanc Montgomery Securities, Inc.................................... 80,000
PaineWebber Incorporated.................................................. 80,000
Smith Barney Inc.......................................................... 80,000
Advest, Inc............................................................... 40,000
Brean Murray & Co., Inc................................................... 40,000
Needham & Company, Inc.................................................... 40,000
Raymond James & Associates, Inc........................................... 40,000
Soundview Financial Group, Inc............................................ 40,000
Tucker Anthony Incorporated............................................... 40,000
Branch, Cabell and Company................................................ 20,000
Moors & Cabot, Inc........................................................ 20,000
Nutmeg Securities, Ltd.................................................... 20,000
The Seidler Companies Incorporated........................................ 20,000
Wit Capital Corporation................................................... 20,000
---------
Total........................................................... 3,500,000
=========
</TABLE>

The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.

The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the shares of Common
Stock initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may reallow to selected dealers a concession
of $0.41 per share; and that such dealers may reallow a concession of $0.10 per
share to certain other dealers. After the initial public offering, the offering
price and the concessions may be changed by the Representatives.

The Company and the Selling Stockholders have granted to the Underwriters
over-allotment options, exercisable for 30 days from the date of this
Prospectus, to purchase, in the aggregate, up to 525,000 additional shares of
Common Stock at the initial public offering price, less underwriting discounts
and commissions, as set forth on the cover page of this Prospectus. The
Underwriters may exercise such options solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such options to purchase are exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to 3,500,000.

The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters and contribute to any losses arising out of certain
liabilities, including liabilities under the Securities Act.

The Representatives have informed the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

The Company, its executive officers and directors and certain Stockholders,
including the Selling Stockholders, have agreed that, subject to certain limited
exceptions, they will not, for a period of 180 days subsequent to the date of
this Prospectus, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of

56
<PAGE> 59

sale, pledge, grant of any option to purchase or other sale or disposition) of
any shares of Common Stock or securities substantially similar thereto, or any
securities convertible into or exercisable or exchangeable for, any shares of
Common Stock or securities substantially similar thereto of the Company without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, except that such agreements do not prevent the Company from
granting additional options under the Stock Option Plan. Further, certain
holders of outstanding vested stock options are subject to 180 day lock-up
agreements with the Company and/or Prudential Securities Incorporated.
Prudential Securities Incorporated may in its sole discretion at any time and
without notice, release all or any portion of the securities subject to such
lock-up agreements.

Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price has been
determined through negotiations between the Company and the Representatives.
Among the factors considered in making such determination were the prevailing
market conditions, the Company's financial and operating history and condition,
its prospects and the prospects for its industry in general, the management of
the Company and the market prices of securities for companies in businesses
similar to that of the Company.

In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Stockholders,
and in such case may purchase Common Stock in the open market following the
closing of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
525,000 shares of Common Stock, by exercising the Underwriters' over-allotment
options referred to above. In addition, Prudential Securities Incorporated, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter or
dealer participating in the Offering for the account of the other Underwriters,
the selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Hutchins, Wheeler &
Dittmar, A Professional Corporation, Boston, Massachusetts. Anthony J. Medaglia,
Jr., a Stockholder of Hutchins, Wheeler & Dittmar and the Clerk of the Company,
owns 17,250 shares directly, 8,000 shares indirectly as Trustee and options to
purchase 5,000 shares of Common Stock, of which options to purchase 2,500 shares
are currently exercisable. James Westra, a Stockholder of Hutchins, Wheeler &
Dittmar and a Selling Stockholder, owns 6,000 shares of Common Stock. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.

EXPERTS

The consolidated balance sheets of Mercury Computer Systems, Inc. as of
June 30, 1996 and 1997 and the consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1997, included in this Prospectus, have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants, on
the authority of that firm as experts in accounting and auditing.

57
<PAGE> 60

ADDITIONAL INFORMATION

The Company has filed with the Commission, Washington, D.C. 20549 a
Registration Statement on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is hereby made to such Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract or any other document referred to are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office in Washington, D.C., and
copies of all or any part of the Registration Statement may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington,
D.C. 20549, upon payment of certain fees prescribed by the Commission. The
Commission maintains a World Wide Website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the website is
http://www.sec.gov.

On the date hereof the Company became subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, must file reports, proxy statements and
other information with the Commission.

The Company intends to furnish its Stockholders with annual reports
containing financial statements audited by the Company's independent public
accountants and quarterly reports for the first three fiscal quarters of each
fiscal year containing unaudited interim financial information.

RACE(R) is a registered trademark of the Company. Mercury, Mercury Computer
Systems, the Mercury logo, SuiteFusion, MC/OS, PAS, SuperVision and PeakWare are
trademarks of the Company. SHARC is a trademark of Analog Devices, Inc. and
PowerPC(R) is a registered trademark of Motorola, Inc. Trademarks of others are
also referred to in this Prospectus.

58
<PAGE> 61

MERCURY COMPUTER SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Accountants................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997 and September 30, 1997
(Unaudited)....................................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1995, 1996 and
1997 and
for the three months ended September 30, 1996 and 1997 (Unaudited)................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended June
30, 1995, 1996 and 1997 and for the three months ended September 30, 1997
(Unaudited)....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and
1997 and for the three months ended September 30, 1996 and 1997 (Unaudited)....... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>

F-1
<PAGE> 62

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Mercury Computer Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Mercury
Computer Systems, Inc. as of June 30, 1996 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mercury
Computer Systems, Inc. as of June 30, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
August 28, 1997, except for
the information in the final
paragraph of Note F,
as to which the date is
December 12, 1997

F-2
<PAGE> 63

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30,
------------------- SEPTEMBER 30,
1996 1997 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 9,704 $15,193 $16,035
Trade accounts receivable, net of allowance for doubtful
accounts of $80, $119 and $119 at June 30, 1996 and
1997, and September 30, 1997, respectively............ 10,236 12,816 12,370
Trade notes receivable................................... 312 -- --
Contracts in progress.................................... -- 1,096 1,997
Inventory................................................ 7,188 8,314 8,905
Deferred income taxes, net............................... 328 926 1,152
Prepaid expenses and other current assets................ 521 728 988
------- ------- -------
Total current assets............................. 28,289 39,073 41,447
Property and equipment, net................................ 4,394 4,984 5,650
Capitalized software development costs, net................ 371 483 363
Deferred income taxes, net................................. 40 39 145
Other assets............................................... 170 269 300
------- ------- -------
Total assets..................................... $33,264 $44,848 $47,905
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 1,710 $ 2,801 $ 2,316
Accrued expenses......................................... 760 1,903 2,679
Accrued compensation..................................... 1,639 2,316 2,351
Billings in excess of revenues and customer advances..... 393 2,877 3,366
Income taxes payable..................................... 233 1,629 2,082
------- ------- -------
Total current liabilities........................ 4,735 11,526 12,794
Commitments and contingencies (Note F)
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000,000 shares
authorized:
1,000,000 shares designated as Series A Convertible
Preferred Stock, 852,264 shares issued and outstanding
(liquidation preference of $1,200,000)................ 1,200 1,200 1,200
Common Stock, $.01 par value; 25,000,000 shares
authorized, 5,083,231, 5,202,231 and 5,269,181 shares
issued and outstanding at June 30, 1996 and 1997, and
September 30, 1997, respectively...................... 51 52 53
Additional paid-in capital............................... 5,434 5,703 5,846
Retained earnings........................................ 22,141 26,752 28,358
Cumulative translation adjustment........................ 3 (60) (21)
Subscriptions and related parties notes receivable....... (300) (325) (325)
------- ------- -------
Total stockholders' equity............................ 28,529 33,322 35,111
------- ------- -------
Total liabilities and stockholders' equity....... $33,264 $44,848 $47,905
======= ======= =======
</TABLE>

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

F-3
<PAGE> 64

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------- -------------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $54,323 $58,300 $64,574 $13,038 $19,039
Cost of revenues......................... 21,221 24,688 22,034 4,538 6,661
------- ------- ------- ------- -------
Gross profit................... 33,102 33,612 42,540 8,500 12,378
------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative.... 15,798 16,927 22,631 4,726 6,645
Research and development............... 8,586 9,776 12,837 2,405 3,381
------- ------- ------- ------- -------
Total operating expenses....... 24,384 26,703 35,468 7,131 10,026
------- ------- ------- ------- -------
Income from operations................... 8,718 6,909 7,072 1,369 2,352
------- ------- ------- ------- -------
Interest income.......................... 278 561 582 136 233
Interest expense......................... (38) (13) (22) -- (2)
Other income (expense), net.............. 22 (77) (88) (23) 83
------- ------- ------- ------- -------
Income before income tax provision....... 8,980 7,380 7,544 1,482 2,666
Income tax provision..................... 2,636 2,952 2,933 576 1,060
------- ------- ------- ------- -------
Net income............................... $ 6,344 $ 4,428 $ 4,611 $ 906 $ 1,606
======= ======= ======= ======= =======
Net income per common share.............. $0.77 $0.54 $0.57 $0.11 $0.20
===== ===== ===== ===== =====
Weighted average number of common and
common equivalent shares outstanding... 8,256 8,264 8,157 8,191 8,174
===== ===== ===== ===== =====
</TABLE>

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

F-4
<PAGE> 65

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE SUBSCRIPTIONS
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE AND RELATED TOTAL
--------------- --------------- PAID-IN RETAINED TRANSLATION PARTIES NOTES STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT RECEIVABLE EQUITY
------ ------ ------ ------ ---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994... 852 $1,200 4,963 $ 50 $4,242 $11,369 $ 17 $(188) $16,690
Issuance of Notes
Receivable to Related
Parties................ (120) (120)
Exercise of Common Stock
options and
subscription
repayment.............. 49 -- 40 8 48
Conversion of Series B
Convertible Redeemable
Preferred Stock........ 1,000 1,000
Net income............... 6,344 6,344
Foreign currency
translation............ 41 41
--- ------ ----- --- ------ ------- ---- ----- -------
Balance, June 30, 1995... 852 1,200 5,012 50 5,282 17,713 58 (300) 24,003
Exercise of Common Stock
options................ 71 1 152 153
Net income............... 4,428 4,428
Foreign currency
translation............ (55) (55)
--- ------ ----- --- ------ ------- ---- ----- -------
Balance, June 30, 1996... 852 1,200 5,083 51 5,434 22,141 3 (300) 28,529
--- ------ ----- --- ------ ------- ---- ----- -------
Issuance of Notes
Receivable to Related
Parties................ (25) (25)
Exercise of Common Stock
options................ 86 1 137 138
Issuance of Common
Stock.................. 33 -- 132 132
Net income............... 4,611 4,611
Foreign currency
translation............ (63) (63)
--- ------ ----- --- ------ ------- ---- ----- -------
Balance, June 30, 1997... 852 1,200 5,202 52 5,703 26,752 (60) (325) 33,322
--- ------ ----- --- ------ ------- ---- ----- -------
Exercise of Common Stock
options and warrants... 67 1 143 144
Net income............... 1,606 1,606
Foreign currency
translation............ 39 39
--- ------ ----- --- ------ ------- ---- ----- -------
Balance, September 30,
1997 (Unaudited)....... 852 $1,200 5,269 $ 53 $5,846 $28,358 $(21) $(325) $35,111
=== ====== ===== === ====== ======= ==== ===== =======
</TABLE>

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

F-5
<PAGE> 66

MERCURY COMPUTER SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------- ------------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 6,344 $ 4,428 $ 4,611 $ 906 $ 1,606
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment................ 1,594 2,020 2,855 518 685
Amortization of capitalized software
development costs..................... -- -- 438 136 120
Provision for doubtful accounts......... -- -- 40 -- --
Deferred income taxes................... 79 242 (596) (117) (332)
Other noncash items..................... -- 88 87 14 27
Changes in assets and liabilities:
Trade accounts receivable............. 996 (2,235) (2,710) (53) 446
Trade notes receivable................ -- (312) 296 (1,163) --
Contracts in progress................. -- -- (1,096) -- (901)
Inventory............................. (4,302) 5,231 (1,158) 135 (591)
Prepaid expenses and other current
assets............................. (5) (103) (246) (22) (260)
Income taxes receivable............... 959 -- -- -- --
Other assets.......................... (46) (158) (101) (238) (31)
Accounts payable...................... (148) (16) 1,081 (199) (485)
Accrued expenses and compensation..... (46) 503 1,846 312 812
Billings in excess of revenues and
customer advances.................. 4,137 (5,090) 2,472 (79) 489
Income taxes payable.................. 525 (291) 1,403 693 453
------- ------- ------- ------- -------
Net cash provided by operating activities.... 10,087 4,307 9,222 843 2,038
======= ======= ======= ======= =======
Cash flows from investing activities:
Purchases of property and equipment........ (2,101) (2,924) (3,457) (567) (1,358)
Capitalized software development costs..... -- (371) (550) (324) --
Notes receivable from related parties...... (120) -- (25) -- --
------- ------- ------- ------- -------
Net cash used in investing activities........ (2,221) (3,295) (4,032) (891) (1,358)
------- ------- ------- ------- -------
Cash flows from financing activities:
Principal payments under capital lease
obligations............................. (73) -- -- -- --
Proceeds from issuance of Common Stock..... 40 153 270 2 144
Subscription repayment..................... 8 -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities................................. (25) 153 270 2 144
------- ------- ------- ------- -------
Net increase in cash and cash equivalents.... 7,841 1,165 5,460 (46) 824
------- ------- ------- ------- -------
Effect of exchange rate changes on cash and
cash equivalents........................... 38 (52) 29 (8) 18
Cash and cash equivalents at beginning of
period..................................... 712 8,591 9,704 9,704 15,193
======= ======= ======= ======= =======
Cash and cash equivalents at end of period... $ 8,591 $ 9,704 $15,193 $ 9,650 $16,035
------- ------- ------- ------- -------
Cash paid during the period for:
Interest................................... $ 38 $ 13 $ 22 -- $ 2
Income taxes............................... 2,177 2,901 2,133 -- 939
Noncash transactions:
Series B Convertible Redeemable Preferred
Stock converted to additional paid-in
capital................................. $ 1,000 -- -- -- --
</TABLE>

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

F-6
<PAGE> 67

MERCURY COMPUTER SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED

A. DESCRIPTION OF BUSINESS:

Mercury Computer Systems, Inc. (the "Company") designs, manufactures and
markets high performance real-time digital signal processing computer systems
which transform sensor generated data into information which can be displayed as
images for human interpretation or subjected to additional computer analysis.
These multicomputer systems are heterogeneous and scalable, allowing them to
accommodate several different microprocessor types and to scale from a few to
hundreds of microprocessors within a single system. The two primary markets for
the Company's products are defense electronics and medical diagnostic imaging.
Both of these markets have computing needs which benefit from the unique system
architecture developed by the Company.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

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

Interim Financial Information

The consolidated financial statements of the Company as of September 30,
1997 and for the three months ended September 30, 1996 and 1997 are unaudited.
All adjustments (consisting only of normal recurring adjustments) have been made
which, in the opinion of management, are necessary for a fair presentation.
Results of operations for the three months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for any future
period.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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.

Revenue Recognition

Revenue from product sales is generally recorded upon shipment to the
customer provided that no significant vendor obligations remain outstanding and
collection of the related receivable is deemed probable by management. If
insignificant vendor obligations remain after shipment of the product, the
Company accrues for the estimated costs of such obligations. Additionally, the
Company accrues for warranty costs upon shipment. Service revenue is recognized
ratably over applicable contract periods or as the services are performed.
Revenue from contracts involving significant product modification or
customization is recognized using the percentage-of-completion accounting method
on an efforts-expended basis. Changes to total estimated costs and anticipated
losses, if any, are recognized in the period in which determined. No revenue was
recognized under the percentage of completion method for the fiscal years ended
June 30, 1995 and 1996, and the three months ended September 30, 1996.
Approximately $2,102,000 and $901,000 of revenue was recognized under the
percentage-of-completion method for the fiscal year ended June 30, 1997, and the
three months ended September 30, 1997, respectively. There were no retainages at
June 30, 1996 and 1997 and September 30, 1997.

F-7
<PAGE> 68

MERCURY COMPUTER SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED

Contracts in Progress

Contracts in progress include costs and estimated profits under uncompleted
contracts accounted for using the percentage-of-completion method, net of
amounts billed. Amounts billed at June 30, 1996 and 1997 and September 30, 1997,
which were netted against costs and estimated profits, were $0, $1,016,000 and
$1,091,000, respectively. Amounts billed at September 30, 1997 are expected to
be collected within the next twelve months.

Billings in Excess of Revenues and Customer Advances

Billings in excess of revenues and customer advances include amounts billed
on uncompleted contracts accounted for using the percentage-of-completion method
net of costs and estimated profits recognized.

Cash and Cash Equivalents

Cash equivalents, consisting of money market funds and U.S. government and
U.S. government agency issues with original maturities of 90 days or less, are
carried at cost which approximates fair value.

Concentration of Credit Risk

Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash and cash equivalents with financial
institutions which management believes are of high credit quality. At September
30, 1997, the Company had approximately $15,489,000 on deposit or invested with
its primary financial and lending institution.

One customer accounted for approximately 19% and 57% of the accounts
receivable balances at June 30, 1996 and 1997, respectively. Two other customers
accounted for approximately 15% and 12% of the accounts receivable balance at
June 30, 1996, respectively. Three customers accounted for approximately 17%,
16% and 10%, respectively, of the accounts receivable balance at September 30,
1997. The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses. Such losses have historically
been within management's expectations.

Inventory

Inventory is stated at the lower of cost, determined on the first-in,
first-out (FIFO) basis, or market.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is based on the
following estimated useful lives of the assets using the straight-line method:

<TABLE>
<S> <C>
Computer equipment.................................... 1-3 years
Machinery and equipment............................... 5 years
Furniture and fixtures................................ 5 years
Leasehold improvements................................ Shorter of the lease
term or economic life
</TABLE>

Expenditures for additions, renewals and betterments of property and
equipment are capitalized. Expenditures for repairs and maintenance are charged
to expense as incurred. As assets are retired or sold, the

F-8
<PAGE> 69

MERCURY COMPUTER SYSTEMS, INC.

related cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations.

Capitalized Software Development Costs

The Company capitalizes software development costs incurred after a
product's technological feasibility has been established and before it is
available for general release to customers. Amortization of capitalized software
costs is computed on an individual product basis and is the greater of a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or b) the straight-line
method over the estimated economic life of the product. Currently, the Company
uses an estimated economic life of 36 months for all capitalized software costs.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the Company's
consolidated financial statements. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using currently enacted tax
rates for the year in which the differences are expected to reverse. The Company
records a valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.

Net Income Per Common Share

Net income per common share is based upon the weighted average number of
common and common equivalent shares (using the treasury stock method)
outstanding after certain adjustments described below. Common equivalent shares
are included in the per share calculations where the effect of their inclusion
would be dilutive. Common equivalent shares consist of outstanding stock
options, stock warrants, and the Series A convertible preferred stock. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
common and common equivalent shares issued at prices less than the mid-point of
the estimated initial public offering price range during the twelve-month period
prior to the initial filing of the Registration Statement for the initial public
offering have been included in the calculation as if they were outstanding for
all periods using the treasury stock method and an assumed mid-point of the
estimated initial public offering price range of $13.00 per common share. Fully
diluted earnings per share is not presented, as the difference between primary
and fully diluted earnings per share is immaterial.

Foreign Currency

The accounts of foreign subsidiaries are translated using exchange rates in
effect at period-end for assets and liabilities and at average exchange rates
during the period for results of operations. The local currency for all foreign
subsidiaries is the functional currency. The related translation adjustments are
reported as a separate component of stockholders' equity. Gains (losses)
resulting from foreign currency transactions are included in other income
(expense) and are immaterial for all period presented.

Reclassification

Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.

F-9
<PAGE> 70

MERCURY COMPUTER SYSTEMS, INC.

New Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," which is effective for both interim and annual periods ending after
December 31, 1997. Earlier adoption is not permitted. The statement requires
restatement of all prior period earnings per share data presented after the
effective date. SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share and is substantially similar to
the standards recently issued by the International Accounting Standards
Committee entitled "International Accounting Standards, Earnings Per Share." The
Company will adopt SFAS No. 128 in the interim period ending December 31, 1997.
The impact of SFAS No. 128 will be immaterial to reported net income per common
share.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement will be effective for annual periods
beginning after December 15, 1997 and the Company will adopt its provisions in
fiscal 1999. Reclassification for earlier periods is required for comparative
purposes. The Company is currently evaluating the impact this statement will
have on its financial statements; however, because the statement requires only
additional disclosure, the Company does not expect the statement to have a
material impact on its financial position or results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for annual periods beginning after December 15, 1997
and the Company will adopt its provisions in fiscal 1999. Reclassification for
earlier periods is required, unless impracticable, for comparative purposes. The
Company is currently evaluating the impact this statement will have on its
financial statements; however, because the statement requires only additional
disclosure, the Company does not expect the statement to have a material impact
on its financial position or results of operations.

In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued the statement of position ("SOP") 97-2 "Software Revenue
Recognition," which will supersede SOP 91-1. SOP 97-2 has not changed the basic
rules of revenue recognition but does provide more guidance particularly with
respect to multiple deliverables and "when and if available" products. SOP 97-2
is effective for transactions entered into for annual periods beginning after
December 15, 1997. The Company will adopt SOP 97-2 in fiscal 1999 and has not
yet determined its impact.

F-10
<PAGE> 71

MERCURY COMPUTER SYSTEMS, INC.

C. INVENTORY:

Inventory consists of the following:

<TABLE>
<CAPTION>
JUNE 30,
----------------- SEPTEMBER 30,
1996 1997 1997
------ ------ -------------
<S> <C> <C> <C>
Raw materials................................ $2,107 $2,925 $ 2,548
Work in process.............................. 2,355 3,084 4,477
Finished goods............................... 2,726 2,305 1,880
------ ------ -------
$7,188 $8,314 $ 8,905
====== ====== =======
</TABLE>

D. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
JUNE 30,
-------------------- SEPTEMBER 30,
1996 1997 1997
-------- ------- -------------
<S> <C> <C> <C>
Computer equipment........................ $ 11,651 $11,253 $ 12,437
Machinery and equipment................... 982 337 268
Furniture and fixtures.................... 1,481 1,697 1,880
Leasehold improvements.................... 934 1,050 1,098
-------- ------- ---------
15,048 14,337 15,683
Less: accumulated depreciation and
amortization............................ (10,654) (9,353) (10,033)
-------- ------- ---------
$ 4,394 $ 4,984 $ 5,650
======== ======= =========
</TABLE>

The decrease in accumulated depreciation as of June 30, 1997 occurred when
the Company disposed of a significant amount of fully depreciated assets without
receiving any proceeds.

E. FINANCING ARRANGEMENT:

Under a credit agreement with a commercial bank, the Company may borrow up
to $6,000,000 at an interest rate equal to the prime rate or, at the election of
the Company, two and one-quarter percentage points above the London InterBank
Offered Rate, payable monthly. The credit agreement contains certain covenants,
including restrictions on incurrence of additional indebtedness and liens on its
assets, capital expenditures, disposition of assets, investments and
acquisitions, limitations on distributions, and requires the Company to meet
certain financial tests pertaining to current and debt ratios and income before
tax provision. There were no borrowings outstanding at June 30, 1996 and 1997
and September 30, 1997.

F. COMMITMENTS AND CONTINGENCIES:

Lease Commitments

The Company has an operating lease agreement for its main facility which
expires on September 30, 2002, with an option to extend the lease for an
additional five-year period.

Additionally, the Company leases branch office space. The leases expire at
various dates through 2003 and contain various renewal options. Rental charges
are subject to escalation for increases in certain operating costs of the
lessor.

F-11
<PAGE> 72

MERCURY COMPUTER SYSTEMS, INC.

Future minimum lease payments under noncancelable operating leases with
initial or remaining terms of one year or more consisted of the following at
September 30, 1997:

<TABLE>
<S> <C>
October 1, 1997 through June 30, 1998............................. $ 701
Year ending June 30, 1999......................................... 904
Year ending June 30, 2000......................................... 827
Year ending June 30, 2001......................................... 820
Year ending June 30, 2002......................................... 804
Thereafter........................................................ 197
------
Total future minimum lease payments............................... $4,253
======
</TABLE>

Rental expense during the fiscal years ended June 30, 1995, 1996 and 1997
and the three months ended September 30, 1996 and 1997 was approximately
$674,000, $670,000, $642,000, $140,000 and $203,000, respectively.

Internal Revenue Service Audit

On December 12, 1997, the Internal Revenue Service ("IRS") concluded an
audit of the Company's tax returns for the years ended June 30, 1992 through
June 30, 1995, and issued a formal report reflecting proposed adjustments with
respect to the years under audit. The proposed IRS adjustments primarily relate
to the disallowance of research and experimental tax credits claimed by the
Company, as well as the treatment of certain other items. The total deficiency
attributable to the proposed adjustments is $4,181,000, including penalties and
interest of $1,591,000 through the date of the report. The Company is in the
process of responding to this report by appealing the proposed adjustments to
the Appeals Division of the IRS. While the Company does not believe that the
final outcome of the IRS audit will have a material adverse effect on the
Company's financial condition or results of operations, no assurance can be
given as to the final outcome of the audit, the amount of any final adjustments
or the potential impact of such adjustments on the Company's financial condition
or results of operations.

G. STOCKHOLDERS' EQUITY:

Preferred Stock

General

The Company is authorized to issue 2,000,000 shares of preferred stock with
a par value of $.01 per share. Under the terms of the various agreements related
to the sale and/or issuance of the preferred stock, restrictions are placed on
the Company pertaining to dividends, mergers, incurrence of indebtedness and
reorganizations. These agreements also grant certain preferred stockholders'
representation on the Company's Board of Directors ("the Board"), demand
registration rights, piggyback registration rights and certain antidilutive
rights.

Series A Convertible Preferred Stock

The Series A Convertible Preferred Stock has a liquidation preference of
$1.41 per share and has voting rights similar to the common stock. Each of the
preferred stockholders has one vote for each share of Common Stock into which
the Series A Convertible Preferred Stock is convertible. The Series A
Convertible Preferred Stock is convertible, at the option of the holder, into
shares of the Company's Common Stock in accordance with a conversion formula
which would currently result in a three-for-one exchange with

F-12
<PAGE> 73

MERCURY COMPUTER SYSTEMS, INC.

mandatory conversion required in the event of a sale of the Company's Common
Stock in a public offering meeting a specified aggregate valuation.

Series B Convertible Redeemable Preferred Stock

On April 26, 1993, the Company redeemed all of the outstanding shares of
Series B Convertible Redeemable Preferred Stock for $3.00 per share resulting in
a $1,500,000 redemption and a $1,000,000 payment contingent on a qualified
public offering on or before April 26, 1995. During the fiscal year ended June
30, 1995, the contingent obligation expired and the remaining obligation was
reclassified to additional paid-in capital.

Stock Options

The Company has four stock option plans. The 1982, 1991 and 1993 Stock
Option Plans (the "Plans") provide for the granting of options to purchase an
aggregate of not more than 1,950,000 shares of the Company's Common Stock to
employees and directors. Under these plans, options are granted at not less than
the fair value of the stock on the date of grant as determined by the Board. The
terms of the options are established by the Board on an individual basis. The
options generally vest over five years and have a maximum term of ten years.

The 1997 Stock Option Plan (the "1997 Plan"), which the Board approved in
June 1997, provides for the granting of options to purchase an aggregate of not
more than 575,000 shares of the Company's Common Stock. Under the 1997 Plan,
options are granted at not less than 50% of the fair value of the stock on the
date of grant as determined by the Board. The options vest over five years and
have a maximum term of ten years. With the implementation of the 1997 Plan, no
further stock options were granted under the 1982, 1991 and 1993 Stock Option
Plans. No options were granted under the 1997 Plan during the fiscal year ended
June 30, 1997. Options granted under the 1997 Plan during the three months ended
September 30, 1997 were granted at the fair value of the common stock on the
date of grant.

In determining the fair value of the Stock at the date of grant under each
plan, the Board considered a broad range of factors including the illiquid
nature of an investment in the Company's Common Stock, transactions in the
Company's Common Stock with third parties, consultations with financial advisors
(as appropriate), the Company's historical financial performance relative to
that of comparable companies and its future prospects.

F-13
<PAGE> 74

MERCURY COMPUTER SYSTEMS, INC.

In fiscal year 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires that companies either recognize
compensation expense for grants of stock, stock options and other equity
instruments based on fair value or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions of SFAS No. 123 in fiscal 1997 and has applied
APB Opinion No. 25 and related Interpretations in accounting for all of its
stock option plans. Accordingly, no compensation cost has been recognized for
its stock option plans as compensation cost is measured as the excess, if any,
of the fair market value of the Company's stock at the date of grant over the
amount an individual must pay to acquire the stock.

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at June 30, 1994.................................... 849,367 $ 3.23
--------
Granted......................................................... 90,251 7.25
Exercised....................................................... (49,067) 0.82
Canceled........................................................ (96,900) 3.88
--------
Outstanding at June 30, 1995.................................... 793,651 3.76
--------
Granted......................................................... 47,675 6.16
Exercised....................................................... (71,250) 2.17
Canceled........................................................ (60,700) 5.51
--------
Outstanding at June 30, 1996.................................... 709,376 4.02
--------
Granted......................................................... 526,292 4.00
Exercised....................................................... (85,850) 1.61
Canceled........................................................ (305,226) 6.15
--------
Outstanding at June 30, 1997.................................... 844,592 3.41
--------
Granted......................................................... 41,101 4.00
Exercised....................................................... (56,950) 2.19
Canceled........................................................ (600) 5.00
--------
Outstanding at September 30, 1997............................... 828,143 $ 3.60
========
</TABLE>

Information related to the stock options outstanding as of September 30,
1997, is as follows:

<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED -------------------------
RANGE OF NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE OF REMAINING AVERAGE OF AVERAGE
PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
-------------------------- ------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$1.50 - $3.50............. 309,250 3.42 $ 2.48 303,450 $ 2.46
$4.00 ............... 475,293 9.06 4.00 127,604 4.00
$5.00 - $7.50............. 43,600 6.60 7.10 35,850 7.10
------- ---- ------ ------- ------
Total........... 828,143 6.83 $ 3.60 466,904 $ 3.24
======= ==== ====== ======= ======
</TABLE>

There were 527,791 and 473,890 options exercisable at June 30, 1996 and
1997, respectively. The weighted average fair value at date of grant for stock
options granted during the fiscal years ended June 30, 1996 and 1997 and the
three months ended September 30, 1997 was $3.82, $1.64 and $1.64, respectively.
The

F-14
<PAGE> 75

MERCURY COMPUTER SYSTEMS, INC.

fair value of each option granted during the fiscal years ended June 30, 1996
and 1997 is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions: an expected life of eight years, a
dividend yield of 0%, a risk free interest rate of 6.8% and zero expected
volatility.

Had compensation cost for the Company's stock option grants been determined
based on the fair value at the grant dates, as calculated in accordance with
SFAS No. 123, the Company's net income and net income per common share for the
fiscal years ended June 30, 1996 and 1997 and the three months ended September
30, 1997, would approximate the following pro forma amounts as compared to the
amounts reported:

<TABLE>
<CAPTION>
NET INCOME PER
NET INCOME COMMON SHARE
---------- --------------
<S> <C> <C>
As reported:
1996........................................... $4,428 $ 0.54
1997........................................... 4,611 0.57
Three months ended September 30, 1997.......... 1,606 0.20

Pro Forma:
1996........................................... $4,330 $ 0.53
1997........................................... 4,345 0.53
Three months ended September 30, 1997.......... 1,542 0.19
</TABLE>

The effects of applying SFAS No. 123 in this disclosure are not indicative
of future amounts. SFAS No. 123 does not apply to awards prior to 1995 and
additional awards in future years are anticipated.

Repricing Stock Options

On July 30, 1996, the Board approved a plan (the "repricing plan") to
reprice employee stock options under the Plans to restore the long-term employee
retention and performance incentives of the stock options outstanding. In
accordance with the repricing plan, all stock options with exercise prices above
$4.00 per share and approved by the individual optionholder were canceled and
replaced by the same number of options exercisable at $4.00 per share, the fair
value of the Company's common stock as determined by the Board on the date of
the repricing. In reaching this determination, the Board considered a broad
range of factors including the illiquid nature of an investment in the Company's
Common Stock, transactions of the Company's Common Stock with third parties, the
Company's historical financial performance relative to that of comparable
companies and its future prospects. Fifty percent of those options which were
vested prior to the repricing vested immediately under the repricing plan. All
remaining previously vested and unvested options will vest in accordance with
the current option plan.

Warrants

At June 30, 1996 and 1997, a warrant to purchase 10,000 shares of the
Company's Common Stock was outstanding with an exercise price of $2.00 per share
and exercisable through June 30, 2000. In September 1997, the warrants were
exercised.

F-15
<PAGE> 76

MERCURY COMPUTER SYSTEMS, INC.

H. INCOME TAXES:

Income tax expense consisted of the following:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------- ----------------
1995 1996 1997 1996 1997
------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Federal:
Current.............................. $2,295 $2,437 $3,088 $ 606 $1,168
Deferred............................. 214 115 (592) (116) (290)
------ ------ ------ ----- ------
2,509 2,552 2,496 490 878
------ ------ ------ ----- ------
State:
Current.............................. 208 101 301 60 162
Deferred............................. (135) 127 (4) (1) (42)
------ ------ ------ ----- ------
73 228 297 59 120
------ ------ ------ ----- ------
Foreign -- current..................... 54 172 140 27 62
------ ------ ------ ----- ------
$2,636 $2,952 $2,933 $ 576 $1,060
------ ------ ------ ----- ------
</TABLE>

The following is a reconciliation between the statutory provision for
federal income taxes and the effective income tax expense:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------- -----------------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income taxes at federal statutory 34.0% 34.0% 34.0% 34.0% 34.0%
rates...............................
State income tax, net of federal tax 0.5 2.0 3.9 3.9 3.9
benefit and credits.................
Research and development credits (5.9) -- (3.5) (3.5) (2.9)
utilized............................
Other................................. 0.8 4.0 4.5 4.5 4.8
---- ---- ---- ---- ----
29.4% 40.0% 38.9% 38.9% 39.8%
---- ---- ---- ---- ----
</TABLE>

The components of the net deferred tax asset are as follows:

<TABLE>
<CAPTION>
JUNE 30,
------------------------ SEPTEMBER 30,
1995 1996 1997 1997
---- ----- ----- -------------
<S> <C> <C> <C> <C>
Receivables, allowances and inventory
reserves.................................... $162 $ 377 $ 614 $ 851
Deferred revenue.............................. 188 -- -- --
Accrued vacation.............................. -- -- 213 202
Property and equipment........................ (54) 1 232 290
Research and development credits.............. 260 100 -- --
Capitalized software development costs........ -- (148) (193) (145)
Other temporary differences................... 54 38 99 99
---- ----- ----- -------
Total deferred tax asset, net................. $610 $ 368 $ 965 $ 1,297
---- ----- ----- -------
</TABLE>

Property and equipment temporary differences as of September 30, 1997
result from a shorter estimated useful life related to certain computer
equipment for financial reporting versus tax reporting.

F-16
<PAGE> 77

MERCURY COMPUTER SYSTEMS, INC.

No valuation allowance was deemed necessary for the deferred tax asset.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.

I. MAJOR CUSTOMERS AND INTERNATIONAL DATA:

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Customer A.................. 18% -- -- -- --
Customer B.................. 12% 16% -- -- 11%
Customer C.................. -- 12% 10% 10% --
Customer D.................. -- 19% 22% -- 11%
Customer E.................. -- -- -- 19% 11%
Customer F.................. -- -- -- -- 16%
</TABLE>

Export sales to unaffiliated customers were approximately $20,987,000,
$5,521,000, $5,351,000, $1,000,714 and $1,130,280 for the fiscal years ended
June 30, 1995, 1996 and 1997 and September 30, 1996 and 1997, respectively.

The Company has operations in the United Kingdom, the Netherlands, Japan
and France. For each of the fiscal years ended June 30, 1995, 1996 and 1997 and
each of the three months ended September 30, 1996 and 1997, revenues and
operating income from foreign operations represented less than 10% of the
Company's total revenues and operating income. At June 30, 1996 and 1997 and
September 30, 1997, identifiable assets of foreign operations were not material
to total assets.

J. EMPLOYEE BENEFIT PLANS:

The Company maintains a qualified 401(a) Plan and a qualified Profit
Sharing and 401(k) Plan. The plans cover substantially all full-time employees
who have three months of service and have attained the age of 21. Employee
contributions to the Profit Sharing and 401(k) Plan may range from 1% to 15% of
compensation with a discretionary matching Company contribution. The Company
will match up to 2% of compensation. The Company may also make optional
contributions to both plans for any plan year at its discretion.

Expense recognized by the Company under the Profit Sharing and 401(k) Plan
was approximately $245,000, $232,000, $287,000, $40,000 and $101,000 for the
fiscal years ended June 30, 1995, 1996 and 1997 and the three months ended
September 30, 1996 and 1997, respectively.

The Company maintains a bonus plan which provides cash awards to employees,
at the discretion of the Board of Directors, based upon operating results and
employee performance. Bonus expense to employees was approximately $943,000,
$1,150,000, $1,245,000, $245,000 and $454,000 for the years ended June 30, 1995,
1996, and 1997, and for the three months ended September 30, 1996 and 1997,
respectively.

F-17
<PAGE> 78

MERCURY COMPUTER SYSTEMS, INC.

K. RELATED PARTY TRANSACTIONS:

Notes receivable from related parties are from members of the Board of
Directors and management and are due 181 days subsequent to an initial public
offering or December 31, 1999, whichever occurs first. The notes receivable are
without recourse and bear interest at two percentage points above the prime rate
per annum.

L. VALUATION AND QUALIFYING ACCOUNTS:

The following table sets forth activity in the Company's reserve accounts:

ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended:
June 30, 1995......................... $124 17 $107
June 30, 1996......................... $107 27 $ 80
June 30, 1997......................... $ 80 40 1 $119
Three months ended September 30, 1997... $119 -- -- $119
</TABLE>

INVENTORY

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended:
June 30, 1995......................... $1,000 896 1,623 $ 273
June 30, 1996......................... $ 273 1,047 74 $1,246
June 30, 1997......................... $1,246 504 27 $1,723
Three months ended September 30, 1997... $1,723 561 -- $2,284
</TABLE>

Charges to expenses for inventory are due to program cancellations,
engineering change orders and obsolescence. Deductions are recorded when the
inventory is written-off. During the year ended June 30, 1995, the Company
wrote-off $1,623,000 in inventory relating primarily to engineering change
orders, program cancellations and obsolescence.

F-18
<PAGE> 79
SHARED STORAGE
- -----------------------------
- -----------------------------

[DRAWING OF TELEVISION MERCURY's application software and system
VCR, SPEAKER AND VIDEO integration services are used in shared storage,
CAMERA] work group environments within video post-
production, broadcasting and webcasting applications.

The software allows work groups to share commodity,
network-attached disk arrays, eliminating the need
for an expensive, intermediate file server.

MERCURY'S SuiteFusion(TM)
is supported on several [PICTURE OF PACKAGING
desktop environments, and WITH THE WORDS "SUITEFUSION
supports multiple network THE SHARED STORAGE SOLUTION"
technologies including AND THE MERCURY LOGO]
fibrechannel.

MERCURY'S SuiteFusion(TM)
[PICTURE OF PEOPLE choreographs the interactions
SITTING AT DESKS IN between workstations and disks
FRONT OF COMPUTERS] to keep files protected and
allow work to proceed
efficiently.

[MERCURY COMPUTER SYSTEMS, INC. LOGO]
<PAGE> 80

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 81

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 82

=============================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

UNTIL FEBRUARY 23, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 6
Use of Proceeds............................. 15
Dividend Policy............................. 15
Capitalization.............................. 16
Dilution.................................... 17
Selected Consolidated Financial Data........ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 19
Business.................................... 28
Management.................................. 41
Certain Transactions........................ 48
Principal and Selling Stockholders.......... 49
Description of Capital Stock................ 51
Shares Eligible for Future Sale............. 54
Underwriting................................ 56
Legal Matters............................... 57
Experts..................................... 57
Additional Information...................... 58
Index to Consolidated Financial
Statements................................ F-1
</TABLE>

=============================================================
=============================================================

3,500,000 Shares

[LOGO: MERCURY COMPUTER SYSTEMS, INC.--
The Ultimate Performance Machine]

Common Stock

---------------------

PROSPECTUS

---------------------

PRUDENTIAL SECURITIES INCORPORATED

COWEN & COMPANY
January 29, 1998

=============================================================