SYSTEMS

Mercury Computer Systems reported results for its first quarter ended September 30, 2004. The Company posted its 55th consecutive quarter of profitable performance. * First quarter revenues were $55.0 million, an increase of 35.7% over the prior year's first quarter, and a record for first quarter revenues. * First quarter operating income was $8.0 million, representing 14.5% of revenues. * First quarter net income was $5.1 million, or 9.3% of revenues. Diluted earnings per share (EPS) were $0.23 for the first quarter, exceeding guidance by $0.01. * Cash flows from operating activities were $11.2 million in the first quarter. "We are proud to announce record first quarter revenues of $55 million, which is also the second highest revenue quarter in the Company's history," said Jay Bertelli, president and chief executive officer of Mercury Computer Systems. "This quarter marks our 55th consecutive quarter of profitability, and a strong start to our fiscal year. We are well-positioned to execute on our growth initiatives for fiscal 2005 and beyond, with the objective to sustain a 25% or better long-term revenue growth rate." Backlog The Company's total backlog at the end of the quarter was $83.0 million, a $19.6 million increase over the same quarter last year. Of the current total backlog, $73.3 million represents shipments scheduled over the next 12 months. Defense Electronics Defense electronics revenues grew to $31.0 million, representing 56% of total revenues for the quarter and an increase of 8% over last year. Revenues were particularly strong in signals intelligence and defense technology segments. Imaging and Visualization Solutions Imaging and visualization solutions revenues grew to $10.5 million, representing 19% of total revenues for the quarter and an increase of 46% over last year. Revenues were particularly strong in the area of digital X-ray. OEM Solutions OEM solutions revenues grew to $13.5 million, representing 25% of total revenues for the quarter and an increase of $9.0 million from last year. Revenues were driven by design wins in semiconductor inspection applications that moved into production. Business Outlook This section presents our current expectations and estimates, given current visibility, on our business outlook. It is possible that actual performance will differ materially from the ranges and estimates given - either on the upside or on the downside. Investors should consider all of the risks, including those listed in the Safe Harbor Statement below, with respect to these estimates and make themselves aware of the risk factors that may impact the Company's actual performance. On October 11, the Financial Accounting Standards Board (FASB) ratified the Emerging Issues Task Force (EITF), Item 04-08, "Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share." Our guidance anticipates this FASB-proposed change in accounting treatment relative to our contingent convertible debt offering completed earlier in the year. This change in accounting treatment will become effective with the next quarter reporting cycle, ending December 31, 2004. The impact of this accounting change is included within the guidance provided below. The impact of this new accounting treatment for contingent convertibles would be to first adjust net income by adding back interest expense and amortization of debt issuance costs, net of tax; and then to increase the total shares outstanding by converting the debt to equivalent shares at the conversion price. The new FASB regulation would impact the Company's second quarter reported earnings per share in the following manner. Net income would be increased by approximately $0.6 million, and shares outstanding would be increased by approximately 4.1 million shares. In the second quarter of fiscal year 2005, revenues are expected to be in the range of $56 to $58 million. At these revenue levels, and under this new FASB accounting, the Company projects a range of $0.25 to $0.28 for earnings per share for the second quarter ending December 31, 2004. For the full year, the Company continues to project revenues to be in the range of $225 to $230 million. At these revenue levels, the Company had projected a range of $1.20 to $1.25 for full-year earnings per share. Due entirely to the pending FASB accounting change related to contingent convertibles, the Company now projects a range of $1.10 to $1.15. Recent Highlights September - Mercury was featured on the cover of the September issue of Advanced Imaging magazine and in the feature article "High-Performance Systems for Multi-dimensional Medical Imaging." September - Mercury's Ensemble development system was highlighted at SNDF 2004 Europe, the premier event for developers in the networking industry. Mercury participated in joint announcements with Xilinx, Inc. and Enea Embedded Systems on Ensemble's interoperability and technology and standards support, that includes serial RapidIO(R), the OSE real-time operating system, and the Advanced Telecom Computing Architecture (AdvancedTCA). September - Mercury introduced the MCP3 FCN, the first of a new family of rugged, 3U CompactPCI signal processing modules. The MCP3 FCN integrates a PowerPC 7447 processor, a Virtex-II Pro FPGA, and a PMC site, and is designed for deployment in harsh environments. August - Mercury introduced the first multi-chassis, serial RapidIO systems. The Mercury ImpactRT(TM) 3200 and PowerStream(R) 7000 systems provide high-bandwidth serial RapidIO over fiber connections in a single, cohesive system, and enable twice the system performance to address the increasingly larger computational challenges in commercial and defense applications. August - Mercury is the technology feature story "New infrastructure for deployed military environments" in the August issue of VMEbus Systems magazine. July - Mercury announced a follow-on order for RACE++(R) systems for the development and implementation of the SOSTAR-X (Stand-Off Surveillance and Target Acquisition Radar) system from the Research Establishment for Applied Science. SOSTAR-X is a European radar development system comprising ground aperture radar (SAR), classification and data exploitation technologies. July - Mercury shipped RACE++ systems to Telephonics Corporation for the Canadian Air Force's CP-140 Aurora Incremental Modernization Program. The Aurora aircraft is used for search and rescue, sovereignty, and counter-drug patrols. Mercury's multicomputers will be installed in the advanced APS-143B(V)3-MPA OceanEye Surveillance Radar on the CP-140 Aurora and will enable the Canadian Air Force to detect, classify and track targets or objects at sea; detect and image land targets; and provide ground mapping.