Edgar Filing: MERCURY COMPUTER SYSTEMS INC

SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]

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

Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))

Mercury Computer Systems, Inc.
(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement)

PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

1) Title of each class of securities to which transaction applies:

2) Aggregate number of securities to which transaction applies:

3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):

4) Proposed maximum aggregate value of transaction:

5) Total fee paid:

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

1) Amount Previously Paid:

2) Form, Schedule or Registration Statement No.:

3) Filing Party:

4) Date Filed:

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

MERCURY COMPUTER SYSTEMS, INC.
199 RIVERNECK ROAD
CHELMSFORD, MA 01824
(978) 256-1300

October 17, 2002

Dear Stockholder:

Mercury Computer Systems, Inc. (the "Corporation") will hold a Special
Meeting of Stockholders (the "Meeting") in lieu of the 2002 Annual Meeting of
Stockholders on November 19, 2002 beginning at 10:00 a.m. at the Boston Museum
of Science, Science Park, Boston, Massachusetts. We look forward to your
attending either in person or by proxy. The Notice of Meeting, the Proxy
Statement and the Proxy Card from the Board of Directors are enclosed. These
materials provide further information concerning the Meeting.

This year's Meeting will be a business meeting only with no additional
presentations from the Company's business unit executives. The agenda for the
Meeting includes (i) election of Class II Directors, and (ii) authorization of
an increase in the number of shares issuable pursuant to the Corporation's 1997
Stock Option Plan (the "1997 Plan"). The Board of Directors recommends that you
vote FOR the election of the slate of nominees for directors, and FOR the
authorization of the increase in the number of shares issuable pursuant to the
1997 Plan.

Please refer to the enclosed Proxy Statement for detailed information on
each of these proposals. If you have any further questions concerning the
Meeting or any of the proposals, please feel free to contact the Corporation at
(978) 256-1300. Your vote is important. Whether or not you expect to attend the
Meeting, your shares should be represented. Therefore, we urge you to complete,
sign, date and promptly return the enclosed proxy.

On behalf of the Board of Directors, we would like to express our
appreciation for your continued interest in our Company.

Sincerely yours,

/s/ James R. Bertelli
JAMES R. BERTELLI
President and Chief Executive Officer

MERCURY COMPUTER SYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS IN LIEU OF THE
2002 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 19, 2002

To the Stockholders:

A Special Meeting of the Stockholders of MERCURY COMPUTER SYSTEMS, INC. in
lieu of the 2002 Annual Meeting of Stockholders will be held on Tuesday,
November 19, 2002 at 10:00 a.m. at The Boston Museum of Science, Science Park,
Boston, Massachusetts, for the following purposes:

1. To elect Dr. Gordon Baty as a Director for a term of three years,
as more fully described in the accompanying Proxy Statement.

2. To elect Mr. Sherman Mullin as a Director for a term of three
years, as more fully described in the accompanying Proxy Statement.

3. To consider and act upon a proposal to approve an amendment to the
Corporation's 1997 Stock Option Plan to increase the number of
shares of Common Stock reserved for issuance thereunder by
1,000,000 shares, from 5,650,000 shares to 6,650,000 shares.

4. To consider and act upon any other business which may properly come
before the meeting.

The Board of Directors has fixed the close of business on September 27,
2002 as the record date for the meeting. All stockholders of record on that date
are entitled to notice of and to vote at the meeting.

PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING IN PERSON.

By order of the Board of Directors

/s/ Anthony J. Medaglia, Jr.
ANTHONY J. MEDAGLIA, JR.
Clerk

Chelmsford, Massachusetts
October 17, 2002

MERCURY COMPUTER SYSTEMS, INC.

PROXY STATEMENT

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Mercury Computer Systems, Inc. (the
"Corporation") for use at the Special Meeting of Stockholders in lieu of the
2002 Annual Meeting of Stockholders to be held on Tuesday, November 19, 2002, at
the time and place set forth in the notice of the meeting, and at any
adjournments thereof (the "Meeting"). The approximate date on which this Proxy
Statement and form of proxy are first being sent to stockholders is October 17,
2002.

VOTING AND REVOCABILITY OF PROXIES

If the enclosed proxy is properly executed and is received prior to the
Meeting, it will be voted in the manner directed by the stockholder. If no
instructions are specified with respect to any particular matter to be acted
upon, proxies will be voted for the election of Directors as set forth in this
Proxy Statement and for the proposal to amend the Mercury Computer Systems, Inc.
1997 Stock Option Plan. Any person giving the enclosed form of proxy has the
power to revoke it by voting in person at the Meeting, or by giving written
notice of revocation to the Clerk of the Corporation any time before the proxy
is exercised.

The holders of a majority in interest of all Common Stock issued,
outstanding and entitled to vote are required to be present in person or to be
represented by proxy at the Meeting in order to constitute a quorum for the
transaction of business. The election of the nominees for Director will be
decided by plurality vote. The proposal to amend the 1997 Stock Option Plan
requires the affirmative vote of a majority of voting shares present in person
or represented by proxy at the Meeting (following the determination of a
quorum). Both abstentions and broker "non-votes" are counted as present for the
purposes of determining the existence of a quorum for the transaction of
business. However, for purposes of determining the number of shares voting on a
particular proposal, abstentions and broker "non-votes" are not counted as votes
cast or shares voting.

The Corporation's principal executive offices are located at 199 Riverneck
Road, Chelmsford, Massachusetts 01824, telephone number (978) 256-1300.

RECORD DATE AND VOTING SECURITIES

Only stockholders of record at the close of business on September 27, 2002
are entitled to notice of and to vote at the Meeting. On that date the
Corporation had outstanding and entitled to vote 21,150,061 shares of Common
Stock, par value $.01 per share. Each outstanding share of the Corporation's
Common Stock entitles the record holder to one vote.

PROPOSAL TO ELECT CLASS II DIRECTORS

Pursuant to Massachusetts law, the Board of Directors is divided into three
classes, with each class as nearly equal in number as possible. Presently, the
Board of Directors consists of eight members, with Dr. Albert Belle Isle, Mr.
James A. Dwyer and Mr. Melvin Sallen serving as Class I Directors; Dr. Gordon
Baty and Mr. Sherman Mullin serving as Class II Directors; and Mr. James
Bertelli, Mr. Russell K. Johnsen and Mr. Richard P. Wallace serving as Class III
Directors. The terms of the Class I, Class II and Class III Directors expire in
2004, 2002, and 2003, respectively. Following expiration of its respective
current term, each class is then nominated for election for a subsequent
three-year term.

It is proposed that the Class II nominees listed below, whose terms expire
at this Meeting, be elected to serve a term of three years and until their
successors are duly elected and qualified or until they sooner die, resign or
are removed.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE CLASS II
NOMINEES LISTED BELOW. The persons named in the accompanying proxy will vote,
unless authority is withheld, for the election of the Class II nominees named
below. If any such nominees should become unavailable for election, which is not
anticipated, the persons named in the accompanying proxy will vote for such
substitute as the Board of Directors may recommend. Dr. Baty and Mr. Mullin are
not related to any Executive Officer of the Corporation or its subsidiaries.

YEAR FIRST
ELECTED A POSITION WITH THE CORPORATION OR PRINCIPAL
NAME OF NOMINEE AGE DIRECTOR OCCUPATION DURING PAST FIVE YEARS
--------------- --- ---------- ------------------------------------------

NOMINATED FOR A TERM ENDING IN 2005:
Dr. Gordon B. Baty.................... 63 1983 Dr. Baty has been a partner of Zero Stage
Capital Co., Inc., 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 nine private companies.

Sherman N. Mullin..................... 66 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
advisor to the U.S. Air Force Scientific
Advisory Board.

SERVING A TERM ENDING IN 2003:
James R. Bertelli..................... 62 1981 Mr. Bertelli co-founded the Corporation in
1981, and has served as the Corporation's
President, Chief Executive Officer, and a
Director since that time and has served as
the Chairman of the Board of Directors
since April 15, 2002. Prior to founding
the Corporation, 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, Mr. Bertelli began his
high-tech career with RCA Corporation as a
computer systems analyst, and later moved
into computer sales with RCA and Univac.

Russell K. Johnsen.................... 48 2001 Mr. Johnsen is currently the Vice
President, Corporate Business Development
at Analog Devices. Mr. Johnsen has held
various positions at Analog Devices since
1993. Prior to his years at Analog
Devices, Mr. Johnsen held positions at
National Semiconductor Corporation.

Richard P. Wallace.................... 42 2002 Mr. Wallace is currently Executive Vice
President, Wafer Inspection Group at KLA-
Tencor Corp. Mr. Wallace has held various
positions at KLA-Tencor since 1988. Prior
to his years at KLA-Tencor, Mr. Wallace
held positions at Ultratech Stepper,
Cypress Semiconductor and Proctor &
Gamble.

SERVING A TERM ENDING IN 2004
Dr. Albert P. Belle Isle.............. 59 1986 Dr. Belle Isle is an independent investor
in technology-based companies, was
President of Custom Silicon, Inc., a
semiconductor company, and has 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.

James A. Dwyer........................ 65 2000 Mr. Dwyer is currently President of
Wireless One Network, L.P., a former
cellular operator in Florida. Previously,
Mr. Dwyer was President of American
Cellular Telephone Corp., and Attorney and
Vice President, International Relations of
Western Union International. Mr. Dwyer
currently serves on the Board of Directors
of the Cellular Telecommunications
Industry Association, and was previously
Chairman of its Executive Committee and
Chairman of its Legislative and Regulatory
Committee.

Melvin Sallen......................... 74 1990 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 Copley
Controls Corporation.

Melvin Sallen has recently informed the Corporation of his intention to
retire from the Board of Directors immediately following the Special Meeting of
Stockholders in lieu of the 2002 Annual Meeting of Stockholders to be held on
November 19, 2002. The Corporation wishes to thank Mr. Sallen for his diligent
efforts and many contributions made to the Corporation as a Director since 1990.

INFORMATION CONCERNING THE BOARD OF DIRECTORS

During fiscal year 2002, there were ten (10) meetings of the Board of
Directors of the Corporation, six (6) meetings of the Audit Committee (see
below), eleven (11) meetings of the Compensation Committee (see below), and one
(1) meeting of the Nominating Committee (see below). All of the Directors
attended at least seventy-five percent (75%) of the aggregate of (i) the total
number of meetings of the Board of Directors and (ii) the total number of
meetings held by committees of the Board of Directors on which they served. Each
Director who is not otherwise an employee of the Corporation receives cash
compensation in the amount of $10,000 for the fiscal year, paid quarterly, plus
an additional $2,500 for each meeting attended, as well as reimbursement for
reasonable expenses incurred in connection with attendance at Board and
committee meetings. In addition, committee members and the committee chairman
receive an annual retainer of $1,000 and $1,750, respectively, as well as an
additional $300 for attending a meeting not held on the same day as a meeting of
the Board of Directors. The cash compensation paid to Directors in their
capacity as such during fiscal year 2002 was as follows:

DIRECTOR CASH COMPENSATION
-------- -----------------

Gordon B. Baty............................................. $28,950
Albert P. Belle Isle....................................... $28,950
James A. Dwyer............................................. $22,800
Russell K. Johnsen......................................... $21,600
Sherman N. Mullin.......................................... $26,300
Melvin Sallen.............................................. $27,050
Michael I. Schneider....................................... $ 6,000

In addition to cash compensation, Directors are also granted options
pursuant to the Mercury Computer Systems, Inc. 1997 Stock Option Plan. During
the year ended June 30, 2002, Directors Baty, Belle Isle, Dwyer, Johnsen, Mullin
and Sallen were granted an option to purchase 2,020 shares at an exercise price
of $37.15 per share; In addition, Directors Dwyer and Johnsen were granted an
option to purchase 12,500 shares at an exercise price of $29.80 per share. In
lieu of cash and other compensation to Director Wallace, the Corporation will
make a charitable contribution in the amount of $5,000 to a non-profit
institution.

The Board of Directors has a standing Audit Committee, Compensation
Committee and Nominating Committee. The members of the Audit Committee are Dr.
Baty, Dr. Belle Isle and Mr. Johnsen. The Audit Committee reviews the scope of
the Corporation's engagement of its independent public accountant and their
reports. The Audit Committee also meets with the financial staff of the
Corporation to review accounting procedures and reports. The Compensation
Committee was comprised of Messrs. Mullin, Sallen and Mr. Schneider until his
death on September 6, 2001, and Mr. Dwyer commencing in November 2001. 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 Corporation's various stock option and stock
purchase plans. The Nominating Committee was established in August 2001 to
recommend nominees to the Board of Directors, and has recommended the nominees
for election at the Meeting (with Dr. Baty abstaining from his own nomination).
The members of the Nominating Committee are Dr. Baty, Dr. Belle Isle and Mr.
Bertelli. The Nominating Committee will consider nominees recommended by
stockholders. Stockholders who wish to submit names of candidates for
consideration as nominees may submit an appropriate letter and resume to the
Clerk of the Corporation at the Corporation's principal executive office in
Chelmsford, Massachusetts pursuant to the Corporation's By-laws.

PROPOSAL TO INCREASE THE SHARES RESERVED FOR ISSUANCE UNDER THE
MERCURY COMPUTER SYSTEMS, INC. 1997 STOCK OPTION PLAN FROM
5,650,000 SHARES TO 6,650,000 SHARES

There will be presented at the Meeting a proposal to approve an amendment
to the Corporation's 1997 Stock Option Plan (the "1997 Stock Option Plan"),
which amendment was approved by the Board of Directors on September 20, 2002,
whereby the number of shares of Common Stock reserved for issuance under the
1997 Stock Option Plan was increased from 5,650,000 shares to 6,650,000 shares.
As of August 31, 2002, options for the purchase of 4,183,406 shares of Common
Stock were outstanding under the 1997 Stock Option Plan.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSED INCREASE IN SHARES OF
COMMON STOCK RESERVED FOR ISSUANCE UNDER THE 1997 STOCK OPTION PLAN FROM
5,650,000 SHARES TO 6,650,000 SHARES.

MERCURY COMPUTER SYSTEMS, INC. 1997 STOCK OPTION PLAN

The 1997 Stock Option Plan (the "Plan") provides for the granting of both
incentive stock options meeting the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") and non-qualified options which
are not intended to meet the requirements of the Code.

The Plan is intended to encourage ownership of the stock of the Corporation
by employees of, and other key individuals engaged to provide services to, the
Corporation and its subsidiaries, including directors, to induce qualified
personnel to enter and remain in the employ of, or otherwise provide services
to, the Corporation or its subsidiaries and to provide additional incentive for
optionees to promote the success of its business. The Plan is administered by a
Committee (the "Committee"), consisting of two or more members of the
Corporation's Board of Directors. The members of the Committee are appointed by
the Board of Directors and the Board may from time to time appoint a member or
members of the Committee in substitution for or in addition to the member or
members then in office, and may fill vacancies on the Committee, however caused.
The present members of the Committee are Melvin J. Sallen, Chairman, James A.
Dwyer and Sherman N. Mullin, c/o Mercury Computer Systems, Inc., 199 Riverneck
Road, Chelmsford, Massachusetts, 01824. The Plan is viewed by management and the
Corporation's Board of Directors as vital to attracting, retaining and
motivating the talented individuals upon whom the Corporation's success depends.

The amendment increased the number of shares of Common Stock reserved for
issuance under the Plan from 5,650,000 shares to 6,650,000 shares. The maximum
number of shares of the Corporation's Common Stock for which options may be
granted under the Plan is subject to adjustments for capital changes. Shares
issued under the Plan may be authorized but unissued shares of Common Stock or
shares of Common Stock held in the treasury. As of August 31, 2002, options for
the purchase of 4,183,406 shares of Common Stock were outstanding under the Plan
and 407,107 shares were available for new grants under the Plan.

Set forth below is a summary of other principal provisions of the Plan, a
copy of which may be obtained from the Clerk of the Corporation upon request.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE AMENDMENT
TO THE PLAN INCREASING THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR
ISSUANCE THEREUNDER FROM 5,650,000 SHARES TO 6,650,000 SHARES. The affirmative
vote of the holders of at least a majority of the shares of Common Stock voting
in person or by proxy at the Meeting will be required for approval of the
amendment to the 1997 Stock Option Plan.

Options. The Plan provides that options designated as incentive stock
options may be granted only to employees (including officers and directors who
are also employees) of the Corporation or any subsidiary.

Options designated as non-qualified options may be granted to officers,
directors, employees, consultants and advisors of the Corporation or any of its
subsidiaries.

In determining the eligibility of an individual to be granted an option, as
well as in determining the number of options to be granted to any individual,
the Committee takes into account the position and responsibilities of the
individual being considered, the nature and value to the Corporation or its
subsidiaries of the individual's service and accomplishments, his or her present
and potential contribution to the success of the Corporation or its subsidiaries
and such other factors as the Committee deems relevant.

The maximum number of shares with respect to which an option or options may
be granted to any employee in any one taxable year of the Corporation shall not
exceed 200,000, taking into account shares granted during such taxable period
under options that have terminated.

Terms and Provisions of Options. Options granted under the Plan are
exercisable at such times and during such period as is set forth in the option
agreement, but no option granted under the Plan can have a term in excess of 10
years from the date of grant. The option agreement may contain such provisions
and conditions as may be determined by the Committee. The option exercise price
for options designated as non-qualified stock options granted under the Plan is
determined by the Committee, but in no event shall be less than 100% of the fair
market value of the underlying Common Stock at the time such option is granted.
The option exercise price for incentive stock options granted under the Plan
shall be no less than fair market value of the Common Stock of the Corporation
at the time the option is granted. Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or shares of Common
Stock of the Corporation owned by the optionee having a fair market value equal
in amount to the exercise price of the options being exercised, or any
combination thereof; provided, however, that the payment of the exercise price
by delivery of shares of Common Stock of the Corporation owned by the optionee
may be made only if the payment does not result in a charge to earnings for
financial accounting purposes, as determined by the Committee.

The right of any optionee to exercise an option granted under the Plan is
not assignable or transferable by such optionee otherwise than by will or the
laws of descent and distribution, and any such option shall be exercisable
during the lifetime of such optionee only by him or her; provided, however, that
in the case of a non-qualified stock option, the Committee may permit
transferability of such options on such terms and conditions as determined by
the Committee and set forth in an option agreement.

An option granted to any employee optionee who ceases to be an employee of
the Corporation or one or its subsidiaries shall terminate ninety (90) days
after the date such optionee ceases to be an employee of the Corporation or one
of its subsidiaries. If such termination of employment is because of dismissal
for cause or because the employee is in breach of any employment agreement, such
an option will terminate immediately on the date the optionee ceases to be an
employee of the Corporation or one of its subsidiaries. If such termination of
employment is because the optionee has become permanently disabled, the option
shall terminate on the last day of the twelfth month from the date such optionee
ceases to be an employee. In the event of the death of the optionee, the option
shall terminate on the last day of the twelfth month from the date of death. If
such termination of employment is because of the retirement of the optionee on
or after attaining the minimum age, completing the minimum number of years of
service, and satisfying of all other conditions specified for retirement status
under the Company's Retirement Policy Statement as in effect at the time of the
grant of the option, such option will terminate on the date that is five (5)
years after the date the optionee ceases to be an employee of the Company or one
of its subsidiaries. An option granted to a non-employee director, a consultant,
or any other person who is not an employee of the Company or one of its
subsidiaries shall be exercisable only to the extent so provided in the
optionee's Agreement. In no event shall an option be exercisable after the date
upon which it expires by its terms. The Committee has the authority to

extend the expiration date of any outstanding option in circumstances in which
it deems such action to be appropriate.

An option granted to an employee optionee who ceases to be an employee of
the Corporation or one of its subsidiaries shall be exercisable only to the
extent that the right to purchase shares under such option has accrued and is in
effect on the date such optionee ceases to be an employee of the Corporation or
one of its subsidiaries. In the event of the death of any optionee, the option
granted to such optionee may be exercised by the estate of such optionee, or by
any person or persons who acquired the right to exercise such option by bequest
or inheritance or by reason of the death of such optionee.

Recapitalization; Reorganization; Change of Control. The Plan provides
that the number and kind of shares as to which options may be granted thereunder
and as to which outstanding options then unexercised shall be exercisable shall
be adjusted to prevent dilution in the event of any reorganization, merger,
consolidation, recapitalization, reclassification, stock split-up, combination
of shares or dividends payable in capital stock. In addition, unless otherwise
determined by the Committee in its sole discretion, in the case of any sale or
conveyance to another entity of all or substantially all of the property and
assets of the Corporation or a Change of Control as defined in the Plan, the
purchaser of the Corporation's assets or stock may deliver to the optionee the
same kind of consideration that is delivered to the stockholders of the
Corporation as a result of the sale, conveyance or Change of Control or the
Committee may cancel all outstanding options in exchange for consideration in
cash or in kind, which consideration shall be equal in value to the value of
those shares of stock or other securities the optionee would have received had
the option been exercised (to the extent then exercisable) and no disposition of
the shares acquired upon such exercise has been made prior to such sale,
conveyance or Change of Control, less the option price therefor.

The Committee shall also have the power to accelerate the exercisability of
any options, notwithstanding any limitations in the Plan or in the option
agreement, upon such a sale, conveyance or Change of Control. In addition, in
the event of a Change of Control, 50% of the unvested shares of each optionee
with a minimum of 6 months' service will automatically be vested and in the
event of a Change of Control not approved by the Board of Directors prior to
such Change in Control, all of the shares will be fully vested immediately upon
such Change of Control. Change of Control is defined in the Plan as having
occurred if any of the following conditions have occurred: (1) the merger or
consolidation of the Corporation with another entity where the Corporation is
not the surviving entity and where after the merger or consolidation (i) its
stockholders prior to the merger or consolidation hold less than 50% of the
voting stock of the surviving entity and (ii) its Directors prior to the merger
or consolidation are less than a majority of the Board of the surviving entity;
(2) the sale of all or substantially all of the Corporation's assets to a third
party and subsequent to the transaction (i) its stockholders hold less than 50%
of the stock of said third party and (ii) its Directors are less than a majority
of the Board of said third party; (3) a transaction or series of related
transactions, including a merger of the Corporation with another entity where
the Corporation is the surviving entity, whereby 50% or more of the voting stock
of the Corporation is transferred to parties who are not prior thereto
stockholders or affiliates of the Corporation; or (4) the Continuing Directors
shall not constitute a majority of the Board of Directors of the Corporation.
The term "Continuing Directors" shall mean a member of the Board of Directors of
the Corporation who either was a member of the Board of Directors of the
Corporation on the date the Plan was adopted by the Board of Directors or who
subsequently became a director of the Corporation and whose initial appointment,
initial election or initial nomination for election by the Corporation's
shareholders subsequent to such date was approved by a vote of a majority of the
Continuing Directors then on the Board of Directors of the Corporation. Upon
dissolution or liquidation of the Corporation, all options granted under the
Plan shall terminate, but each optionee shall have the right, immediately prior
to such dissolution or liquidation, to exercise his or her option to the extent
then exercisable. The Committee shall have the right to accelerate the

vesting of any option or take such other action with respect thereto as the
Committee shall in its sole discretion determine in the event of any
contemplated dissolution or liquidation of the Corporation.

Termination and Amendment. Unless sooner terminated, the Plan shall
terminate ten (10) years from June 5, 1997, the date upon which it was adopted
by the Board of Directors. The Board of Directors may at any time terminate the
Plan or make such modification or amendment as it deems advisable; provided,
however, that the Board of Directors may not, without stockholder approval,
increase the maximum number of shares for which options may be granted or change
the designation of the class of persons eligible to receive options under the
Plan or make any other change in the Plan which requires stockholder approval
under applicable law or regulations.

TAX EFFECTS OF PLAN PARTICIPATION

Options granted under the Plan are intended to be either incentive stock
options, as defined in Section 422 of the Code, or non-qualified stock options.

Incentive Stock Options. Except as provided below with respect to the
alternative minimum tax, the optionee will not recognize taxable income upon the
grant or exercise of an incentive stock option. If the optionee holds the shares
received pursuant to the exercise of the option for at least one year after the
date of exercise and for at least two years after the option is granted, the
optionee will recognize long-term capital gain or loss upon the disposition of
the stock measured by the difference between the option exercise price (the
stock's basis) and the amount received for such shares upon disposition.

In the event that the optionee disposes of the stock prior to the
expiration of the required holding periods (a "disqualifying disposition"), the
optionee generally will realize ordinary income equal to the difference between
the exercise price and the lower of the fair market value of the stock at the
date of the option exercise or the sale price of the stock. The basis in the
stock acquired upon exercise of the option will equal the amount of income
recognized by the optionee plus the option exercise price. Upon eventual
disposition of the stock, if the optionee holds the stock as a capital asset,
the optionee will recognize long-term or short-term capital gain or loss,
depending on the holding period of the stock and the difference between the
amount realized by the optionee upon disposition of the stock and the optionee's
basis in the stock.

For alternative minimum tax purposes, the excess of the fair market value
of stock on the date of the exercise of the incentive stock option over the
exercise price of the option is included in alternative minimum taxable income
for alternative minimum tax purposes. If the alternative minimum tax applies to
the optionee, an alternative minimum tax credit may reduce the regular tax upon
eventual disposition of the stock.

The Corporation will not be allowed an income tax deduction upon the grant
or exercise of an incentive stock option. However, upon a disqualifying
disposition by the optionee of shares acquired upon exercise of the incentive
stock option, the Corporation will be allowed a deduction in an amount equal to
the ordinary income recognized by the optionee.

The Internal Revenue Service will treat the exercise of an option with
previously acquired stock of the Corporation as, in effect, two separate
transactions. Pursuant to Section 1036 of the Code, the first transaction will
be a tax-free exchange of the previously acquired shares for the same number of
new shares. The new shares will retain the basis and the holding periods of the
previously acquired shares. The second transaction will be the issuance of
additional new shares having a value equal to the difference between the
aggregate fair market value of all of the new shares being acquired and the
aggregate option exercise price for those shares. Because the exercise of an
incentive stock option does not result in the recognition by the optionee of
income, this issuance will also be tax-free (unless the alternative minimum tax
applies, as described above). The optionee's basis in these additional new
shares will be zero and the optionee's holding period for these shares

will commence on the date on which the shares are transferred. For purposes of
the one and two-year holding period requirements which must be met for favorable
incentive stock option tax treatment to apply, the holding periods of previously
acquired shares are disregarded.

Non-qualified Stock Options. As in the case of incentive stock options, no
income is recognized by the optionee on the grant of a non-qualified stock
option. On the exercise by an optionee of a non-qualified option, generally the
excess of the fair market value of the stock when the option is exercised over
its cost to the optionee will be (a) taxable to the optionee as ordinary income
and (b) deductible for income tax purposes by the Corporation. The optionee's
tax basis in his stock will equal his cost for the stock plus the amount of
ordinary income the optionee had to recognize with respect to the non-qualified
stock option.

The Internal Revenue Service will treat the exercise of a non-qualified
stock option with already owned stock of the Corporation as two transactions.
First, there will be a tax-free exchange of the old shares for a like number of
shares under Section 1036 of the Code, with such exchanged shares retaining the
basis and holding period of the old shares. Second, there will be an issuance of
additional new shares having a value equal to the difference between the fair
market value of all new shares being acquired (including the exchanged shares
and the additional new shares) and the aggregate option price for those shares.
The employee will recognize ordinary income under Section 83 of the Code, in an
amount equal to the fair market value of the additional new shares (i.e., the
spread on the option). The additional new shares will have a basis equal to the
fair market value of the additional new shares and the optionees holding period
for the additional new shares will commence on the date on which the shares are
transferred.

If the optionee holds the stock as a capital asset, upon a subsequent
disposition of stock acquired upon the exercise of a non-qualified stock option,
the optionee will recognize short-term or long-term capital gain or loss,
depending upon the holding period of the stock equal to the difference between
the amount realized upon disposition of the stock by the optionee and the
optionee's basis in the stock.

For all options, different tax rules may apply if the optionee is subject
to Section 16 of the Securities Exchange Act of 1934.

NEW PLAN BENEFITS

It is not possible to state the persons who will receive options or awards
under the Plan in the future, nor the amount of options or awards which will be
granted thereunder. The following table provides information with respect to
options granted under the Plan in the fiscal year ended June 30, 2002. See
"Mercury Computer Systems, Inc. 1997 Stock Option Plan" for a description of the
options which are provided for under the Plan.

1997 PLAN
NAME AND POSITION DOLLAR VALUE (1) STOCK OPTIONS EXERCISE PRICE
----------------- ---------------- ------------- --------------

James R. Bertelli, President and CEO................ $ 1,870,841 78,820 $25.37-$37.15
John F. Alexander II, Senior Vice President,
Treasurer and CFO................................. 1,851,408 80,000 32.08
Vincent A. Mancuso, Vice President and General
Manager, Government Electronics Group............. 531,799 20,680 25.55- 37.15
Robert Becker, Senior Vice President, Engineering
and Operations.................................... 798,497 33,850 25.55- 37.15
Douglas F. Flood, Vice President, Corporate
Development....................................... 319,795 12,810 25.55- 37.15

1997 PLAN
NAME AND POSITION DOLLAR VALUE (1) STOCK OPTIONS EXERCISE PRICE
----------------- ---------------- ------------- --------------

All Executive Officers as a Group................... 5,372,340 226,160 25.37- 37.15
All Non-Executive Officer Directors................. 862,262 37,120 25.55- 37.15
Employees as a Group (excluding Executive
Officers)......................................... $21,051,635 $887,680 $25.37-$40.85

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

(1) The dollar value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model utilizing the following
weighted-average assumptions: (1) expected risk-free interest rate of 4.68%
in 2002, (2) expected option life of 6 years; (3) expected stock volatility
of 81% for June 30, 2002, and (4) expected dividend yield of 0.0.%.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information as of June 30, 2002 with respect
to compensation plans under which equity securities of the Company are
authorized for issuance.

(C)
(A) (B) NUMBER OF
NUMBER OF WEIGHTED SECURITIES AVAILABLE
SECURITIES TO BE AVERAGE EXERCISE FOR FUTURE ISSUANCE
ISSUED UPON PRICE OF UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
OPTIONS, WARRANTS WARRANTS AND REFLECTED IN
PLAN CATEGORY AND RIGHTS RIGHTS COLUMN(A)
------------- ----------------- ----------------- ---------------------

Equity compensation plans approved by security
holders........................................ 3,663,639 $25.46 1,489,779
Equity compensation plans not approved by
security holders............................... -- -- --
--------- ------ ---------
Total............................................ 3,663,639 $25.46 1,489,779
========= ====== =========

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal year 2002, Messrs. Mullin and Sallen served on the
Compensation Committee of the Corporation's Board of Directors for the entire
year. Mr. Schneider served on the Compensation Committee until his death on
September 6, 2001, and Mr. Dwyer was appointed to the Compensation Committee in
November 2001. No member of the Compensation Committee was an officer or
employee of the Corporation or any of its subsidiaries during the fiscal year
ended June 30, 2002.

CERTAIN TRANSACTIONS

In 1996 the Corporation entered into a contract with NDC Development
Associates, Inc. ("Northland") to perform design, development, permitting and
management activities related to the construction of new corporate facilities.
An officer and principal of Northland is an immediate family member of the
Corporation's chief executive officer. The Corporation paid Northland fees of
$83,008, $29,453 and $285,813 for the fiscal years ended June 30, 2002, 2001 and
2000, respectively. The Corporation believes that these fees paid to Northland
were made in the ordinary course of business on terms that were no less
favorable to the Corporation than could have been obtained from unaffiliated
parties. No amounts were owed to Northland as of June 30, 2002 or 2001.

In conjunction with the development and construction of an additional
facility, the Corporation is negotiating a similar arrangement with Northland to
assist with the design, permitting activities and oversight of the construction
of a new facility. This arrangement is subject to a competitive pricing analysis
and review by the Audit Committee of the Board of Directors to ensure that the
terms of the arrangement are fair and no less favorable to the Corporation than
could be obtained from unaffiliated parties.

The Corporation has arrangements with other parties that do not meet the
technical disclosure requirements of related parties and are not material in the
aggregate. These individual arrangements either fall under reporting thresholds
or are with non-immediate family members of executive officers of the
Corporation. The Corporation believes that the terms of these arrangements,
which are based upon hourly rates for services performed, were fair and no less
favorable to the Corporation than could have been obtained from unaffiliated
parties.

PRINCIPAL HOLDERS OF VOTING SECURITIES

The following table shows, as of August 31, 2002, any person who is known
by the Corporation to be the beneficial owner of more than five percent of any
class of voting securities of the Corporation. For purposes of this Proxy
Statement, beneficial ownership is defined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934 and means generally the power to vote or
dispose of the securities, regardless of any economic interest therein.

NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------- -------------------- ----------

Capital Research and Management Company (1)................. 1,769,000 8.4%

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

(1) This information has been derived from a Schedule 13F filed with the
Securities and Exchange Commission reporting ownership as of June 30, 2002.
The reporting entity's address is 333 South Hope Street, Los Angeles, CA
90071.

SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS

The following information is furnished as of August 31, 2002, with respect
to Common Stock of the Corporation beneficially owned within the meaning of Rule
13d-3 by (i) all Directors of the Corporation and nominees (the "Directors");
(ii) the Chief Executive Officer of the Corporation and the four most highly
compensated executive officers of the Corporation other than the Chief Executive
Officer (collectively, the "Named Executive Officers"); and (iii) all Directors
and Named Executive Officers as a group. Unless otherwise indicated, the
individuals named below held sole voting and investment power over the shares
listed below.

NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------

James R. Bertelli(1)........................................ 1,004,047 4.7%
Vincent A. Mancuso(2)....................................... 57,018 *
G. Mead Wyman(3)............................................ 81,830 *
Gordon B. Baty(4)........................................... 86,486 *
Albert P. Belle Isle(5)..................................... 115,007 *
Sherman N. Mullin(6)........................................ 42,587 *
James A. Dwyer(7)........................................... 13,924 *

NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------

Russell Johnsen(8).......................................... 9,924 *
Melvin Sallen(9)............................................ 68,649 *
Richard P. Wallace.......................................... 0 *
Douglas Flood(10)........................................... 36,336 *
Robert Becker (11).......................................... 11,175 *
John F. Alexander II (12)................................... 0 *
All Directors and Named Executive Officers As a Group (12
persons)(13).............................................. 1,526,983 7.1%

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

* Less than 1.0%.

(1) Includes 12,400 shares owned by Mr. Bertelli's spouse, and options to
purchase 164,577 shares exercisable within sixty days of August 31, 2002.

(2) Includes options to purchase 33,240 shares exercisable within sixty days of
August 31, 2002.

(3) Mr. Wyman resigned as Treasurer and Chief Financial Officer effective May
1, 2002 and remained as a Senior Vice President through June 20, 2002.

(4) Includes options to purchase 33,007 shares exercisable within sixty days of
August 31, 2002.

(5) Includes options to purchase 33,007 shares exercisable within sixty days of
August 31, 2002.

(6) Includes options to purchase 26,987 shares exercisable within sixty days of
August 31, 2002.

(7) Includes options to purchase 9,924 shares exercisable within sixty days of
August 31, 2002.

(8) Includes options to purchase 9,924 shares exercisable within sixty days of
August 31, 2002.

(9) Includes 800 shares owned by Mr. Sallen's wife, 2,000 shares owned by the
Lois S. Sallen Trust, of which Mr. Sallen is a co-trustee and options to
purchase 29,349 shares exercisable within sixty days of August 31, 2002.

(10) Includes options to purchase 35,655 shares exercisable within sixty days of
August 31, 2002.

(11) Includes options to purchase 11,175 shares exercisable within sixty days of
August 31, 2002.

(12) Mr. Alexander joined the Corporation in April 2002 and has served as the
Corporation's Senior Vice President, Chief Financial Officer and Treasurer
since May 2002.

(13) Includes 386,845 shares which certain Directors and Executive Officers have
the right to acquire upon the exercise of outstanding options, exercisable
presently or within sixty days of August 31, 2002.

Notwithstanding anything to the contrary set forth in any of the
Corporation's previous filings under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, that might incorporate future
filings, including this Proxy Statement, in whole or in part, the following
Report of the Compensation Committee, Report of the Audit Committee and the
Performance Graph on page 17 shall not be incorporated by reference into any
such filing.

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

The Compensation Committee (the "Committee") of the Board of Directors has
furnished the following report on executive compensation.

The Committee administers the Corporation's stock option plans, makes
annual recommendations to the full Board of Directors regarding the chief
executive officer's salary, bonus, and equity-based compensation, and oversees
the executive compensation program for the Corporation's other employees,
including its

executive officers. The Committee is composed of three independent directors who
are not employees of the Corporation.

COMPENSATION PHILOSOPHY

The Corporation's compensation policies for executive officers are based on
the belief that the interests of executives should be closely aligned with those
of the Corporation's shareholders. The compensation policies are designed to
achieve the following objectives:

- Offer compensation opportunities that attract highly qualified
executives, reward exceptional initiative and achievement, and retain the
leadership and skills necessary to build long-term stockholder value.

- Maintain a significant portion of executives' total compensation at risk,
tied to both the annual and long-term financial performance of the
Corporation and the creation of stockholder value.

- Further the Corporation's short and long-term strategic goals and values
by aligning compensation with business objectives and individual
performance.

EXECUTIVE COMPENSATION

Compensation of executive officers other than the chief executive officer
is determined by the chief executive officer and is subject to review by the
Committee. The Committee historically has obtained outside survey data regarding
executive and senior level compensation and provided this data to the chief
executive officer to assist him in making compensation decisions. Compensation
for executive officers is comprised of base salary, cash bonuses and periodic
stock option grants.

Base salary: Annual determinations of base salaries are made based in part
on the competitive pay practices of companies in the same industry of similar
size and market capitalization, the skills, performance level, and contribution
to the business of the individual executives, and the needs of the Corporation.

Cash incentive awards: The Corporation's executive officers are eligible
to receive cash bonus awards designed to motivate executives to attain
short-term and longer-term corporate and individual management goals. Award
levels vary depending upon the achievement of performance criteria established
by the chief executive officer. The bonus criteria for each executive officer
are tailored to the achievement of financial and operational goals specifically
developed for that officer's area or responsibility, as well as overall
corporate performance and the attainment of other individual objectives.
Consequently, there is a direct link between the compensation of the executive
officers and the Corporation's performance.

Industry benchmark bonus: When Mercury's results exceed the performance of
the 50th percentile of the high-tech universe of the Russell 2000, an add-on
will be applied to the executive officers' compensation. In calculating this
bonus, Mercury's performance is based on revenue growth, profit growth and
profit before tax as a percentage of sales.

Long-term incentives: The Committee believes that stock options are an
excellent vehicle for compensating its officers and employees. The Corporation
provides long-term incentives through its stock option and stock purchase plans,
a purpose of which is to create a direct link between executive compensation and
increases in stockholder value. Stock options are granted at fair market value
and vest in installments, generally over four years. When determining option
awards for an executive officer, the Committee considers the executive's current
contribution to Corporation performance, the anticipated contribution to meeting
the Corporation's long-term strategic performance goals, and industry practices
and norms. Long-term incentives granted in prior years and existing levels of
stock ownership are also taken into consideration. Because the receipt of value
by an executive officer under a stock option is dependent upon an increase in
the price of the

Corporation's Common Stock, this portion of the executive's compensation is
directly aligned with an increase in stockholder value.

Deferred Compensation Plan: An executive non-qualified deferred
compensation plan ("Deferred Compensation Plan") was established during fiscal
2001. In accordance with the Deferred Compensation Plan, executives of the
Company may elect to contribute up to 35% of their total compensation in a
deferral account.

CHIEF EXECUTIVE COMPENSATION

The chief executive officer's compensation is comprised of base salary,
annual cash incentive awards and stock option grants.

In determining the base salary paid to Mr. Bertelli for the year ended June
30, 2002, the Committee considered his level of responsibility, salary increases
awarded to him in the past, his experience, his potential, and compensation
programs of other companies of similar size and characteristics.

Early in the year ended June 30, 2002, the Committee set Mr. Bertelli's
base salary at $388,000 per annum (an increase of approximately 9% over his base
compensation for the prior year), with the proviso that the increase not be paid
until the lifting of the freeze on senior staff increases in salary. In fact,
the salary freeze was not lifted and a roll-back of salaries was instituted as a
result of which Mr. Bertelli received, for the year ended June 30, 2002, base
salary in the amount of $314,052, which represents a decrease of approximately
11% from his base compensation for fiscal 2001.

Annual cash bonuses to Mr. Bertelli are based on the attainment of
individual and corporate performance targets established at the beginning of the
fiscal year. Mr. Bertelli received a cash bonus of $45,000 with respect to the
year ended June 30, 2002 in recognition of his achievement of certain
non-financial goals. He did not receive any bonus related to corporate
performance targets, such goals not having been achieved. Set forth below under
the heading "Option Grants, Exercises and Holdings" in the section of this proxy
statement entitled "Executive Compensation" are the options granted to Mr.
Bertelli during the year ended June 30, 2002, as well as options granted
subsequent to the close of fiscal 2002.

In 1993, the Internal Revenue Code was amended to limit the deduction a
public company is permitted for compensation paid in 1994 and thereafter to the
chief executive officer and to the four most highly compensated executive
officers, other than the chief executive officer. Generally, amounts paid in
excess of $1,000,000 to a covered executive, other than performance-based
compensation, cannot be deducted. In order to qualify as performance-based
compensation under the new tax law, certain requirements must be met, including
approval of the performance measures by the stockholders. In its deliberations,
the Committee considers ways to maximize deductibility of executive
compensation, but nonetheless retains the discretion to compensate executive
officers at levels the Committee considers commensurate with their
responsibilities and achievements. The Corporation has not adopted a policy that
all executive compensation be fully deductible.

By the Compensation Committee of the
Board of Directors of Mercury
Computer Systems, Inc.

Melvin J. Sallen, Chairman
Sherman N. Mullin
James A. Dwyer

REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

The Audit Committee of the Corporation's Board of Directors is currently
composed of three members and acts under a written charter, a copy of which is
attached to this Proxy Statement as Exhibit A. The members of the Audit
Committee are independent directors, as defined by its charter and in accordance
with the listing standards of the National Association of Securities Dealers,
and possess the financial sophistication required by such charter and rules. The
Audit Committee held six (6) meetings during the fiscal year 2002.

Management is responsible for the Corporation's internal controls and the
financial reporting process. The Corporation's independent accountants are
responsible for performing an independent audit of the Corporation's financial
statements in accordance with generally accepted auditing standards and issuing
a report on those financial statements. The Audit Committee is responsible for
monitoring and overseeing these processes. As appropriate, the Audit Committee
reviews and evaluates, and discusses with the Corporation's management,
financial and accounting personnel and the independent auditors, the following:

- the plan for, and the independent auditors' report on, each audit of the
Corporation's financial statements;

- the Corporation's financial disclosure documents, including all financial
statements and reports filed with the Securities and Exchange Commission
or sent to shareholders;

- management's selection, application and disclosure of critical accounting
policies;

- changes in the Corporation's accounting practices, principles, controls
or methodologies;

- significant risks and exposures and the steps management has taken to
minimize such risks and exposures to the Corporation;

- significant developments or changes in accounting rules applicable to the
Corporation; and

- the adequacy of the Corporation's internal controls, and financial and
accounting personnel.

The Audit Committee reviewed the Corporation's audited financial statements
for the fiscal year ended June 30, 2002, and discussed these financial
statements with the Corporation's management. Management represented to the
Audit Committee that the Corporation's financial statements had been prepared in
accordance with generally accepted accounting principles. The Audit Committee
also reviewed and discussed the audited financial statements and the matters
required by Statement on Auditing Standards 61 (Communication with Audit
Committees), with the Corporation's independent auditors. SAS 61 requires the
Corporation's independent auditors to discuss with the Corporation's Audit
Committee, among other things, the following:

- methods to account for significant unusual transactions;

- the initial selection of and changes in significant accounting policies;

- the effect of significant accounting policies in controversial or
emerging areas for which there is a lack of authoritative guidance or
consensus;

- the process used by management in formulating particularly sensitive
accounting estimates and the basis for the auditors' conclusions
regarding the reasonableness of those estimates;

- adjustments arising from the audit that in the auditor's judgment have a
significant effect on the Corporation's financial reporting; and

- disagreements with management over the application of accounting
principles, the basis for management's accounting estimates and the
disclosures in the financial statements.
15

The Corporation's independent auditors also provided the Audit Committee
with the written disclosures and the letter required by Independence Standards
Board Standard No. 1 (Independence Discussions with Audit Committees).
Independence Standards Board Standard No. 1 requires auditors annually to
disclose in writing all relationships that in the auditor's professional opinion
may reasonably be thought to bear on independence, confirm their perceived
independence and engage in a discussion of independence. In addition, the Audit
Committee discussed with the independent auditors their independence from the
Corporation.

Based on its discussions with management and the independent auditors, and
its review of the representations and information provided by management and the
independent auditors, the Audit Committee recommended to the Corporation's Board
of Directors that the audited financial statements be included in the
Corporation's Annual Report on Form 10-K for the year ended June 30, 2002.

Management has advised us that for the year ended June 30, 2002, the
Corporation was billed by its independent auditors, PricewaterhouseCoopers LLP
("PwC") for services in the following categories:

AUDIT FEES: PwC billed the Corporation an aggregate of $246,465 in fees
for professional services rendered in connection with the audit of the
Corporation's financial statements for the most recent fiscal year and the
reviews of the financial statements included in each of the Corporation's
Quarterly Reports on Form 10-Q during the last fiscal year.

FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES: PwC did not
bill the Corporation for any professional services rendered for the most recent
fiscal year in connection with financial information systems design or
implementation, the operation of the Corporation's information system or the
management of its local area network.

ALL OTHER FEES: PwC billed the Corporation an aggregate of $462,361 for
all other services rendered for the most recent fiscal year. All Other Fees
includes fees for the following routine audit and tax services:

Tax advice and tax return assistance........................ $281,898
Due diligence, accounting and tax advice in support of
acquisitions and other accounting matters................. $180,463

We have considered and determined that the provision of the non-audit
services noted in the foregoing table is compatible with maintaining PwC's
independence.

BY THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF MERCURY COMPUTER SYSTEMS,
INC.
Audit Committee for 2002
Gordon B. Baty, Chairman
Albert P. Belle Isle
Russell K. Johnsen

PERFORMANCE GRAPH

Set forth below is a line graph comparing the cumulative total stockholder
return of the Corporation's Common Stock against the cumulative total return of
the MG Group 810 Diversified Computer Systems Index (consisting of 13 companies)
and the Russell 2000 Index for the period 1/31/98 through 6/30/02. The graph and
table assume that $100 was invested on 1/31/98 in each of the Corporation's
Common Stock, the MG Group 810 Diversified Computer Systems Index, and the
Russell 2000 Index and that all dividends were reinvested. This data was
furnished by Media General Financial Services, Richmond, Virginia.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG MERCURY COMPUTER SYSTEMS, INC.,
RUSSELL 2000 INDEX AND MG GROUP INDEX
[PERFORMANCE GRAPH]

MERCURY COMPUTER
SYSTEMS, INC. MG GROUP INDEX RUSSELL 2000 INDEX
---------------- -------------- ------------------

1/31/98 100.00 100.00 100.00
6/30/98 138.10 108.24 106.61
6/30/99 307.14 230.49 107.19
6/30/00 615.48 274.74 120.96
6/30/01 840.00 184.10 119.89
6/30/02 412.76 106.82 108.12

ASSUMES $100 INVESTED ON JAN. 31, 1998
ASSUMES DIVIDEND REINVESTED

EXECUTIVE OFFICERS

NAME AGE POSITION
---- --- --------

James R. Bertelli......................... 62 President, Chief Executive Officer,
Director and Co-founder

John F. Alexander II...................... 46 Senior Vice President, Chief Financial
Officer and Treasurer

Vincent A. Mancuso........................ 55 Vice President and Director of Government
Electronics Group

Robert Becker............................. 43 Senior Vice President of Operations

Douglas Flood............................. 45 Vice President, Corporate Development

MR. BERTELLI co-founded the Corporation in 1981, and has served as the
Corporation's President, Chief Executive Officer and a Director since that time.
For further information, see "Election of Directors."

MR. ALEXANDER joined the Corporation in April 2002 and has served as the
Corporation's Senior Vice President, Chief Financial Officer and Treasurer since
May 2002. From 1999 to 2002, Mr. Alexander was an independent management
consultant and an adjunct professor at Babson College. From 1982 to 1999, he
held a number of operating and financial positions at EG&G Inc. (subsequently
renamed Perkin Elmer), serving as the company's Corporate Controller from 1991
to 1995 and Chief Financial Officer from 1996 to 1999. Mr. Alexander was
previously employed by Coopers & Lybrand.

MR. MANCUSO joined the Corporation 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. 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 management positions.

MR. BECKER joined the Corporation in May 2001 as Vice President of
Engineering and has served as Senior Vice President of Engineering and
Operations since November 2001. Before joining Mercury Mr. Becker was Vice
President of Engineering at Microtouch Systems (now part of 3M Corporation) from
1998 to 2001. From 1993 to 1998 he was Vice President of Engineering at Picture
Tel Corporation.

MR. FLOOD has served as Vice President, Corporate Development since 1998.
Prior to joining the Corporation, Mr. Flood was Senior Vice President for
Business Development and Planning at FTP Software, Inc. from 1993 to 1998. Mr.
Flood has also held positions at the law firm of Fish & Richardson, Dun &
Bradstreet Corp., and Raytheon Company.

EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by or
paid to the Corporation's Chief Executive Officer and each of the Corporation's
four other most highly compensated executive officers (the "Named Executive
Officers") for the Corporation's three most recent fiscal years ended June 30:

SUMMARY COMPENSATION TABLE

LONG-TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION SECURITIES
--------------------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION SARS(#) COMPENSATION
--------------------------- ---- ---------- --------- ------------ ---------- ------------

James R. Bertelli,.................... 2002 $314,052 $ 45,000 $ 18,048(1) 78,820 $19,965(2)
President and CEO 2001 $352,715 $245,443 $ 18,169(1) 42,381 $21,771(3)
2000 $332,750 $241,620 $ 8,451(1) 30,104 $26,187(4)

G. Mead Wyman,........................ 2002 $198,360 $ 23,690 $ 14,667(1) 8,210 $15,046(5)
Senior Vice President, 2001 $214,000 $137,435 $ 14,890(1) 14,000 $16,075(6)
Treasurer and CFO* 2000 $200,000 $ 92,086 $ 2,398(1) 26,000 $16,795(7)

Vincent A. Mancuso,................... 2002 $165,456 --+ $ 16,268(1) 20,680 $18,345(8)
Vice President and Director 2001 $178,500 $ 75,708 $ 16,887(1) 7,000 $17,347(9)
of Government Electronics Group 2000 $170,000 $117,975 $ 2,596(1) 18,000 $12,042(10)

Douglas Flood,........................ 2002 $173,564 $ 18,137 $ 14,667(1) 12,810 $22,212(11)
Vice President, Corporate
Development 2001 $187,250 $104,446 $ 14,890(1) 10,500 $24,420(12)
2000 $175,000 $ 72,025 $ 2,398(1) 18,000 $ 5,100(13)

Robert Becker,........................ 2002 $186,967 $ 24,188 -- 33,850 $ 9,340(14)
Senior Vice President Engineering
and Operations

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

* Mr. Wyman resigned as Treasurer and Chief Financial Officer effective May
1, 2002 and remained as a Senior Vice President through June 20, 2002.

+ Mr. Mancuso's fiscal year 2002 bonus has not been determined.

(1) Represents automobile allowance and compensation related to automobile
leases provided by the Corporation.

(2) Represents $4,497 matching contribution by the Corporation into Mr.
Bertelli's 401(k) plan for the benefit of Mr. Bertelli, a premium of
$12,686 paid by the Corporation for a split dollar life insurance policy
for the benefit of Mr. Bertelli, and $2,783 paid in connection with tax
preparation fees.

(3) Represents $5,100 matching contribution by the Corporation into Mr.
Bertelli's 401(k) plan for the benefit of Mr. Bertelli, and a premium of
$16,671 paid by the Corporation for a split dollar life insurance policy
for the benefit of Mr. Bertelli.

(4) Represents $5,100 matching contribution by the Corporation into Mr.
Bertelli's 401(k) plan for the benefit of Mr. Bertelli, a premium of
$20,337 paid by the Corporation for a split dollar life insurance policy
for the benefit of Mr. Bertelli, and $750 paid in connection with tax
preparation fees.

(5) Represents $4,859 matching contribution by the Corporation into Mr. Wyman's
401(k) plan for the benefit of Mr. Wyman, and a premium of $10,187 paid by
the Corporation for a split dollar life insurance policy for the benefit of
Mr. Wyman.

(6) Represents $5,100 matching contribution by the Corporation into Mr. Wyman's
401(k) plan for the benefit of Mr. Wyman, and a premium of $10,975 paid by
the Corporation for a split dollar life insurance policy for the benefit of
Mr. Wyman.

(7) Represents $5,100 matching contribution by the Corporation into Mr. Wyman's
401(k) plan for the benefit of Mr. Wyman, and a premium of $11,695 paid by
the Corporation for a split dollar life insurance policy for the benefit of
Mr. Wyman.

(8) Represents $6,633 matching contribution by the Corporation into Mr.
Mancuso's 401(k) plan for the benefit of Mr. Mancuso, and a premium of
$11,712 paid by the Corporation for a split dollar life insurance policy
for the benefit of Mr. Mancuso.

(9) Represents $5,100 matching contribution by the Corporation into Mr.
Mancuso's 401(k) plan for the benefit of Mr. Mancuso, and a premium of
$12,247 paid by the Corporation for a split dollar life insurance policy
for the benefit of Mr. Mancuso.

(10) Represents $5,100 matching contribution by the Corporation into Mr.
Mancuso's 401(k) plan for the benefit of Mr. Mancuso, and a premium of
$6,942 paid by the Corporation for a split dollar life insurance policy for
the benefit of Mr. Mancuso.

(11) Represents $3,072 matching contribution by the Corporation into Mr. Flood's
401(k) plan for the benefit of Mr. Flood and a premium of $19,140 paid by
the Corporation for a split dollar life insurance policy for the benefit of
Mr. Flood.

(12) Represents $5,100 matching contribution by the Corporation into Mr. Flood's
401(k) plan for the benefit of Mr. Flood and a premium of $19,320 paid by
the Corporation for a split dollar life insurance policy for the benefit of
Mr. Flood.

(13) Represents $5,100 matching contribution by the Corporation into Mr. Flood's
401(k) plan for the benefit of Mr. Flood.

(14) Represents $9,340 matching contribution by the Corporation into Mr.
Becker's 401(k) plan for the benefit of Mr. Becker.

STOCK OPTION AND STOCK PURCHASE PLANS

The Corporation had in effect its 1998 Stock Option Plan for Non-Employee
Directors (the "1998 Plan"), which was terminated in August 2001, no options
having been granted under such Plan in 2001; however, certain persons continue
to hold options to purchase shares of common stock granted under the 1998 Plan.
Additionally, the Corporation has in effect its 1997 Employee Stock Purchase
Plan, 1997 Stock Option Plan, 1993 Stock Option Plan for Non-Employee Directors,
1991 Stock Option Plan, and 1982 Stock Option Plan (together with the 1998 Plan,
collectively the "Stock Option and Purchase Plans"). The Corporation is no
longer permitted to grant options under its 1982 Stock Option Plan, its 1993
Stock Option Plan for Non-Employee Directors, or its 1998 Stock Option Plan for
Non-Employee Directors; however, certain persons continue to hold options to
purchase shares of common stock granted under such plans. The Compensation
Committee of the Board of Directors is responsible for the administration and
interpretation of the Stock Option and Purchase Plans. Copies of the Stock
Option and Purchase Plans are available from the Clerk of the Corporation upon
request.

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, 2002. The Corporation did not issue any stock appreciation rights
("SARs") during the three most recent fiscal years ended June 30, 2002.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTION/SARS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTION/SARS EMPLOYEES IN PRICE -----------------------------
NAME GRANTED(#) FISCAL YEAR(%) ($/SHARE) DATE 5%($) 10%($)
---- ----------- ----------------- --------- -------- ------------- -------------

James R. Bertelli(2)..... 19,738 1.7686% $25.37 9/6/01 $ 314,921 $ 798,071
8,820 0.7903% $25.55 9/10/01 141,722 359,151
50,262 4.5037% $37.15 10/15/01 1,174,293 2,975,889

G. Mead Wyman(3)......... 3,210 0.2876% $25.55 9/10/01 51,579 130,712
5,000 0.4480% $37.15 10/15/01 116,817 296,038

Vincent A. Mancuso (4)... 2,680 0.2401% $25.55 9/10/01 43,063 109,130
18,000 1.6129% $37.15 10/15/01 420,542 1,065,736

Douglas Flood (5)........ 2,810 0.2518% $25.55 9/10/01 45,152 114,424
10,000 0.8960% $37.15 10/15/01 233,634 592,075

Robert Becker (6)........ 2,850 0.2554% $25.55 9/10/01 45,795 116,052
15,000 1.3441% $37.15 10/15/01 350,452 888,113
16,000 1.4337% $29.80 4/15/02 299,857 759,896

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

(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 Corporation's estimate or projection of
future Common Stock prices.

(2) No options were exercisable at June 30, 2002. Options vest as to 19,738
shares in increments of 6,579 shares on September 6 in each of 2002, 2003,
and 2004; 8,820 shares in increments of 4,410 on September 10 in each of
2002 and 2003 and 50,262 shares in increments of 12,565 shares on October 15
in each of 2002, 2003, 2004 and 2005 so long as Mr. Bertelli's employment
with the Corporation has not been terminated.

(3) No options were exercisable at June 30, 2002.

(4) No options were exercisable at June 30, 2002. Options vest as to 2,680
shares in increments of 1,340 shares on September 10 in each of 2002 and
2003 and 18,000 shares in increments of 4,500 on each of 2002, 2003, 2004
and 2005 so long as Mr. Mancuso's employment with the Corporation has not
been terminated.

(5) No options were exercisable at June 30, 2002. Options vest as to 10,000
shares in increments of 2,500 shares on October 15 in each of 2002, 2003,
2004 and 2005 so long as Mr. Flood's employment with the Corporation has not
been terminated.

(6) No options were exercisable at June 30, 2002. Options vest as to 2,850
shares in increments of 1,425 shares on September 10 in each of 2002 and
2003; 15,000 shares in increments of 3,750 shares on October 15 in each of
2002, 2003, 2004 and 2005; and 16,000 shares in increments of 5,333 shares
on April 15 in each of 2003, 2004 and 2005 so long as Mr. Becker's
employment with the Corporation has not been terminated.

OPTIONS GRANTED SUBSEQUENT TO JUNE 30, 2002

During 2002, the Compensation Committee and the Board of Directors changed
the timing of granting stock options for directors, officers and employees to
the first board meeting following the close of the Corporation's fiscal year. As
a result, from July 31, 2002 through August 5, 2002 the following stock options
were granted to Directors, Officers and others:

INDIVIDUAL SHARES EXERCISE PRICE
---------- ------- -----------------

Gordon A. Baty................................... 6,000 $19.48
Albert P. Belle Isle............................. 6,000 $19.48
Robert D. Becker................................. 38,000 $19.01
James A. Dwyer................................... 6,000 $19.48
James R. Bertelli................................ 115,000 $16.45
Russell Johnson.................................. 6,000 $19.48
Vincent A. Mancuso............................... 11,248 $19.01
Sherman Mullin................................... 6,000 $19.48
Melvin Sallen.................................... 6,000 $19.48
Others........................................... 562,852 $16.45 to $19.48
-------
Total............................................ 763,100
=======

AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND 6/30/02 OPTION VALUES

The following table provides information on option exercises and on the
value of the Named Executive Officers' unexercised options at June 30, 2002.

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS EAT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------

James R. Bertelli...... 0 $ 0 125,400 118,157 $1,657,805 $93,322
G. Mead Wyman.......... 94,000 2,209,870 16,500 35,710 0 52,300
Vincent A. Mancuso..... 17,500 488,404 24,850 36,530 317,900 20,920
Douglas Flood.......... 0 0 21,125 71,685 169,050 507,150
Robert Becker.......... 0 0 6,000 51,850 0 0

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

(1) Value of unexercised in-the-money stock options represents the difference
between the exercise prices of the stock options and the closing price of
the Corporation's Common Stock on The Nasdaq National Market on June 30,
2002.

(2) Value realized on exercise represents the difference between the exercise
prices of stock options exercised and the trading price of the Corporation's
Common Stock on The Nasdaq National Market on the date of such exercise.

OTHER MATTERS

Independent Public Accountants. The Board of Directors has appointed
PricewaterhouseCoopers LLP as independent auditors to examine the consolidated
financial statements of the Corporation and its subsidiaries for the fiscal year
ended June 30, 2003. A representative of PricewaterhouseCoopers LLP is expected
to be present at the Meeting and will have the opportunity to make a statement
if he or she so desires and to respond to appropriate questions. The engagement
of PricewaterhouseCoopers LLP was approved by the Board of Directors at the
recommendation of the Audit Committee of the Board of Directors.

Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of
the Securities Exchange Act of 1934 requires the Corporation's officers and
Directors and persons beneficially owning more than 10% of the outstanding
Common Stock of the Corporation to file reports of beneficial ownership and
changes in beneficial ownership with the Securities and Exchange Commission
("SEC"). Officers, Directors, and greater than 10% beneficial owners of Common
Stock are required by SEC regulation to furnish the Corporation with copies of
all Section 16(a) forms they file.

Based solely on copies of such forms furnished as provided above, or
written representations that no Forms 5 were required, the Corporation believes
that during the fiscal year ended June 30, 2002, all Section 16(a) filing
requirements applicable to its officers, Directors, and beneficial owners of
greater than 10% of its Common Stock were complied with, except that through
inadvertence, (i) the Forms 5 reporting option grants for each of the following
individuals was not timely filed: James R. Bertelli, three grants; Vincent
Mancuso, one grant; Gordon Baty, one grant; Albert Belle Isle, one grant;
Sherman Mullin, one grant; James Dwyer, two grants; Russell Johnson, two grants;
Douglas Flood, one grant; and Robert Becker, one grant was not timely reported;
(ii) the Form 3 for Robert Becker; and (iii) a Form 4 for Mead Wyman regarding
two transactions was not timely filed. The Corporation has since rectified this
process.

Deadlines for Submission of Stockholder Proposals. Under regulations
adopted by the Securities and Exchange Commission, any proposal submitted for
inclusion in the Corporation's Proxy Statement relating to the Annual Meeting of
Stockholders to be held in 2003 must be received at the Corporation's principal
executive offices in Chelmsford, Massachusetts on or before June 20, 2003.
Receipt by the Corporation of any such proposal from a qualified stockholder in
a timely manner will not ensure its inclusion in the proxy material because
there are other requirements in the proxy rules for such inclusion. Stockholders
interested in submitting such a proposal are advised to contact knowledgeable
counsel with regards to the detailed requirements of such securities rules. In
accordance with the provisions of Rule 14a-4(c) promulgated under the Securities
Exchange Act of 1934, if the Corporation does not receive notice of a
stockholder proposal to be raised at its 2003 Annual Meeting of Stockholders on
or before September 3, 2003, then in such event, the proxies shall be allowed to
use their discretionary voting authority when the proposal is raised at the 2003
Annual Meeting of Stockholders.

In addition to the Securities and Exchange Commission requirements
regarding stockholder proposals, the Corporation's By-Laws contain provisions
regarding matters to be brought before stockholder meetings. If stockholder
proposals, including proposals regarding the election of Director, are to be
considered at the 2003 Annual Meeting of Stockholders, notice of them whether or
not they are included in the Corporation's proxy statement and form of proxy
must be given by personal delivery or by United States mail, postage prepaid, to
the Clerk of the Corporation on or before August 2, 2003.

Other Matters. Management knows of no matters which may properly be and
are likely to be brought before the meeting other than the matters discussed
herein. However, if any other matters properly come before the meeting, the
persons named in the enclosed proxy will vote in accordance with their best
judgment.

EXPENSES AND SOLICITATION

The cost of solicitation of proxies will be borne by the Corporation, and
in addition to soliciting stockholders by mail through its regular employees,
the Corporation may request banks, brokers, and other custodians, nominees and
fiduciaries to solicit their customers who have stock of the Corporation
registered in the names of a nominee, and, if so, will reimburse such banks,
brokers and other custodians, nominees and fiduciaries for their reasonable
out-of-pocket costs. Solicitation by officers and employees of the Corporation
may also be made of some stockholders in person or by mail, telephone or
telegraph following the original solicitation. The Corporation may retain a
proxy solicitation firm to aid in soliciting proxies from its stockholders. The
fees of such firm are not expected to exceed $10,000 plus reimbursement for
out-of-pocket expenses.

10-K REPORT

THE CORPORATION WILL PROVIDE EACH BENEFICIAL OWNER OF ITS SECURITIES WITH A
COPY OF AN ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND
SCHEDULES THERETO, REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION FOR THE CORPORATION'S MOST RECENT FISCAL YEAR, WITHOUT CHARGE, UPON
RECEIPT OF A WRITTEN REQUEST FROM SUCH PERSON. SUCH REQUEST SHOULD BE SENT TO
MR. JOHN F. ALEXANDER II, CHIEF FINANCIAL OFFICER, MERCURY COMPUTER SYSTEMS,
INC., 199 RIVERNECK ROAD, CHELMSFORD, MASSACHUSETTS 01824.

VOTING PROXIES

The Board of Directors recommends an affirmative vote on all proposals
specified. Proxies will be voted as specified. If signed proxies are returned
without specifying an affirmative or negative vote on any proposal, the shares
represented by such proxies will be voted in favor of the Board of Directors'
recommendations.

By order of the Board of Directors

/s/ Anthony J. Medaglia, Jr.
ANTHONY J. MEDAGLIA, JR., Clerk

Chelmsford, Massachusetts
October 17, 2002

EXHIBIT A
AUDIT COMMITTEE CHARTER
PURPOSE

The primary purpose of the Audit Committee (the "Committee") is to assist
the Board of Directors (the "Board") in fulfilling its responsibility to oversee
management's conduct of the Company's financial reporting process, including by
overviewing the financial reports and other financial information provided by
the Company's systems of internal accounting and financial controls, and the
annual independent audit of the Company's financial statements.

In discharging its oversight role, the Committee is empowered to
investigate any matter brought to its attention with full access to all books,
records, facilities and personnel of the Company and the power to retain outside
counsel, auditors or other experts for this purpose. The Board and the Committee
are in place to represent the Company's shareholders; accordingly, the outside
auditor is ultimately accountable to the Board and the Committee.

The Committee shall review the adequacy of this Charter on an annual basis.

MEMBERSHIP

The Committee shall be comprised of not less than three members of the
Board. The members of the Committee shall meet the independence and experience
requirements of applicable statutes and regulations, including the requirements
of NASDAQ.

KEY RESPONSIBILITIES

The Committee's job is one of oversight and it recognizes that the
Company's management is responsible for preparing the Company's financial
statements and that the outside auditors are responsible for auditing those
financial statements. Additionally, the Committee recognizes that financial
management, as well as the outside auditors, have more time, knowledge and more
detailed information on the Company than do Committee members; consequently, in
carrying out its oversight responsibilities, the Committee is not providing any
expert or special assurance as to the Company's financial statements or any
professional certification as to the outside auditor's work.

The following functions shall be the common recurring activities of the
Committee in carrying out its oversight function. These functions are set forth
as a guide with the understanding that the Committee may diverge from this guide
as appropriate given the circumstances.

- The Committee shall review with management and the outside auditors the
audited financial statements to be included in the Company's Annual
Report on Form 10-K (or the Annual Report to Shareholders if distributed
prior to the filing of Form 10-K) and review and consider with the
outside auditors the matters required to be discussed by Statement of
Auditing Standards ("SAS") No. 61, to assist the Committee in fulfilling
its oversight responsibilities.

- As a whole, or through the Committee chair, the Committee shall review
with the outside auditors the matters (if any) required to be discussed
by SAS No. 61 in connection with the interim financial reviews conducted
by the outside auditors to assist the Committee in fulfilling its
oversight responsibilities; this review will occur prior to the Company's
filing of the Form 10-Q.

- The Committee shall receive from time to time the outside auditor reports
concerning:

- all critical accounting policies and practices to be used;

A-1

- all alternative treatments of financial information within generally
accepted accounting principles that have been discussed with
management of the Company, ramifications of the use of such
alternative disclosures and treatments, and the treatment preferred
by the registered public accounting firm; and

- other material written communications between the registered public
accounting firm and the management of the Company, such as any
management letter or schedule of unadjusted differences.

- The Committee shall discuss with management and the outside auditors:

- the accounting policies of the Company which may be viewed as
critical; the nature and extent of any significant changes in
accounting principles or the application thereof; significant
judgment areas; significant risks and exposures and the steps
management has taken to minimize such risks to the Company; and the
quality and adequacy of the Company's internal controls, accounting
policies and estimates.

- the terms and effects of any transactions with parties related to
the Company which are significant in size or which involve terms or
other aspects which differ from those which would likely be
negotiated with an unaffiliated third party and which are material
to an understanding of the Company's financial statements.

- the nature of any off-balance sheet structures, including financing
arrangements, and their potential impact on the Company and its
financial statements.

- The Committee shall:

- request from the outside auditors annually, a formal written
statement delineating all relationships between the auditor and the
Company consistent with Independence Standards Board Standard Number
1;

- discuss with the outside auditors any such disclosed relationships
and their impact on the outside auditor's independence;

- take appropriate action to oversee the independence of the outside
auditor.

- preapprove all auditing and non-audit services provided to the
Company by the outside auditor. The Committee may delegate to one or
more of its members the authority to grant such preapprovals.
Preapprovals granted by any such delegate shall be presented to the
full Committee at its next scheduled meeting.

- establish procedures for:

- the receipt, retention, and treatment of complaints received by
the Company regarding accounting, internal accounting controls,
or auditing matters; and

- the confidential, anonymous submission by employees of the
Company of concerns regarding questionable accounting or auditing
matters.

- The Committee shall have sole authority to appoint or replace the
outside auditor, to determine all compensation to be paid to the
outside auditor and to oversee the work of the outside auditor
(including resolution of disagreements between management and the
outside auditor regarding financial reporting). The outside
auditor shall report directly to the Committee.

A-2

- The Committee will prepare the report required by the rules of
the Securities and Exchange Commission to be included in the
Company's annual proxy statement, commencing with the proxy
statement for the 2001 Annual Meeting.

- Based on the criteria set forth in Item 306(a) of Regulation S-K
and, if so determined by the Committee, recommend to the Board of
Directors that the audited financial statements for each fiscal
year be included in the Company's Annual Report on Form 10-K in
respect of such year.

- The Committee shall conduct an appropriate review of all related
party transactions on an ongoing basis and the approval of the
Committee shall be required for all related party transactions.
The term related party transaction shall have the meaning
ascribed to it for purposes of Rule 4350(h) of NASDAQ.

- The Committee shall have the authority to engage and determine
financing for independent counsel and other advisers as it
determines necessary to carry out its duties.

- The Committee will perform such other functions as may be required by
law, the Company's Certificate of Incorporation or its By-Laws.

Adopted by the Board of Directors September 20, 2002

A-3

MERCURY COMPUTER SYSTEMS, INC.
SPECIAL MEETING IN LIEU OF
ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 19, 2002

The undersigned hereby appoints James R. Bertelli and Anthony J. Medaglia, Jr.,
and each of them, with full power of substitution, proxies to represent the
undersigned at the Special Meeting in Lieu of the 2002 Annual Meeting of
Stockholders of Mercury Computer Systems, Inc. to be held on November 19, 2002
at 10:00 a.m. at the Boston Museum of Science, Science Park, Boston,
Massachusetts, and at any adjournment or adjournments thereof, to vote in the
name and place of the undersigned, with all powers which the undersigned would
possess if personally present, upon such business as may properly come before
the meeting including the proposals as set forth on the reverse side of this
Proxy Card.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THE BOARD
RECOMMENDS AN AFFIRMATIVE VOTE ON ALL PROPOSALS SPECIFIED. SHARES WILL BE VOTED
AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED WILL BE VOTED
IN FAVOR OF THE PROPOSALS.

PLEASE VOTE, DATE, AND SIGN THIS PROXY IN THE SPACE PROVIDED AND RETURN IN THE
ENCLOSED ENVELOPE, WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON.

Please sign exactly as your name(s) appear(s) on the Proxy. When shares are held
by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.

HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?

{Top half of Proxy Card}

(X) PLEASE MARK VOTES AS IN THIS EXAMPLE.

MERCURY COMPUTER SYSTEMS, INC.

1. Election of Directors:

NOMINEES: (01) Dr. Gordon R. Baty

(2) Mr. Sherman N. Mullin

FOR WITHHELD
[ ] [ ]

[ ] _________________________________________
For all nominees except as noted above.

2. Authorization to amend the Mercury Computer Systems, Inc. 1997 Stock Option
Plan to increase the number of shares of Common Stock reserved for issuance
thereunder by 1,000,000 shares, from 5,650,000 shares to 6,650,000 shares.

FOR AGAINST ABSTAIN
[ ] [ ] [ ]

3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Meeting.

Mark box at right if an address change or comment has
been noted on the reverse side of this card. [ ]

MARK HERE IF YOU PLAN TO ATTEND THE MEETING [ ]

PLEASE BE SURE TO DATE AND SIGN THIS PROXY.

Signature: _____________ Date: ________ Signature: ______________ Date: ________

DETACH CARD DETACH CARD DETACH CARD

{Bottom half of Proxy Card}

MERCURY COMPUTER SYSTEMS, INC.
C/O EQUISERVE
P.O. BOX 43068
PROVIDENCE, RI 02940

Dear Stockholder:

Please take note of the important information enclosed with this Proxy Card.
There are a number of issues related to the management of your company that
require your immediate attention and approval. These are discussed in detail in
the enclosed proxy materials.

Your vote counts, and you are strongly encouraged to exercise your right to vote
your shares.

Please mark the boxes on this Proxy Card to indicate how your shares will be
voted. Then sign the card, detach it, and return your proxy vote in the enclosed
postage paid envelope.

Your vote must be received prior to the Special Meeting of Stockholders on
November 19, 2002.

Thank you in advance for your prompt consideration of these matters.

Sincerely,

Mercury Computer Systems, Inc.

MERCURY COMPUTER SYSTEMS, INC.
1997 STOCK OPTION PLAN

1. PURPOSE OF THE PLAN.

This stock option plan (the "Plan") is intended to encourage ownership
of the stock of Mercury Computer Systems, Inc. (the "Company") by employees and
advisors of the Company and its subsidiaries, to induce qualified personnel to
enter and remain in the employ of the Company or its subsidiaries and otherwise
to provide additional incentive for optionees to promote the success of its
business.

2. STOCK SUBJECT TO THE PLAN.

(a) The maximum number of shares of common stock, par value $.01 per
share, of the Company (the "Common Stock") for which options may be granted
under this Plan shall be six million six hundred fifty thousand (6,650,000)
shares. The maximum number of shares of Common Stock available for granting
incentive stock options under this Plan shall be six million six hundred fifty
thousand (6,650,000) shares. These limitations and all other limitations on the
number of shares referenced in this Plan shall be subject to adjustment as
provided in Section 12 of the Plan. Shares issued under the Plan may be
authorized but unissued shares of Common Stock, or shares of Common Stock held
in treasury by the Company.

(b) If an option granted hereunder shall expire or terminate for any
reason without having vested fully or having been exercised in full, the
unvested and/or unpurchased shares subject thereto shall again be available for
subsequent option grants under the Plan.

(c) Stock issuable upon exercise of an option granted under the Plan
may be subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Committee.

3. ADMINISTRATION OF THE PLAN.

The Plan shall be administered by a committee (the "Committee")
consisting of two or more members of the Company's Board of Directors. The
selection of persons for participation in the Plan and all decisions concerning
the timing, pricing and amount of any grant or award under the Plan shall be
made solely by the Committee. The Board of Directors may from time to time
appoint a member or members of the Committee in substitution for or in addition
to the member or members then in office and may fill vacancies on the Committee
however caused. The Committee shall choose one of its members as Chairman and
shall hold meetings at such times and places as it shall deem advisable. A
majority of the

members of the Committee shall constitute a quorum and any action may be taken
by a majority of those present and voting at any meeting. Any action may also be
taken without the necessity of a meeting by a written instrument signed by a
majority of the Committee. The decision of the Committee as to all questions of
interpretation and application of the Plan shall be final, binding and
conclusive on all persons. The Committee shall have the authority to adopt,
amend and rescind such rules and regulations as, in its opinion, may be
advisable in the administration of the Plan. The Committee may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement granted hereunder in the manner and to the extent it shall
deem expedient to carry the Plan into effect and shall be the sole and final
judge of such expediency. No Committee member shall be liable for any action or
determination made in good faith.

4. TYPE OF OPTIONS.

Options granted pursuant to the Plan shall be authorized by action of
the Committee and may be designated as either incentive stock options meeting
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or non-qualified options which are not intended to meet the
requirements of such Section 422 of the Code, the designation to be in the sole
discretion of the Committee. The Plan shall be administered by the Committee in
such manner as to permit options to qualify as incentive stock options under the
Code.

5. ELIGIBILITY.

Options designated as incentive stock options shall be granted only to
employees (including officers and directors who are also employees) of the
Company and any of its subsidiaries. Options designated as non-qualified options
may be granted to officers, directors, employees, consultants, and advisors of
the Company or of any of its subsidiaries. "Subsidiary" or "subsidiaries" shall
be as defined in Section 424 of the Code and the Treasury Regulations
promulgated thereunder (the "Regulations") and shall include present and future
subsidiaries.

The Committee shall, from time to time, at its sole discretion, select
from such eligible individuals those to whom options shall be granted and shall
determine the number of shares to be subject to each option. In determining the
eligibility of an individual to be granted an option, as well as in determining
the number of shares to be granted to any individual, the Committee in its sole
discretion shall take into account the position and responsibilities of the
individual being considered, the nature and value to the Company or its
subsidiaries of his or her service and accomplishments, his or her present and
potential contribution to the success of the Company or its subsidiaries, and
such other factors as the Committee may deem relevant.

- 2 -

No option designated as an incentive stock option shall be granted to
any employee of the Company or any subsidiary if such employee owns, immediately
prior to the grant of an option, stock representing more than 10% of the
combined voting power of all classes of stock of the Company or a parent or a
subsidiary, unless the purchase price for the stock under such option shall be
at least 110% of its fair market value at the time such option is granted and
the option, by its terms, shall not be exercisable more than five years from the
date it is granted. In determining the stock ownership under this paragraph, the
provisions of Section 424(d) of the Code shall be controlling. In determining
the fair market value under this paragraph, the provisions of Section 7 hereof
shall apply.

The maximum number of shares of the Company's Common Stock with respect
to which an option or options may be granted to any employee in any one taxable
year of the Company shall not exceed 200,000 shares, taking into account shares
granted during such taxable year under options that are terminated or repriced.

6. OPTION AGREEMENT.

(a) Each option shall be evidenced by an option agreement (the
"Agreement") duly executed on behalf of the Company and by the optionee to whom
such option is granted, which Agreement shall comply with and be subject to the
terms and conditions of the Plan. The Agreement may contain such other terms,
provisions and conditions which are not inconsistent with the Plan as may be
determined by the Committee, provided that options designated as incentive stock
options shall meet all of the conditions for incentive stock options as defined
in Section 422 of the Code. The date of grant of an option shall be as
determined by the Committee. More than one option may be granted to an
individual.

(b) Unless the Agreement specifies otherwise, the Committee may cancel,
rescind, suspend, withhold or otherwise limit or restrict any option (whether
vested or unvested, exercised or unexercised) at any time if the optionee is not
in compliance with all applicable provisions of the Agreement and the Plan, or
if the optionee engages in any "Detrimental Activity." For purposes of this
Section 6, "Detrimental Activity" shall include: (i) the rendering of services
for any organization or engaging directly or indirectly in any business which is
or becomes competitive with the Company, or which organization or business, or
the rendering of services to such organization or business, is or becomes
otherwise prejudicial to or in conflict with the interests of the Company; (ii)
the disclosure to anyone outside the Company, or the use in other than the
Company's business, without prior written authorization from the Company, of any
confidential information or material, as defined in the Company's Employee
Confidentiality Agreement or such other agreement regarding confidential
information and intellectual property that the optionee and the Company may
enter into (collectively, the "Confidentiality

- 3 -

Agreement"), relating to the business of the Company, acquired by the optionee
either during or after employment with the Company; (iii) the failure or refusal
to disclose promptly and to assign to the Company, pursuant to the
Confidentiality Agreement or otherwise, all right, title and interest in any
invention or idea, patentable or not, made or conceived by the optionee during
employment by the Company, relating in any manner to the actual or anticipated
business, research or development work of the Company or the failure or refusal
to do anything reasonably necessary to enable the Company to secure a patent
where appropriate in the United States and in other countries; (iv) activity
that results in termination of the optionee's employment for cause; (v) a
material violation of any rules, policies, procedures or guidelines of the
Company; (vi) any attempt directly or indirectly to induce any employee of the
Company to be employed or perform services elsewhere or any attempt directly or
indirectly to solicit the trade or business of any current or prospective
customer, supplier or partner of the Company; or (vii) the optionee being
convicted of, or entering a guilty plea with respect to, a crime, whether or not
connected with the Company.

(c) Upon exercise, payment, or delivery pursuant to an option, the
optionee shall certify in a manner acceptable to the Company that he or she is
in compliance with the terms and conditions of the Plan. In the event an
optionee engages in any Detrimental Activity as set forth in paragraphs
(b)(i)-(viii) of this Section 6 prior to, or during the six (6) months after,
any exercise, payment, or delivery pursuant to an option, such exercise,
payment, or delivery may be rescinded by the Company within two (2) years
thereafter. In the event of any such rescission, the optionee shall pay to the
Company the amount of any gain realized or payment received as a result of the
rescinded exercise, payment, or delivery, in such manner and on such terms and
conditions as may be required, and the Company shall also be entitled to set-off
against the amount of any such gain any amount owed to the optionee by the
Company, and to be reimbursed for any attorney's fees or other costs or expenses
incurred in enforcing this Section 6 of the Plan.

7. OPTION PRICE.

The option price or prices of shares of the Company's Common Stock for
options designated as non-qualified stock options shall be determined by the
Committee, but in no event shall the option price of a non-qualified stock
option be less than 100% of the fair market value of such Common Stock at the
time the option is granted, as determined by the Committee. The option price or
prices of shares of the Company's Common Stock for incentive stock options shall
be not less than the fair market value of such Common Stock at the time the
option is granted as determined by the Committee in accordance with the
Regulations promulgated under Section 422 of the Code. If the shares of Common
Stock are listed on any

- 4 -

national securities exchange, or traded on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") National
Market System, the fair market value of a share of Common Stock on the date of
grant of an option shall be the closing price, if any, on the largest such
exchange, or if not traded on an exchange, the Nasdaq National Market System on
such day, or if the date of grant is not a business day, the business day
immediately preceding the date of the grant, or if there are no sales of shares
of Common Stock on the date of grant or on the business day immediately
preceding the date of grant, the fair market value of a share of Common Stock
shall be determined by taking a weighted average of the means between the
highest and lowest sales on the nearest date before and the nearest date after
the date of grant in accordance with Treasury Regulations Section 25.2512-2. If
the shares are not then either listed on any such exchange or quoted in
NASDAQ/NM, the fair market value shall be the mean between the average of the
"Bid" and the average of the "Ask" prices, if any, as reported in the National
Daily Quotation Service for the date of grant, or if the date of grant is not a
business day the business day immediately preceding the date of the grant of the
option, or, if none, shall be determined by taking a weighted average of the
means between the highest and lowest sales prices on the nearest date before and
the nearest date after the date of grant in accordance with Treasury Regulations
Section 25.2512-2. If the fair market value cannot be determined under the
preceding two sentences, it shall be determined in good faith by the Committee.

8. MANNER OF PAYMENT; MANNER OF EXERCISE.

(a) Options granted under the Plan may provide for the payment of the
exercise price, as determined by the Committee and set forth in the Option
Agreement, by delivery of (i) cash or a check payable to the order of the
Company in an amount equal to the exercise price of such options, (ii) 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, (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 if such payment does not result in a charge to
earnings for financial accounting purposes as determined by the Committee, or
(iv) payment may also be made by delivery of a properly executed exercise notice
to the Company, together with a copy of irrevocable instruments to a broker to
deliver promptly to the Company the amount of sale or loan proceeds to pay the
exercise price. The fair market value of any shares of the Company's Common
Stock which may be delivered upon exercise of an option shall be determined by
the Committee in accordance with Section 7 hereof. To facilitate clause (iv)
above, the Company may enter into agreements for coordinated procedures with one
or more brokerage firms. The date of exercise shall be the date of delivery of
such exercise notice.

- 5 -

(b) To the extent that the right to purchase shares under an option has
accrued and is in effect, options may be exercised in full at one time or in
part from time to time, by giving written notice, signed by the person or
persons exercising the option, to the Company, stating the number of shares with
respect to which the option is being exercised, accompanied by payment in full
for such shares as provided in subparagraph (a) above. Upon such exercise,
delivery of a certificate for paid-up non-assessable shares shall be made at the
principal office of the Company to the person or persons exercising the option
at such time, during ordinary business hours, after 9:00 a.m. but not more than
thirty (30) days from the date of receipt of the notice by the Company, as shall
be designated in such notice, or at such time, place and manner as may be agreed
upon by the Company and the person or persons exercising the option. Upon
exercise of the option and payment as provided above, the optionee shall become
a stockholder of the Company as to the Shares acquired upon such exercise.

9. VESTING OF OPTIONS.

Except as otherwise provided in an optionee's Agreement, each
option granted under the Plan shall, subject to Section 10 and Section 12
hereof, be exercisable with reference to the option's Vesting Reference Date
(the date selected by the Committee) as follows: prior to the First Anniversary
Date of the Vesting Reference Date - zero percent (0%); on the First Anniversary
Date of the Vesting Reference Date - twenty five percent (25%); on the Second
Anniversary Date of the Vesting Reference Date - fifty percent (50%); on the
Third Anniversary Date of the Vesting Reference Date - seventy-five percent
(75%); and on the Fourth Anniversary Date of the Vesting Reference Date - one
hundred percent (100%). Notwithstanding any other provisions of this section, in
the event of a Change of Control (as hereinafter defined) of the Company, fifty
percent (50%) of the unvested shares of each Participant with a minimum of six
months' service will automatically be fully Vested; in the event of a Change of
Control of the Company not approved by the Board of Directors prior to such
Change of Control, all of the Shares shall be fully Vested immediately upon such
Change of Control. For purposes of the Plan, a "Change of Control" shall be
deemed to have occurred if any of the following conditions have occurred: (1)
the merger or consolidation of the Company with another entity where the Company
is not the surviving entity and where after the merger or consolidation (i) its
stockholders prior to the merger or consolidation hold less than 50% of the
voting stock of the surviving entity and (ii) its Directors prior to the merger
or consolidation are less than a majority of the Board of the surviving entity;
(2) the sale of all or substantially all of the Company's assets to a third
party and subsequent to the transaction (i) its stockholders hold less than 50%
of the stock of said third party and (ii) its Directors are less than a majority
of the Board of said third party; (3) a transaction or series of related
transactions, including a

- 6 -

merger of the Company with another entity where the Company is the surviving
entity, whereby 50% or more of the voting stock of the Company is transferred to
parties who are not prior thereto stockholders or affiliates of the Company; or
(4) the Continuing Directors shall not constitute a majority of the Board of
Directors of the Company. The term "Continuing Directors" shall mean a member of
the Board of Directors of the Company who either was a member of the Board of
Directors of the Company on the date this Plan was adopted by the Board of
Directors or who subsequently became a director of the Company and whose initial
appointment, initial election or initial nomination for election by the
Company's shareholders subsequent to such date was approved by a vote of a
majority of the Continuing Directors then on the Board of Directors of the
Company.

To the extent that an option to purchase shares is not
exercised by an optionee when it becomes initially exercisable, it shall not
expire but shall be carried forward and shall be exercisable, on a cumulative
basis, until the expiration of the exercise period. No partial exercise may be
made for less than fifty (50) full shares of Common Stock.

Notwithstanding the foregoing, the Committee may in its
discretion (i) specifically provide for another time or times of exercise (but
not delay a vesting period) or (ii) accelerate the exerciseability of any option
subject to such terms and conditions as the Committee deems necessary and
appropriate.

10. TERM AND EXERCISABILITY OF OPTIONS; RELATIONSHIP TO VESTING;
NON-EMPLOYEE OPTIONS.

(a) TERM AND EXERCISABILITY.

(1) The term of each option shall be as stated in the
optionee's Agreement, provided , however, that the term of an
option shall not exceed ten (10) years from the date of the
granting thereof, subject to earlier termination as provided
in the Plan and the Agreement.

(2) Except as otherwise provided in the optionee's
Agreement, or this Section 10, an option granted to any
employee who ceases to be an employee of the Company or one of
its subsidiaries shall terminate ninety (90) days after the
date of such optionee ceases to be an employee of the Company
or one of its subsidiaries, or on the last day of the term of
the option, whichever occurs first.

(3) Except as otherwise provided in the optionee's
Agreement, if such termination of employment is because of
dismissal for cause or because the employee is in breach of
any employment agreement, such option will terminate on the
date the optionee ceases to be an employee of the Company or
one of its subsidiaries, or on the last day of the term of the
option, whichever occurs first.

- 7 -

(4) Except as otherwise provided in the optionee's
Agreement, if such termination of the employment is because
the optionee has become permanently disabled (within the
meaning of Section 22(e)(3) of the Code), such option shall
terminate on the last day of the twelfth month from the date
such optionee ceases to be an employee, or on the last day of
the term of the option, whichever occurs first.

(5) Except as otherwise provided in the optionee's
Agreement, in the event of the death of an optionee, any
option granted to such optionee shall terminate on the last
day of the twelfth month from the date of death, or on the
last day of the term of the option, whichever occurs first.

(6) Except as otherwise provided in the optionee's
Agreement, if such termination of employment is because of the
retirement of the optionee on or after attaining the minimum
age, completing the minimum number of years of service, and
satisfying of all other conditions specified for retirement
status under the Company's Retirement Policy Statement as in
effect at the time of the grant of the option, such option
will terminate on the date that is five (5) years after the
date the optionee ceases to be an employee of the Company or
one of its subsidiaries, or the last day of the term of the
option, whichever occurs first.

(7) Notwithstanding subparagraphs (2) through (6)
above, the Committee shall have the authority to extend the
expiration date of any outstanding option in circumstances in
which it deems such action to be appropriate.

(b) RELATIONSHIP TO VESTING. Except as otherwise provided in the
optionee's agreement, an option granted to an employee who ceases to be an
employee of the Company or one of its subsidiaries, whether by having become
permanently disabled, as defined in Sedition 22(e)(3) of the Code, by death, or
otherwise, shall be exercisable only to the extent that the right to purchase
shares under such option has vested and accrued on the date that such optionee
ceases to be an employee of the Company or one of its subsidiaries.

(c) NON-EMPLOYEE OPTIONS. The term of an option granted to a
non-employee director, a consultant, or any other person who is not an employee
of the Company or one of its subsidiaries shall be stated in the optionee's
Agreement, provided, however, that the term of an option shall not exceed ten
(10) years from the date of the granting thereof, subject to earlier termination
as provided in the Plan and the Agreement. An option granted to a non-employee
director, a consultant, or any other person who is not an employee of the
Company or one of its subsidiaries shall be exercisable only to the extent so
provided in the optionee's Agreement.

11. OPTIONS NOT TRANSFERABLE.

The right of any optionee to exercise any option granted to him or her
shall not be assignable or transferable by such optionee otherwise than by will
or the laws of descent and distribution, and any such option shall be
exercisable during the lifetime of such optionee only by him; provided, however,
that in

- 8 -

the case of a non-qualified stock option, the Committee may permit
transferability of such options on such terms and conditions as determined by
the Committee and set forth in the Option Agreement. Any option granted under
the Plan shall be null and void and without effect upon the bankruptcy of the
optionee to whom the option is granted, or upon any attempted assignment or
transfer, except as herein provided, including without limitation any purported
assignment, whether voluntary or by operation of law, pledge, hypothecation or
other disposition, attachment, divorce, trustee process or similar process,
whether legal or equitable, upon such option.

12. RECAPITALIZATIONS, REORGANIZATIONS AND THE LIKE.

(a) In the event that the outstanding shares of the Common Stock of the
Company are changed into or exchanged for a different number or kind of shares
or other securities of the Company or of another corporation by reason of any
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, combination of shares, or dividends payable in capital stock,
appropriate adjustment shall be made in the number and kind of shares as to
which options may be granted under the Plan and as to which outstanding options
or portions thereof then unexercised shall be exercisable, to the end that the
proportionate interest of the optionee shall be maintained as before the
occurrence of such event; such adjustment in outstanding options shall be made
without change in the total price applicable to the unexercised portion of such
options and with a corresponding adjustment in the option price per share.

(b) In addition, unless otherwise determined by the Committee in its
sole discretion, in the case of any Change of Control of the Company, the
purchaser(s) of the Company's assets or stock may, in his, her or its
discretion, deliver to the optionee the same kind of consideration that is
delivered to the stockholders of the Company as a result of such sale,
conveyance or Change of Control, or the Committee may cancel all outstanding
options in exchange for consideration in cash or in kind, which consideration in
both cases shall be equal in value to the value of those shares of stock or
other securities the optionee would have received had the option been exercised
(to the extent then exercisable) and no disposition of the shares acquired upon
such exercise been made prior to such Change of Control, less the option price
therefor. Upon receipt of consideration by the optionee, his or her option shall
immediately terminate and be of no further force and effect. The value of the
stock or other securities the optionee would have received if the option had
been exercised shall be determined in good faith by the Committee, and in the
case of shares of the Common Stock of the Company, in accordance with the
provisions of Section 7 hereof. The Committee shall also have the power and
right to accelerate the exercisability of any options, notwithstanding any
limitations in this Plan or in the Agreement upon such Change of Control. Upon

- 9 -

such acceleration, any options or portion thereof originally designated as
incentive stock options that no longer qualify as incentive stock options under
Section 422 of the Code as a result of such acceleration shall be redesignated
as non-qualified stock options.

(c) Upon dissolution or liquidation of the Company, all options granted
under this Plan shall terminate, but each optionee (if at such time in the
employ of or otherwise associated with the Company or any of its subsidiaries)
shall have the right, immediately prior to such dissolution or liquidation, to
exercise his or her option to the extent then exercisable.

(d) No fraction of a share shall be purchasable or deliverable upon the
exercise of any option, but in the event any adjustment hereunder of the number
of shares covered by the option shall cause such number to include a fraction of
a share, such fraction shall be adjusted to the nearest smaller whole number of
shares.

13. NO SPECIAL EMPLOYMENT RIGHTS.

Nothing contained in the Plan or in any option granted under the Plan
shall confer upon any option holder any right with respect to the continuation
of his or her employment by the Company (or any subsidiary thereof) or interfere
in any way with the right of the Company (or any subsidiary thereof), subject to
the terms of any separate employment agreement to the contrary, at any time to
terminate such employment or to increase or decrease the compensation of the
option holder from the rate in existence at the time of the grant of an option.
Whether an authorized leave of absence, or absence in military or government
service, shall constitute termination of employment shall be determined by the
Committee at the time.

14. WITHHOLDING.

The Company's obligation to deliver shares upon the exercise of any
option granted under the Plan and any payments or transfers under Section 12
hereof shall be subject to the option holder's satisfaction of all applicable
Federal, state and local income, excise, employment and any other tax
withholding requirements.

15. RESTRICTIONS ON ISSUE OF SHARES.

(a) Notwithstanding the provisions of Section 8, the Company may delay
the issuance of shares covered by the exercise of an option and the delivery of
a certificate for such shares until one of the following conditions shall be
satisfied:

(1) The shares with respect to which such option has
been exercised are at the time of the issue of such shares effectively
registered or qualified under applicable Federal and state securities acts now
in force or as hereafter amended; or

- 10 -

(2) Counsel for the Company shall have given an opinion,
which opinion shall not be unreasonably conditioned or withheld, that such
shares are exempt from registration and qualification under applicable Federal
and state securities acts now in force or as hereafter amended.

(b) It is intended that all exercises of options shall be effective,
and the Company shall use its best efforts to bring about compliance with the
above conditions within a reasonable time, except that the Company shall be
under no obligation to qualify shares or to cause a registration statement or a
post-effective amendment to any registration statement to be prepared for the
purpose of covering the issue of shares in respect of which any option may be
exercised, except as otherwise agreed to by the Company in writing.

16. PURCHASE FOR INVESTMENT; RIGHTS OF HOLDER ON SUBSEQUENT
REGISTRATION.

Unless the shares to be issued upon exercise of an option granted under
the Plan have been effectively registered under the Securities Act of 1933, as
now in force or hereafter amended, the Company shall be under no obligation to
issue any shares covered by any option unless the person who exercises such
option, in whole or in part, shall give a written representation and undertaking
to the Company which is satisfactory in form and scope to counsel for the
Company and upon which, in the opinion of such counsel, the Company may
reasonably rely, that he or she is acquiring the shares issued pursuant to such
exercise of the option for his or her own account as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares,
and that he or she will make no transfer of the same except in compliance with
any rules and regulations in force at the time of such transfer under the
Securities Act of 1933, or any other applicable law, and that if shares are
issued without such registration, a legend to this effect may be endorsed upon
the securities so issued. In the event that the Company shall, nevertheless,
deem it necessary or desirable to register under the Securities Act of 1933 or
other applicable statutes any shares with respect to which an option shall have
been exercised, or to qualify any such shares for exemption from the Securities
Act of 1933 or other applicable statutes, then the Company may take such action
and may require from each optionee such information in writing for use in any
registration statement, supplementary registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably necessary for such
purpose and may require reasonable indemnity to the Company and its officers and
directors and controlling persons from such holder against all losses, claims,
damages and liabilities arising from such use of the information so furnished
and caused by any untrue statement of any material fact therein or caused by the
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made.

- 11 -

17. MODIFICATION OF OUTSTANDING OPTIONS.

The Committee may authorize the amendment of any outstanding option
with the consent of the optionee when and subject to such conditions as are
deemed to be in the best interests of the Company and in accordance with the
purposes of this Plan.

18. APPROVAL OF STOCKHOLDERS.

The Plan shall be subject to approval by the vote of stockholders
holding at least a majority of the voting stock of the Company present, or
represented, and entitled to vote at a duly held stockholders' meeting, or by
written consent of the stockholders as provided for under applicable state law,
within twelve (12) months after the adoption of the Plan by the Board of
Directors and shall take effect as of the date of adoption by the Board of
Directors upon such approval. The Committee may grant options under the Plan
prior to such approval, but any such option shall become effective as of the
date of grant only upon such approval and, accordingly, no such option may be
exercisable prior to such approval.

19. TERMINATION AND AMENDMENT.

Unless sooner terminated as herein provided, the Plan shall terminate
ten (10) years from the date upon which the Plan was duly adopted by the Board
of Directors of the Company. The Board of Directors may at any time terminate
the Plan or make such modification or amendment thereof as it deems advisable;
provided, however, that except as provided in this Section 19, the Board of
Directors may not, without the approval of the stockholders of the Company
obtained in the manner stated in Section 19, increase the maximum number of
shares for which options may be granted or change the designation of the class
of persons eligible to receive options under the Plan, or make any other change
in the Plan which requires stockholder approval under applicable law or
regulations.

20. RESERVATION OF STOCK.

The Company shall at all times during the term of the Plan reserve and
keep available such number of shares of stock as will be sufficient to satisfy
the requirements of the Plan and shall pay all fees and expenses necessarily
incurred by the Company in connection therewith.

21. LIMITATION OF RIGHTS IN THE OPTION SHARES.

An optionee shall not be deemed for any purpose to be a stockholder of
the Company with respect to any of the options except to the extent that the
option shall have been exercised with respect thereto and, in addition, a
certificate shall have been issued theretofore and delivered to the optionee.

22. NOTICES.

Any communication or notice required or permitted to be given under the
Plan shall be in writing, and mailed by registered or certified mail or
delivered by hand, if to the Company, to its principal place of

- 12 -

business, attention: President, and, if to an optionee, to the address as
appearing on the records of the Company.

- 13 -