- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended February 28, 2009

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

For the transition period from ________ to ________

Commission File No. 1-33752

MERIX CORPORATION

(Exact name of registrant as specified in its charter)

Oregon	93-1135197
(State or other jurisdiction of incorporationor organization)	(I.R.S. Employer Identification No.)

15725 SW Greystone Court, Suite 200, Beaverton, Oregon	97006
(Address of principal executive offices)	(Zip Code)


Registrant’s telephone number, including area code: 503-716-3700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of common stock outstanding as of April 6, 2009 was 21,840,126 shares.

MERIX CORPORATION

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION		Page

Item 1.	Consolidated Financial Statements (Unaudited)

	Consolidated Balance Sheets – February 28, 2009 and May 31, 2008	2

	Consolidated Statements of Operations – for the three- and nine-month fiscal periods Ended February 28, 2009 and March 1, 2008	3

	Consolidated Statements of Cash Flows – for the nine-month fiscal periods ended February 28, 2009 and March 1, 2008	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 6.	Exhibits	44

Signatures		45

Index

MERIX CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	February 28,			May 31,
	2009			2008
Assets
Current assets:
Cash and cash equivalents	$	19,084		$	5,728
Accounts receivable, net of allowances for doubtful accounts of $2,140 and $2,252		45,699			73,153
Inventories, net		16,213			23,631
Assets held for sale		4			1,477
Deferred income taxes		75			75
Prepaid and other current assets		4,684			12,961
Total current assets		85,759			117,025

Property, plant and equipment, net of accumulated depreciation of $132,872 and $121,253		101,015			103,012
Goodwill		11,392			31,794
Definite-lived intangible assets, net of accumulated amortization of $9,856 and $8,342		7,352			8,866
Deferred income taxes, net		773			885
Assets held for sale		1,146			-
Other assets		4,732			5,859
Total assets	$	212,169		$	267,441

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	37,262		$	59,789
Accrued liabilities		14,712			15,783
Total current liabilities		51,974			75,572

Long-term debt		78,000			70,000
Other long-term liabilities		3,751			3,522
Total liabilities		133,725			149,094

Minority interest		3,849			4,573
Commitments and Contingencies (Note 15)

Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized; none issued		-			-
Common stock, no par value; 50,000 shares authorized; 21,547 and 21,073 issued and outstanding		216,822			215,085
Accumulated deficit		(142,259	)		(101,358	)
Accumulated other comprehensive income		32			47
Total shareholders' equity		74,595			113,774
Total liabilities and shareholders' equity	$	212,169		$	267,441

See accompanying Notes to Consolidated Financial Statements.

Index

MERIX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Fiscal quarter ended						Nine months ended

	February 28,			March 1,			February 28,			March 1,
	2009			2008			2009			2008

Net sales	$	60,721		$	94,275		$	228,248		$	291,083
Cost of sales		59,845			86,351			211,063			262,593
Gross profit		876			7,924			17,185			28,490

Operating expenses:
Engineering		500			337			1,760			1,287
Selling, general and administration		8,395			9,930			26,086			32,161
Amortization of intangible assets		472			527			1,512			1,785
Severance, asset impairment and restructuring charges (Note 17)		22,342			14,640			22,904			15,861
Total operating expenses		31,709			25,434			52,262			51,094

Operating income (loss)		(30,833	)		(17,510	)		(35,077	)		(22,604	)

Other income (expense):
Interest income		27			155			123			724
Interest expense		(1,060	)		(916	)		(2,920	)		(3,088	)
Gain on settlement of debt		-			5,094			-			5,094
Other income (expense), net		(17	)		(419	)		(471	)		(986	)
Total other expense, net		(1,050	)		3,914			(3,268	)		1,744

Loss before income taxes and minority interests		(31,883	)		(13,596	)		(38,345	)		(20,860	)
Provision for (benefit from) income taxes		628			(511	)		2,049			445
Loss before minority interests		(32,511	)		(13,085	)		(40,394	)		(21,305	)
Minority interest in net income of consolidated subsidiaries		155			269			507			707
Net loss	$	(32,666	)	$	(13,354	)	$	(40,901	)	$	(22,012	)

Basic and diluted loss per share	$	(1.54	)	$	(0.63	)	$	(1.95	)	$	(1.05	)

Weighted average number of shares - basic and diluted		21,170			21,079			20,957			21,002

See accompanying Notes to Consolidated Financial Statements.

Index

MERIX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine months ended
	February 28,			March 1,
CASH FLOWS FROM OPERATING ACTIVITIES	2009			2008
Net loss	$	(40,901	)	$	(22,012	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		16,822			16,231
Contribution of common stock to defined contribution plan		-			873
Share-based compensation expense		1,309			1,877
Minority interest in net income of consolidated subsidiaries		507			707
(Gain) loss on disposition of assets		(648	)		(28	)
Asset impairment charges		21,202			12,722
Gain on settlement of debt		-			(5,094	)
Deferred income taxes		11			(1,005	)
Changes in operating accounts:
(Increase) decrease in accounts receivable, net		27,454			(2,047	)
(Increase) decrease in inventories, net		7,418			(2,091	)
(Increase) decrease in other assets		8,484			(5,227	)
Increase (decrease) in accounts payable		(17,675	)		9,706
Increase (decrease) in other accrued liabilities		(1,743	)		2,449
Increase (decrease) in amounts due to affiliate, net		1,106			1,214
Net cash provided by operating activities		23,346			8,275

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(18,132	)		(19,749	)
Proceeds from disposal of property, plant and equipment		961			23
Purchases of investments		-			(12,775	)
Proceeds from sales and maturity of securities		-			21,800
Net cash used in investing activities		(17,171	)		(10,701	)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing on revolving line of credit		40,000			-
Principal payments on revolving line of credit		(32,000	)		-
Principal payments on notes payable		-			(2,500	)
Payments on capital lease obligations		-			(438	)
Proceeds from exercise of stock options and stock plan transactions		447			1
Reacquisition of common stock		(17	)		(86	)
Distribution to minority shareholder		(1,230	)		(1,144	)
Other financing activities		(19	)		(157	)
Net cash provided by (used in) financing activities		7,181			(4,324	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		13,356			(6,750	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		5,728			17,175

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	19,084		$	10,425

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes, net	$	2,107		$	1,057
Cash paid for interest		1,119			2,176

See accompanying Notes to Consolidated Financial Statements.

Index

MERIX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF BUSINESS

Merix Corporation, an Oregon corporation, was formed in March 1994. Merix is a leading global manufacturing service provider for technologically advanced printed circuit boards (PCBs) for original equipment manufacturer (OEM) customers and their electronic manufacturing service (EMS) providers. The Company’s principal products are complex multi-layer rigid PCBs, which are the platforms used to interconnect microprocessors, integrated circuits and other components that are essential to the operation of electronic products and systems. The market segments the Company serves are primarily in commercial equipment for the communications and networking, computing and peripherals, industrial and medical, defense and aerospace and automotive markets. The Company’s markets are generally characterized by rapid technological change, high levels of complexity and short product life-cycles, as new and technologically superior electronic equipment is continually being developed.

NOTE 2. BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the Annual Report on Form 10-K prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim consolidated financial statements are unaudited; however, they reflect all normal recurring adjustments and non-recurring adjustments that are, in the opinion of management, necessary for a fair presentation. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s 2008 Annual Report on Form 10-K. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The Company’s fiscal year consists of a 52 or 53 week period that ends on the last Saturday in May. Fiscal 2009 is a 52-week fiscal year ending on May 30, 2009. The first quarter of fiscal 2008 ended September 1, 2008 and included 14 weeks, whereas the first quarter of fiscal 2009 ended August 30, 2009 and included 13 weeks. Accordingly, the year-to-date period ended February 28, 2009 included 39 weeks and the year-to-date period ended March 1, 2008 included 40 weeks.

NOTE 3. BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Merix Corporation and its wholly-owned and majority-owned subsidiaries. Except for activity related to Merix Asia, for which certain intercompany amounts cannot be eliminated as discussed below, all intercompany accounts, transactions and profits have been eliminated in consolidation.

The functional currency for all subsidiaries is the U.S. dollar. There were no material foreign exchange gains or losses for the fiscal quarter ended February 28, 2009. Foreign exchange losses for the fiscal quarter ended March 1, 2008 totaled $0.4 million and are included in net other expense in the consolidated statements of operations. Foreign exchange losses for the fiscal year-to-date periods ended February 28, 2009 and March 1, 2008 totaled $0.4 million and $1.0 million, respectively.

Prior to the implementation of the Company’s new enterprise resource planning (ERP) system completed in August 2008, Merix Asia’s financial reporting systems were predominantly manual in nature. Accordingly, significant time has been required to process and review the transactions in order to assure the financial information is properly stated. Additionally, Merix Asia performs a complex financial consolidation of its subsidiaries prior to the Company’s final consolidation. The time required to complete Merix Asia’s consolidation, record intercompany transactions and properly report any adjustments, intervening and/or subsequent events has required the use of a one-month lag in consolidating the financial statements for Merix Asia with Merix Corporation. The new ERP system allows for the streamlining of business processes and may eventually eliminate the need for the one-month reporting lag for Merix Asia. Inter-company transactions which occurred during these periods have been eliminated in consolidation. Inter-company balances resulting from transactions with Merix Asia during the one-month lag period have been netted and presented as a current liability on the consolidated balance sheet. The net intercompany payable totaled $0.9 million as of February 28, 2009. The net intercompany receivable at May 31, 2008, which was included as a component of other current assets, totaled $0.2 million.

Index

NOTE 4. RECLASSIFICATIONS

Certain immaterial reclassifications were made to the prior period financial statements to conform to the current period presentation, including a reclassification of certain engineering costs, which are directly related to the production of goods for sale which are included in cost of sales in the consolidated statements of operations. These costs were previously included as a component of operating expenses. The impact of the reclassification on inventory balances is not material. The results of operations for the third quarter of fiscal 2008 and the nine-month fiscal period ended March 1, 2008 has been revised as shown below:

	Fiscal Quarter Ended						Nine Months Ended
	March 1,			March 1,			March 1,			March 1,
	2008			2008			2008			2008
	(as reported)			(as revised)			(as reported)			(as revised)
Net Sales	$	94,275		$	94,275		$	291,083		$	291,083
Cost of Sales		84,594			86,351			257,200			262,593
Gross Profit		9,681			7,924			33,883			28,490
Gross margin		10.3	%		8.4	%		11.6	%		9.8	%
Engineering expense		2,094			337			6,680			1,287
Other operating expenses		25,097			25,097			49,782			49,807
Loss from operations		(17,510	)		(17,510	)		(22,579	)		(22,604	)
Other income (expense), net		3,914			3,914			1,719			1,744
Minority interest and provision (benefit) for income taxes		(242	)		(242	)		1,152			1,152
Net loss	$	(13,354	)	$	(13,354	)	$	(22,012	)	$	(22,012	)

In the second quarter of fiscal 2009, the Company evaluated the intercompany transactions with its Asia subsidiary which, due to the one month reporting lag described in Note 3, result in an intercompany balance being presented on the consolidated balance sheets. Based on the nature of the intercompany transactions , it was determined that the activity should be included in cash flows from operations on the Company’s consolidated statement of cash flows. This amount has been reclassified from cash flows from financing activities in the presentation of cash flows for the nine-month period ended March 1, 2009.

NOTE 5. INVENTORIES

Inventories are valued at the lower of cost or market value and include materials, labor and manufacturing overhead. Inventories are valued at (i) the actual cost to purchase or manufacture the inventory including material, labor and manufacturing overhead (on a first-in, first-out basis) or (ii) the current estimated market value of the inventory. A standard cost system is used to estimate the actual costs of inventory. Standard costs are regularly compared to actual costs and the estimated market value of the inventory.

The Company includes a provision for inventories to cover excess inventories to their estimated net realizable values, as necessary. A change in customer demand for inventory is the primary indicator for changes in inventory carrying values. The Company records provisions for excess inventories based on historical experiences with customers, the ability to utilize inventory in other programs, the ability to redistribute inventory back to the suppliers, the age of the inventory and current and forecasted demand for the inventory. The increase to inventory valuation reserves was $0.6 million and $0.7 million, respectively for the third quarters of fiscal 2009 and 2008, and $0.4 million and $0.4 million, respectively during the fiscal year-to-date periods ended February 28, 2009 and March 1, 2008. As of February 28, 2009 and May 31, 2008, inventory reserves totaled $4.1 million and $3.7 million, respectively.

Index

The Company maintains inventories on a consignment basis in the United States and in Asia. Consignment inventory is recorded as inventory until the product is pulled from the consignment locations by the customer and all risks and rewards of ownership of the consignment inventory have been transferred to the customer.

Inventories, net of related reserves, consisted of the following (in thousands):

	February 28,		May 31,
	2009		2008
Raw materials	$	3,075	$	4,876
Work-in-process		4,970		7,542
Finished goods		3,719		3,901
Consignment finished goods		4,449		7,312
Total inventories	$	16,213	$	23,631

NOTE 6. PREPAID AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following at February 28, 2009 and May 31, 2008 (in thousands):

	February 28,		May 31,
	2009		2008
Prepaid expenses	$	1,089	$	1,778
Income taxes receivable		435		318
Value-added tax receivable		1,371		7,176
Intercompany receivable (Note 3)		-		227
Other assets		1,789		3,462
	$	4,684	$	12,961

NOTE 7. DEFINITE-LIVED INTANGIBLE ASSETS

At February 28, 2009 and May 31, 2008, the Company’s definite-lived intangible assets included customer relationships and a manufacturing sales representative network. The gross amount of the Company’s definite-lived intangible assets and the related accumulated amortization were as follows (in thousands):

	Amortization	February 28,			May 31,
	Period	2009			2008
Customer relationships	6.5-10 years	$	17,168		$	17,168
Manufacturing sales representatives network	5.5 years		40			40
			17,208			17,208
Accumulated amortization			(9,856	)		(8,342	)
		$	7,352		$	8,866

Amortization expense was as follows (in thousands):

	Nine Months Ended
	February 28, 2009		March 1, 2008
Customer relationships	$	1,509	$	1,779
Manufacturing sales representatives network		5		6
	$	1,514	$	1,785

Amortization expense is scheduled as follows (in thousands):

Remainder of fiscal 2009	$	468
2010		1,765
2011		1,553
2012		1,120
2013		727
Thereafter		1,719
	$	7,352

Index

NOTE 8. ASSETS HELD FOR SALE

Assets held for sale included the following (in thousands):

	February 28,			May 31,
	2009			2008
Two parcels of land	$	1,146		$	1,146
Excess equipment		4			331
		1,150			1,477
Assets held for sale included in current assets		(4	)		(1,477	)
Assets held for sale included in non-current assets	$	1,146		$	-

In accordance with SFAS No. 144, these assets are recorded at the lower of their carrying amount or fair value, less costs to sell and the excess equipment is no longer being depreciated.

During the second quarter of fiscal 2009, the Company determined that land included in assets held for sale should be presented in non-current assets as a result of deteriorating general economic conditions. At May 31, 2008, these assets were classified as current assets.

During fiscal 2008, the Company ceased manufacturing operations at its Hong Kong facility. The net book values of the building and related land use rights were reduced to $0 by an impairment charge recorded in fiscal 2007. These assets are classified as assets held for sale at February 28, 2009 and May 31, 2008.

In the first quarter of fiscal 2009, the Company sold assets previously used in the Hong Kong facility valued at $0.3 million at May 31, 2008 and recorded a gain on sale of $0.6 million. In the second quarter of fiscal 2009, the Company implemented a plan to dispose of certain surplus plant assets to streamline the utilization of equipment in its Merix Oregon factory and recorded $0.7 million in impairment charges on the assets to be disposed. The sale of the assets was finalized in the third quarter of fiscal 2009.

NOTE 9. OTHER ASSETS

Other assets consisted of the following at February 28, 2009 and May 31, 2008 (in thousands):

	February 28,		May 31,
	2009		2008
Leasehold land use rights, net	$	1,206	$	1,227
Deferred financing costs, net		3,218		3,842
Other assets		308		790
	$	4,732	$	5,859

NOTE 10. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at February 28, 2009 and May 31, 2008 (in thousands):

	February 28,		May 31,
	2009		2008
Accrued compensation	$	6,753	$	7,177
Accrued warranty (Note 11)		1,050		2,147
Income taxes payable		656		316
Intercompany payable (Note 3)		879		-
Asset retirement obligation – current portion		-		873
Other liabilities		5,374		5,270
	$	14,712	$	15,783

During the first quarter of fiscal 2009, the Company incurred $0.8 million in costs related to the restoration of leased Wood Village facilities which were charged to the asset retirement obligation.

Index

NOTE 11. ACCRUED WARRANTY

The Company generally warrants its products for a period of up to twelve months from the point of sale. The Company records a liability for the estimated cost of the warranty upon transfer of ownership of the products to the customer. Using historical data, the Company estimates warranty costs and records the provision for such charges as an element of cost of sales upon the recognition of the related revenue. The Company also accrues warranty liability for certain specifically-identified items that are not covered by its assessment of historical experience.

Warranty activity was as follows (in thousands):

	Fiscal Quarter Ended						Nine Months Ended
	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Balance, beginning of period	$	2,070		$	1,862		$	2,147		$	2,129
Provision for warranty charges		348			1,201			1,858			3,173
Change in estimate for existing warranties		(742	)		-			(742	)		-
Warranty charges incurred		(626	)		(377	)		(2,213	)		(2,616	)
Balance, end of period	$	1,050		$	2,686		$	1,050		$	2,686

Prior to its acquisition in September 2005 and in selected circumstances subsequent to acquisition, Merix Asia granted longer warranty periods to certain customers of up to three years. During the third quarter of fiscal 2009, the Company reduced its accrual for warranty charges by approximately $0.7 million to reflect the change from a three-year warranty period to a twelve-month warranty period on products currently sold by its Asia segment and the impact of improved quality on claim rates for its Asia factories.

NOTE 12. COMPREHENSIVE INCOME (LOSS), EARNINGS PER SHARE AND SHARE ACTIVITY

Comprehensive income (loss) includes the change in our cumulative translation adjustment. The following table sets forth the calculation of comprehensive income (loss) for the periods indicated (in thousands):

	Fiscal Quarter Ended						Nine Months Ended
	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Net income (loss)	$	(32,666	)	$	(13,354	)	$	(40,901	)	$	(22,012	)
Change in cumulative translation adjustment		1			(13	)		(15	)		39
Change in unfunded liability related to long-service payment plan		-			-			-			(115	)
Total comprehensive income (loss)	$	(32,665	)	$	(13,367	)	$	(40,916	)	$	(22,088	)

Basic earnings per share (EPS) and diluted EPS are computed using the methods prescribed by SFAS No. 128, Earnings per Share . The following potentially dilutive shares were excluded from the calculation of diluted EPS because their effect would have been antidilutive:

	Fiscal Quarter Ended				Nine Months Ended
Potential common shares excluded from diluted EPS since their effect would be antidilutive:	February 28, 2009		March 1, 2008		February 28, 2009		March 1, 2008
Stock options		3,304		3,113		3,308		3,003
Restricted stock awards		293		-		293		-
Convertible notes		4,608		4,608		4,608		4,608

During the first and third quarters of fiscal 2009, approximately 147,000 and 603,000 shares, respectively, were issued related to share-based compensation transactions, primarily due to the semi-annual share purchase under the employee stock purchase plan.

Index

NOTE 13. SEGMENT INFORMATION

The Company has three reportable business segments defined by geographic location in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information:” (1) Merix Oregon, (2) Merix San Jose and (3) Merix Asia. Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by senior management. The Company’s operating segments are evidence of the internal structure of its organization. Each segment operates in the same industry with production facilities that produce similar customized products for its customers. The production facilities, sales management and chief decision-makers for all processes are managed by the same executive team. The Company’s chief operating decision maker is its Chief Executive Officer. Segment disclosures are presented to the gross profit level as this is the primary performance measure for which the segment managers are responsible. No other operating results information is provided to the chief operating decision maker for review at the segment level. The following tables reconcile certain financial information by segment.

Net sales by segment were as follows (in thousands):

	Fiscal Quarter Ended				Nine Months Ended
	February 28, 2009		March 1, 2008		February 28, 2009		March 1, 2008
Merix Oregon	$	22,964	$	41,151	$	89,638	$	133,057
Merix San Jose		5,834		7,485		20,237		24,650
Merix Asia		31,914		45,639		118,373		133,376
	$	60,721	$	94,275	$	228,248	$	291,083

Gross profit by segment was as follows (in thousands):

	Fiscal Quarter Ended					Nine Months Ended
	February 28, 2009			March 1, 2008		February 28, 2009		March 1, 2008
Merix Oregon	$	(2,356	)	$	2,200	$	2,261	$	12,534
Merix San Jose		(30	)		1,206		2,001		4,056
Merix Asia		3,262			4,518		12,923		11,900
	$	876		$	7,924	$	17,185	$	28,490

Beginning in fiscal 2009, the Company recorded an allocation of certain costs attributable to costs of sales in all segments that were previously charged to the Merix Oregon segment and included certain engineering costs in costs of sales that were previously presented as a component of operating expenses. Gross profit by segment for the third quarter of fiscal 2008 and nine months ended March 1, 2008 has been revised to present comparable results. The impact of these revisions on gross margin by segment is presented in the tables below for the fiscal quarter and nine-month period ended March 1, 2008:

Fiscal Quarter Ended:	March 1, 2008 (as reported)			Effect of Engineering Cost Reclassification			Effect of Global Cost Allocation			March 1, 2008 (as revised)
Merix Oregon		6.8	%		(2.6	)%		1.2	%		5.3	%
Merix San Jose		20.4	%		(3.0	)%		(1.3	)%		16.1	%
Merix Asia		11.8	%		(1.1	)%		(0.8	)%		9.9	%
Overall		10.3	%		(1.9	)%		-			8.4	%

Nine Months Ended:	March 1, 2008 (as reported)			Effect of Engineering Cost Reclassification			Effect of Global Cost Allocation			March 1, 2008 (as revised)
Merix Oregon		10.7	%		(2.4	)%		1.1	%		9.4	%
Merix San Jose		20.7	%		(2.9	)%		(1.3	)%		16.5	%
Merix Asia		10.9	%		(1.1	)%		(0.9	)%		8.9	%
Overall		11.6	%		(1.8	)%		-			9.8	%

Index

Total assets by segment were as follows (in thousands):

	February 28, 2009		May 31, 2008
Merix Oregon	$	113,308	$	125,158
Merix San Jose		24,699		27,917
Merix Asia		74,162		114,366
	$	212,169	$	267,441

NOTE 14. SIGNIFICANT CUSTOMERS

The following table presents the percentage of net sales, by segment, for significant customers comprising greater than 10% of total net sales:

	Cisco						Motorola
	Fiscal Quarter Ended						Fiscal Quarter Ended
	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Merix Oregon		18	%		21	%		15	%		15	%
Merix San Jose		3	%		2	%		*	(1)		*	(1)
Merix Asia		*	(1)		*	(1)		13	%		9	%
Consolidated		7	%		9	%		12	%		11	%

(1) Less than 1%

	Cisco						Motorola
	Nine Months Ended						Nine Months Ended
	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Merix Oregon		20	%		23	%		16	%		13	%
Merix San Jose		3	%		*	(1)		*	(1)		*	(1)
Merix Asia		*	(1)		*	(1)		12	%		7	%
Consolidated		8	%		11	%		13	%		9	%

(1) Less than 1%

At February 28, 2009, five entities represented approximately 49% of the Company’s net accounts receivable balance, individually ranging from approximately 5% to approximately 22%. The Company has not experienced significant losses related to its accounts receivable in the past.

NOTE 15. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is, from time to time, made subject to various legal claims, actions and complaints in the ordinary course of its business. Except as disclosed below, management believes that the outcome of litigation should not have a material adverse effect on its consolidated results of operations, financial condition or liquidity.

Securities Class Action

Four purported class action complaints were filed against the Company and certain of its executive officers and directors in the first quarter of fiscal 2005. The complaints were consolidated in a single action entitled In re Merix Corporation Securities Litigation , Lead Case No. CV 04-826-MO, in the U.S. District Court for the District of Oregon. After the court granted the Company’s motion to dismiss without prejudice, the plaintiffs filed a second amended complaint. That complaint alleged that the defendants violated the federal securities laws by making certain inaccurate and misleading statements in the prospectus used in connection with the January 2004 public offering of approximately $103.4 million of the Company’s common stock. In September 2006, the Court dismissed that complaint with prejudice. The plaintiffs appealed to the Ninth Circuit Court of Appeals. In April 2008, the Ninth Circuit reversed the dismissal of the second amended complaint. The Company sought rehearing which was denied and rehearing en banc was also denied. The Company obtained a stay of the mandate from the Ninth Circuit and filed a certiorari petition with the United States Supreme Court on September 22, 2008. On December 15, 2008, the Supreme Court denied the certiorari petition. The case has been remanded back to the U.S. District Court for the District of Oregon. The plaintiffs seek unspecified damages. A potential loss or range of loss that could arise from these cases is not estimable or probable at this time.

Index

Breach of Contract

In June 2008, a complaint was filed against Merix Caymans Trading Company Ltd. by Clark Sales, LLC, Case No. 2:08-CV-12551-MOR-VMM, in the United States District Court, Eastern District of Michigan. The complaint alleges breach of contract in relation to payment of post-termination commissions. The plaintiffs sought damages in excess of $4 million. The parties reached a settlement agreement on November 24, 2008 and the Company recorded an accrual of $0.4 million in the second quarter of fiscal 2009. The terms of the settlement amount included a lump sum payment of $0.4 million paid in December 2008, and monthly payments thereafter based on net sales of certain products through August 15, 2009, paid in accordance with the Company’s existing commission structure for outside sales representatives.

Commitments

As of February 28, 2009, the Company had capital commitments of approximately $0.4 million, primarily relating to the purchase of machinery and equipment.

NOTE 16. RELATED PARTY TRANSACTIONS

The Company paid the following amounts to Huizhou Desay Holdings Co. Ltd. and its wholly-owned subsidiary, a minority shareholder of two Merix Asia manufacturing facilities, during the periods indicated (in thousands):

	Fiscal Quarter Ended				Nine Months Ended
	February 28, 2009		March 1, 2008		February 28, 2009		March 1, 2008
Consulting fees	$	53	$	48	$	158	$	145
Operating lease rental fees		82		74		245		224
Management fees		34		18		109		55
Capitalized construction costs for factory expansion		-		651		326		1,406
Other fees		68		92		235		322
	$	237	$	883	$	1,073	$	2,152

NOTE 17. SEVERANCE, ASSET IMPAIRMENT AND RESTRUCTURING CHARGES

Total severance, asset impairment and restructuring charges were as follows (in thousands):

	Fiscal Quarter Ended				Nine Months Ended
	February 28, 2009		March 1, 2008		February 28, 2009			March 1, 2008
Hong Kong closure severance charges	$	7	$	180	$	60		$	1,289
Other severance charges – Merix Asia		151		85		219			85
Gain on sale of Merix Asia equipment		-		-		(567	)		-
Goodwill impairment – Merix Asia		20,500		-		20,500			-
Asset impairment – Merix Asia		-		92		-			187
Severance charges – Merix Oregon		1,413		1,117		1,719			1,117
Asset impairment – Merix Oregon		-		12,767		702			12,767
Lease termination charges – Merix Oregon		222		-		222			-
Executive severance		-		365		-			365
Other restructuring charges		49		34		49			51
	$	22,342	$	14,640	$	22,904		$	15,861

Due to a number of factors including: 1) the substantial variance between the Company’s market capitalization based on the current trading price range for its common stock and the net asset value reflected in its consolidated balance sheet, 2) continuing operating losses sustained in the first three quarters of fiscal 2009 and 3) the deterioration of general economic environment, management has undertaken quarterly assessments of potential impairment of the Company’s long-lived assets in the throughout fiscal 2009. Management’s analyses included assessments of current fair value based on an update of forecasted future cash flows used in our annual impairment test at the end of fiscal 2008. As a result of the deepening economic downturn and resulting reduction in demand for the Company’s products and net sales in the third quarter of fiscal 2009, management has reduced its forecast of net sales and future cash flows and believe that the recovery will occur later than initially anticipated. As a result, an impairment charge of $20.5 million has been recorded in the third quarter of fiscal 2009 to reduce the value of goodwill recorded in the acquisition of the Asia subsidiary to $0. The Company has also performed an assessment of potential impairment of other long-lived assets and has determined that no additional impairment charges are necessary as of February 28, 2009.

Index

Due primarily to the deteriorating macroeconomic conditions, the Company has taken cost reduction actions to mitigate declines in the Company’s net sales. Most of the larger cost reductions were related to three major reductions-in-force that occurred in September 2008, December 2008 and January 2009. These headcount reductions resulted in severance and related charges paid totaling approximately $1.6 million in the third quarter of fiscal 2009 and $2.0 million for the nine months ended February 28, 2009. The Company has also significantly reduced its labor costs due to attrition within its labor force, particularly in the People’s Republic of China (PRC). As of the end of February 2009, the Company has reduced its labor force by approximately 25% compared to July 2008.

In the second quarter of fiscal 2009, the Company implemented a plan to dispose of certain surplus plant assets to streamline the utilization of equipment in its Merix Oregon factory and recorded $0.7 million in impairment charges on the assets to be disposed. The sale of the assets was finalized in the third quarter of fiscal 2009.

In the third quarter of fiscal 2008, the Company approved a plan to close its manufacturing facility located in Wood Village, Oregon, and relocated production to its Forest Grove facility. This restructuring action was completed in the fourth quarter of fiscal 2008. The Company recorded severance and impairment charges in the third quarter of fiscal 2008 totaling $13.9 million, comprising approximately $12.8 million in asset impairments and adjustments to the asset retirement obligation accrual for the Wood Village lease and $1.1 million in severance and related charges. In the third quarter of fiscal 2009, the Company recorded $0.2 million in additional lease termination costs related to the closure of the Wood Village factory due to a revised agreement with the sub lessee regarding the amount to be charged for property taxes during the term of the sublease.

In the third quarter of fiscal 2008, the Company terminated its Executive Vice President of Global Operations. In accordance with the executive employment agreement related to this termination, the Company recorded $0.4 million of severance and related costs.

In the first quarter of fiscal 2008, the Company committed to phasing out operations at its Hong Kong facility, closing the facility and relocating production to other manufacturing facilities. Closure of the facility was substantially complete in the fourth quarter of fiscal 2008. This closure was a part of the Company’s actions to consolidate its Asian operations at its lower-cost facilities in China and expand the facilities at its Huiyang plant. The Company recorded $0.2 million, in severance and related costs in the third quarter of fiscal 2008 in connection with the closure of the Hong Kong facility. The Company recorded approximately $0.1 and $1.3 million, respectively, in Hong Kong facility severance and other restructuring costs in the first nine months of fiscal 2009 and fiscal 2008. In the first quarter of fiscal 2009, the Company recorded a gain of $0.6 million related to the sale of equipment previously used at the Hong Kong facility.

A roll-forward of the Company’s severance accrual for the Hong Kong plant closure for the first three quarters of fiscal 2009 was as follows (in thousands):

	Beginning Balance		Charged to Expense		Expenditures			Ending Balance
First quarter	$	134	$	40	$	(132	)	$	42
Second quarter		42		13		(10	)		45
Third quarter		45		7		(52	)		-

Index

NOTE 18. NEW ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS Nos. 141(R) and 160 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both statements are effective for annual reporting periods beginning on or after December 15, 2008 and earlier adoption is prohibited. SFAS No. 141(R) will be applied to business combinations occurring after the effective date and SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The adoption of SFAS Nos. 141(R) and 160 is not expected to have a significant impact on the Company’s current financial position and results of operations.

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

Forward Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made in this Quarterly Report, other than statements of historical fact, are forward-looking, including, but not limited to, statements regarding industry prospects and cyclicality and future results of operations or financial position. We use words such as “anticipates,” “believes,” “expects,” “future” and “intends” and other similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations, plans or projections and are inherently uncertain. Actual results could differ materially from management’s expectations, plans or projections. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Certain risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, plans and projections are described in Part II, Item 1A, “Risk Factors” under the subheading “Risk Factors Affecting Business and Results of Operations.” This section, along with other sections of this Quarterly Report, describes some, but not all, of the factors that could cause actual results to differ significantly from management’s expectations, plans and projections. We do not intend to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended May 31, 2008.

Business

We are a leading global manufacturing service provider for technologically advanced printed circuit boards (PCBs) for original equipment manufacturer (OEM) customers and their electronic manufacturing service (EMS) providers. Our principal products are complex multi-layer rigid printed circuit boards, which are the platforms used to interconnect microprocessors, integrated circuits and other components that are essential to the operation of electronic products and systems. The market segments we serve are primarily in commercial equipment in the communications and networking, computing and peripherals, industrial and medical, defense and aerospace, and automotive markets. Our markets are generally characterized by rapid technological change, high levels of complexity and short product life-cycles, as new and technologically superior electronic equipment is continually being developed.

Operating Segments

Our business has three operating segments: (1) Merix Oregon, (2) Merix San Jose and (3) Merix Asia. Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by senior management. Each operating segment operates predominately in the same industry with production facilities that produce similar customized products for our global customers. The chief decision maker for all of our operating segments is our Chief Executive Officer.

Index

Markets and Customers

The following table presents the percentage of net sales, by segment, for significant customers comprising greater than 10% of total net sales:

	Cisco						Motorola
	Fiscal Quarter Ended						Fiscal Quarter Ended
	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Merix Oregon		18	%		21	%		15	%		15	%
Merix San Jose		3	%		2	%		*	(1)		*	(1)
Merix Asia		*	(1)		*	(1)		13	%		9	%
Consolidated		7	%		9	%		12	%		11	%

(1) Less than 1%

	Cisco						Motorola
	Nine Months Ended						Nine Months Ended
	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Merix Oregon		20	%		23	%		16	%		13	%
Merix San Jose		3	%		*	(1)		*	(1)		*	(1)
Merix Asia		*	(1)		*	(1)		12	%		7	%
Consolidated		8	%		11	%		13	%		9	%

(1) Less than 1%

Approximately 47% and 56%, respectively, of our OEM sales in third quarter of fiscal 2009 and 2008 were made to EMS providers and in the first nine months of fiscal 2009 and 2008 approximately 50% and 55%, respectively, of our OEM sales were made to EMS providers. Although our contractual relationship is with the EMS provider, most of our shipments to EMS providers are directed by OEMs that negotiate product pricing and volumes directly with us. In addition, we are on the approved vendor list of several EMS providers and are awarded incremental discretionary orders directly from some of them.

Backlog

Backlog comprises purchase orders received and, in some instances, forecast requirements released for production under customer contracts. Backlog shippable within the next 90 days totaled $32.2 million and $66.3 million at February 28, 2009 and May 31, 2008, respectively. The decrease in backlog is due to a decrease in demand experienced in the third quarter as a result of the decline in general economic conditions, and also due to the reduction in lead times achieved over the first nine months of fiscal 2009. Compared to the average booking rate, backlog was abnormally high at the end of fiscal 2008 due to extended customer lead times resulting from the fourth quarter closure of our Wood Village facility requiring customers to place orders over a longer-than-normal period of time. As the production lead times were shortened during the first nine months of fiscal 2009, customers did not need to place orders as far in advance, leading to a reduction in orders placed in the current quarter that is shippable in future quarters.

Customers may cancel or postpone all scheduled orders, in most cases without penalty. Therefore, backlog may not be a meaningful indicator of future financial results.

Summary of Sequential Quarterly Results and Outlook for Fourth Quarter of Fiscal 2009

The global printed circuit board demand is cyclical and cycles typically last 18 to 24 months in which demand declines from peak to trough levels and then rebounds. These variances in demand are normal and in response management may make modest variations in its labor force and hours of production. Since the beginning of our second fiscal quarter of 2009, the global economy has begun to experience a significant contraction affecting many end markets, products and services. The economic contraction has adversely affected the demand for most of Merix’ customers and has significantly reduced our orders, backlog and net sales.

Index

Net sales of $60.7 million in the current quarter decreased $16.2 million or 21% compared to net sales of $76.9 million in the second quarter of fiscal 2009, resulting from a 22% decrease in net sales in our Oregon segment, a 13% decrease in net sales in our San Jose segment and a 22% decrease in net sales in our Asia segment. These decreases reflect lower demand for our products due to the deterioration of general macroeconomic conditions. Net sales decreased sequentially in all end markets, led by a 34% decrease in the automotive end market. We also experienced net sales declines ranging from approximately 18% to 24% in our other primary end markets, which reflects the decrease in demand resulting from further deterioration of general economic conditions during the third quarter of fiscal 2009.

Consolidated gross margin decreased to 1.4% in the current quarter compared to 7.8% in the second quarter of fiscal 2009. Our North American segments’ gross margin decreased approximately 12 percentage points. Despite reductions in variable manufacturing costs consistent with the decrease in revenue and a 6% reduction in our labor and other fixed costs, reduced variable contribution margins on lower production volumes resulted in significantly lower gross margins. Our Asia segment gross margin decreased by 1 percentage point, reflecting the benefit of a two-week plant shutdown for the Chinese New Year holiday as well as the benefit from a reduction in the accrued warranty provision that increased gross margin by approximately 2 percentage points. Operating expenses of $9.4 million, excluding severance, asset impairment and restructuring charges, increased $0.2 million compared $9.2 million in the second quarter of fiscal 2009. Selling, general and administrative expenses increased by $0.4 million primarily due an increase in the allowance for doubtful accounts related to customers in our automotive end market, offset by a $0.2 million decrease in engineering expenses due to headcount reductions and the relocation of certain engineering employees into functions directly affecting manufacturing and thus classified in cost of goods sold. Restructuring charges totaling $22.3 million in the third quarter of fiscal 2009 were primarily comprised of an impairment charge of $20.5 million on goodwill recorded on the acquisition of our Asia subsidiary and $1.6 million in severance charges. Net non-operating expense, primarily comprised of interest expense, remained stable at $1.0 million in the second and third quarters of fiscal 2009. Net loss for the quarter totaled $32.7 million or $1.54 per diluted share, compared to $6.1 million or $0.29 per diluted share in the second quarter of fiscal 2009.

During normal cyclical downturns the Company’s attention would be focused on minimizing the negative impact on net income. However, given the significance of the current economic decline and reduced customer demand we are principally focused on maximizing cash flow, maintaining and improving customer service and retaining factory capacity and flexibility.

In the fourth quarter, we expect that overall net sales will be flat compared to the third quarter of fiscal 2009. We expect that costs, exclusive of restructuring charges, will decrease compared to the third quarter of fiscal 2009, as we will benefit from the full-quarter impact of cost reduction activities undertaken in the third quarter. Additional cost reduction activities in the March 2009 will result in $0.8 million in restructuring charges in the fourth quarter. No significant changes are expected for other non-operating expenses compared to third quarter levels.

Index

Results of Operations

The following table sets forth our statement of operations data, both in absolute dollars and as a percentage of net sales (dollars in thousands).

	Fiscal Quarter Ended (1)					Fiscal Quarter Ended (1)
	February 28, 2009					March 1, 2008
Net sales	$	60,721		100.0	%	$	94,275		100.0	%
Cost of sales		59,845		98.6			86,351		91.6
Gross profit		876		1.4			7,924		8.4
Engineering		500		0.8			337		0.4
Selling, general and administrative		8,395		13.8			9,930		10.5
Amortization of identifiable intangible assets		472		0.8			527		0.6
Severance, impairment and restructuring charges		22,342		36.8			14,640		15.5
Operating loss		(30,833	)	(50.8	)		(17,510	)	(18.6	)
Other income (expense), net		(1,050	)	(1.7	)		3,914		4.2
Loss before income taxes and minority interests		(31,883	)	(52.5	)		(13,596	)	(14.4	)
Provision for (benefit from) income taxes		628		1.0			(511	)	(0.5	)
Minority interest		155		0.3			269		0.3
Net loss	$	(32,666	)	(53.8	)%	$	(13,354	)	(14.2	)%

	Nine Months Ended (1)					Nine Months Ended (1)
	February 28, 2009					March 1, 2008
Net sales	$	228,248		100.0	%	$	291,083		100.0	%
Cost of sales		211,063		92.5			262,593		90.2
Gross profit		17,185		7.5			28,490		9.8
Engineering		1,760		0.8			1,287		0.4
Selling, general and administrative		26,086		11.4			32,161		11.0
Amortization of identifiable intangible assets		1,512		0.7			1,785		0.6
Severance, impairment and restructuring charges		22,904		10.0			15,861		5.4
Operating loss		(35,077	)	(15.4	)		(22,604	)	(7.8	)
Other income (expense), net		(3,268	)	(1.4	)		1,744		0.6
Loss before income taxes and minority interests		(38,345	)	(16.8	)		(20,860	)	(7.2	)
Provision for income taxes		2,049		0.9			445		0.2
Minority interest		507		0.2			707		0.2
Net loss	$	(40,901	)	(17.9	)%	$	(22,012	)	(7.6	)%

(1) Percentages may not add due to rounding.

Net Sales

Net sales decreased by $33.6 million, or 36%, to $60.7 million, in the third quarter of fiscal 2009 compared to $94.3 million in the third quarter of fiscal 2008. Net sales of $228.2 million in the nine months ended February 28, 2009 decreased by $62.8 million, or 22%, compared to net sales of $291.1 million in the comparable period of the prior fiscal year.

Net sales for our North American segments of 41% and 30%, respectively, for the three- and nine-month periods ended February 28, 2009 compared to the same periods in the prior fiscal year. Net sales in our Asia segment decreased by 30% in the current quarter compared to the third quarter of fiscal 2008, and decreased 11% in the nine months ended February 28, 2009 compared to the nine months ended March 1, 2008.

Net Sales by Segment

Net sales by segment were as follows (in thousands):

	Fiscal Quarter Ended				Nine Months Ended
	February 28, 2009		March 1, 2008		February 28, 2009		March 1, 2008
Merix Oregon	$	22,964	$	41,151	$	89,638	$	133,057
Merix San Jose		5,843		7,485		20,237		24,650
Merix Asia		31,914		45,639		118,373		133,376
	$	60,721	$	94,275	$	228,248	$	291,083

Index

Per Unit Information

Selected statistical information is summarized below. We define “unit” as the number of panels. Percentage increases (decreases) in unit volume and pricing were as follows:

	Fiscal Quarter Ended February 28, 2009 Compared to Fiscal Quarter Ended			Nine Months Ended February 28, 2009 Compared to Nine Months Ended
	March 1, 2008			March 1, 2008
Merix Oregon:
Unit volume		(51	)%		(37	)%
Average unit pricing		13	%		5	%

Merix San Jose:
Unit volume		(21	)%		(24	)%
Average unit pricing		(1	)%		11	%

Merix Asia:
Unit volume		(37	)%		(19	)%
Average unit pricing		10	%		10	%

Overall:
Unit volume		(38	)%		(20	)%
Average unit pricing		3	%		(3	)%

Consolidated

Consolidated unit sales volume decreased 38% in the current quarter compared to the third quarter of fiscal 2008 and 20% in the first nine months of fiscal 2009 versus the comparable period in the prior year, driven primarily by decreases in demand from customers in each of our segments. In addition, the Oregon segment’s unit volume declined as a result of the closure of the Wood Village facility in March 2008. Consolidated average unit pricing increased by 3% in the quarter ended February 28, 2009, driven by significant increases in average unit pricing in our Oregon and Asia segments, as further discussed below. For the nine-month period ended February 28, 2009, average unit pricing decreased by 3% compared to the same period of the prior fiscal year, despite increases in average unit pricing reflected for each of our segments as discussed below. On a year-to-date basis, an overall shift in product mix from higher-technology, higher-priced PCBs produced by our North American facilities to generally lower-technology, lower-priced PCBs produced by our facilities in Asia results in a lower consolidated average unit price. The Asia segment’s average price per unit is significantly lower than both the Oregon and San Jose segments. Our Asia segment comprised 53% of net sales in the nine months ended February 28, 2009 compared to 48% in the nine months ended March 1, 2008.

Merix Oregon

Merix Oregon net sales of $23.0 million decreased by $18.2 million or 44% compared to the third quarter of fiscal 2008. Net sales of $89.6 million in the first nine months of fiscal 2009 decreased $43.4 million or 33%. The decreases in net sales at Merix Oregon were primarily due to decreases in unit volume of 51% and 37%, respectively, for the three- and nine-month periods ended February 28, 2009 compared to the same periods in fiscal 2008 resulting from:

demand decreases resulting from the deterioration of macroeconomic conditions;

a strategic decision to rationalize our production with a focus on more profitable parts;

strategic efforts to transition production to our Asia manufacturing facilities;

capacity decrease as a result of the closure of our Wood Village facility in the fourth quarter of fiscal 2008; and

ongoing impact to customer relationships of the extended lead time issues experienced in the fourth quarter of fiscal 2008 which resulted in lower quick-turn revenue in the first quarter of fiscal 2009.

Index

The volume decreases were partially offset by increases in average unit pricing of 13% and 5%, respectively, for the three- and nine-month periods ended February 28, 2009 compared to the same periods in the prior fiscal year. These average unit pricing increases resulted primarily from our efforts to be more selective on orders and utilize plant capacity for more profitable parts as well as increases in higher technology production which generates higher average prices.

Merix San Jose

Compared to the same periods in the prior fiscal year, net sales at Merix San Jose decreased by $1.6 million (22%) to $5.8 million in the third quarter of fiscal 2009 and decreased by $4.4 million (18%) to $20.2 million in the nine months ended February 28, 2009. These decreases were primarily due to lower demand, principally for quick-turn services, resulting from the impact of the global recession. Compared to fiscal 2008, unit volume declined by 21% on a quarterly basis, and 24% on a fiscal year-to-date basis. Beginning in the third quarter of the prior fiscal year, the San Jose segment’s average unit pricing reflected an increase resulting from efforts to use capacity for products with less than 10-day lead times, which carry a higher price premium. These efforts were sustained over the past 12 months, resulting in relatively stable unit pricing when comparing the third quarter of fiscal 2009 with the third quarter of fiscal 2008, and an 11% increase in average unit pricing for the nine months ended February 28, 2009 compared to the fiscal year-to-date period ended March 1, 2008.

Merix Asia

Net sales at Merix Asia of $31.9 million in the third quarter in fiscal 2009 decreased by $13.7 million or 30% compared to the third quarter of fiscal 2008. Net sales of $118.4 million in the nine months ended February 28, 2009 decreased by $15.0 million or 11% compared to the first nine months of fiscal 2008. The decreases in net sales at Merix Asia in the three- and nine-month periods ended February 28, 2009 compared to the same periods of the prior fiscal year were primarily due to a 38% and 20% decrease, respectively, in sales unit volumes, due primarily to a drop in demand in the second and third quarters of fiscal 2009 due to deteriorating global economic conditions. The unit volume decreases were offset by efforts to improve our product mix through enhanced technology offerings from our Asia manufacturing operations over the past year which resulted in a 10% increase in average unit pricing for both the third quarter and first nine months of fiscal 2009.

Net Sales by End Market

The following table shows, for the periods indicated, the amount of net sales to each of our principal end-user markets and the percentage of the end-user market’s sales to our consolidated net sales (dollars in thousands):

	Fiscal Quarter Ended
	February 28, 2009				March 1, 2008
Communications & Networking	$	24,917	41.0	%	$	40,402	42.9	%
Automotive		11,511	19.0	%		17,520	18.6	%
Computing & Peripherals		4,725	7.8	%		9,681	10.3	%
Test, Industrial & Medical		7,153	11.8	%		9,753	10.3	%
Defense & Aerospace		5,998	9.9	%		6,534	6.9	%
Other		6,417	10.5	%		10,385	11.0	%
	$	60,721	100.0	%	$	94,275	100.0	%

	Nine Months Ended
	February 28, 2009				March 1, 2008
Communications & Networking	$	93,357	40.9	%	$	122,909	42.2	%
Automotive		48,373	21.2	%		58,583	20.1	%
Computing & Peripherals		17,294	7.6	%		26,065	9.0	%
Test, Industrial & Medical		26,938	11.8	%		32,022	11.0	%
Defense & Aerospace		20,520	9.0	%		18,827	6.5	%
Other		21,766	9.5	%		32,677	11.2	%
	$	228,248	100.0	%	$	291,083	100.0	%

Compared to the third quarter of fiscal 2008, the decreases in net sales of $15.5 million (38%) in communications & networking, $5.0 million (51%) in computing & peripherals, $2.6 million (27%) in test, industrial & medical and $3.9 million (38%) in other end markets were due primarily to a reduction in end demand for our customers’ products as a result of the global economic slowdown, as well as a strategic rationalization of our production to focus on more profitable parts. Automotive net sales, historically a steady end market, decreased by $6.0 million or 34% due to a sharp global decrease in automobile sales. These end markets also reflect decreases on a fiscal year-to-date basis compared to the prior fiscal year, driven by the same factors discussed above.

Index

Defense & aerospace net sales decreased by only $0.5 million or 8% in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 and increased by $1.7 million or 9.0% in the first nine months of fiscal 2009 compared to same period in fiscal 2008 due to strategic efforts to penetrate this market to diversify our customer base and provide a steady and profitable North American revenue stream.

We believe that our key competitive advantages include our reputation for high product quality and our unique value proposition, which enables a seamless interface from quick-turn production at the beginning of product life cycles to lower-cost volume production in the U.S. and Asia as a product’s life cycle matures. While the current global economic crisis has adversely impacted end customer demand and delayed our return to profitability, operating our restructured North American factories and upgraded Asian factories are positioned well to enable us to leverage our unique value proposition and profitably grow our customer base when market conditions improve.

Net Sales by Geographic Region

Net sales to customers outside the United States totaled 51% and 32% of net sales in the third quarters of fiscal 2009 and fiscal 2008, respectively. Net sales to customers outside the United States totaled 45% and 32% in the nine months ended February 28, 2009 and March 1, 2008, respectively. In the third quarter of fiscal 2009, sales to customers in China comprised 12% of net sales. In the third quarter of the prior fiscal year, as well as in the nine-month periods ended February 28, 2009 and March 1, 2008, there were no countries outside of the United States to which sales totaled 10% or more of net sales.

Cost of Sales and Gross Margin

Cost of sales includes manufacturing costs, such as materials, labor (both direct and indirect) and factory overhead.

A number of costs, including those for labor, utilities and manufacturing supplies, incurred by our plants in the People’s Republic of China (PRC) are denominated in Chinese renminbi. Strengthening or weakening of the Chinese Renminbi relative to the U.S. dollar affects our cost of sales and profitability. Increases in the value of the Chinese renminbi relative to the U.S. dollar in current fiscal periods compared to prior year have caused the costs of our Chinese operations to increase as stated in U.S. dollars.

Cost of sales decreased $26.5 million, or 31%, to $59.8 million in the third quarter of fiscal 2009 compared to $86.4 million in the third quarter of fiscal 2008 and decreased $51.5 million, or 20%, to $211.1 million in the nine months ended February 28, 2009 compared to $262.6 million in first nine months of fiscal 2008.

Beginning in fiscal 2009, we recorded an allocation of certain costs attributable to costs of sales in all segments that were previously charged to the Merix Oregon segment. Gross margin by segment for the third quarter of fiscal 2008 and the nine months ended March 1, 2008 has been revised to present comparable results using the same allocation methodology. Gross profit by segment was as follows (in thousands):

	Fiscal Quarter Ended					Nine Months Ended
	February 28, 2009			March 1, 2008		February 28, 2009		March 1, 2008
Merix Oregon	$	(2,356	)	$	2,200	$	2,261	$	12,534
Merix San Jose		(30	)		1,206		2,001		4,056
Merix Asia		3,262			4,518		12,923		11,900
	$	876		$	7,924	$	17,185	$	28,490

Index

Our gross margin as a percentage of net sales by segment was as follows:

	Fiscal Quarter Ended						Nine Months Ended
	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Merix Oregon		(10.3	%)		5.3	%		2.5	%		9.4	%
Merix San Jose		(0.5	%)		16.1	%		9.9	%		16.5	%
Merix Asia		10.2	%		9.9	%		10.9	%		8.9	%
Overall		1.4	%		8.4	%		7.5	%		9.8	%

In the middle of the third quarter of fiscal 2009, we implemented cost reduction programs further discussed below which are expected to reduce manufacturing costs by approximately $14.4 million on an annual basis.

Merix Oregon

Gross margin at Merix Oregon decreased to negative 10.3% of net sales in the current quarter from 5.3% of net sales in the third quarter of fiscal 2008, and decreased to 2.5% of net sales in the nine months ended February 28, 2009 compared to 9.4% in the same period of fiscal 2008. These decreases in gross margin for both the current quarter and fiscal year-to-date periods are driven by the decrease in unit sales, particularly in the higher-margin premium service line, which decreased by 72% in the current quarter compared to the third quarter of fiscal 2008. Factory margins are heavily influenced by factory utilization rates because the cost structure needed to produce PCBs is heavily weighted to fixed or step-variable costs. Thus, lower demand resulted in lower utilization rates and decreases in gross margin as a percentage of net sales, despite cost containment programs including plant shutdowns and reductions in head count. In late January 2009, we eliminated one of Merix Oregon’s four production shifts, reducing headcount as well as reducing overtime costs for retained employees. This action, along with reductions-in-force (RIF) and other cost reduction measures taken in the third quarter of fiscal 2009, is expected to reduce quarterly manufacturing costs by $2.0 million. As a result of the cumulative RIF actions taken during fiscal 2009, the manufacturing labor force at Merix Oregon has been reduced by approximately 30% since July 2008.

Merix San Jose

Gross margins at Merix San Jose decreased to negative 0.5% of net sales in the current quarter from 16.1% of net sales in the third quarter of fiscal 2008, and decreased to 9.9% of net sales in the nine months ended February 28, 2009 compared to 16.5% in the same period in fiscal 2008. The decrease on a quarterly basis is primarily due to reductions in the volume of quick-turn services as a result of the global economic slowdown which is reflected in the 21% decrease in unit volume shipments for Merix San Jose, resulting in lower fixed cost absorption. These impacts are less pronounced in a comparison of fiscal year-to-date gross margins for fiscal 2009 and fiscal 2008 as Merix San Jose experienced efficiency issues in the first quarter of the prior fiscal year due to implementation of the ERP system in North America. At Merix San Jose, the quarterly manufacturing cost reduction resulting from the RIF and other programs implemented in the third quarter of fiscal 2009 is estimated at $0.5 million. As a result of the cumulative RIF actions taken during fiscal 2009, the manufacturing labor force at Merix San Jose has been reduced by approximately 15% since July 2008.

Index

Merix Asia

Gross margins at Merix Asia increased to 10.2% of net sales in the current quarter compared to 9.9% in the second quarter of the prior fiscal year and increased to 10.9% of net sales in the nine months ended February 28, 2009 compared to 8.9% in the first nine months of fiscal 2008. These increases are primarily the result of improvements in the product mix due to higher-technology capabilities developed in our China-based facilities, which, along with a two-week plant shutdown for Chinese New Year, offset lower factory utilization rates resulting from a decrease in demand. Additionally, gross margin in the third quarter of fiscal 2009 benefited by approximately 2 percentage points from a reduction in the provision for warranty charges to reflect the change from a three-year warranty period to a twelve-month warranty period on products sold by our Asia segment and the impact of improved quality on claim rates for our Asia factories. We also achieved cost efficiencies in the first three quarters of fiscal 2009 due to the closing of our Hong Kong facility completed in the fourth quarter of fiscal 2008. Merix Asia has used formal RIFs to a lesser extent than Merix Oregon and San Jose. Instead, we have reduced the number of hours of operations within our Asian factories and significantly reduced overtime costs. Along with other cost reduction measures, these actions have resulted in higher attrition and are expected to result in manufacturing labor cost savings of approximately $1.1 million per quarter. The manufacturing labor force at Merix Asia has been reduced by approximately 20% since July 2008.

Engineering Costs

Engineering costs include indirect labor, materials and overhead to support the development of new manufacturing processes required to meet our customers’ technology requirements.

Engineering costs increased $0.2 million, or 48%, to $0.5 million in the third quarter of fiscal 2009 compared to $0.3 million in the third quarter of fiscal 2008 and increased $0.5 million, or 37%, to $1.8 million in the nine months ended February 28, 2009 compared to $1.3 million in the nine months ended March 1, 2008. The increases were due primarily to costs to support the development of higher technology products in Asia.

Selling, General and Administrative Costs

Selling, general and administrative (SG&A) costs include indirect labor, travel, outside services and overhead incurred in our sales, marketing, management and administrative support functions.

SG&A costs decreased $1.5 million, or 15%, to $8.4 million in the third quarter of fiscal 2009 compared to $9.9 million in the third quarter of fiscal 2008 and decreased $6.1 million, or 19%, to $26.1 million in the nine months ended February 28, 2009 compared to $32.2 million in the nine months ended March 1, 2008. The decreases on both a quarterly and fiscal year-to-date comparative basis were primarily due to lower labor costs resulting from headcount reductions, lower stock compensation expense, reduced commission expense on the lower revenue base and reduced overall expense levels due to aggressive cost management programs. These decreases in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 were offset by increased bad debt expense recorded to reflect additional collection risk on customers in our automotive end market.

Amortization of Identifiable Intangible Assets

Amortization of identifiable intangible assets was $0.5 million and $1.5 million, respectively, in the third quarter of fiscal 2009 and the nine months ended February 28, 2009 compared to $0.5 million and $1.8 million, respectively, in the comparable periods of the prior fiscal year. The reduction in amortization on a fiscal year-to-date basis was primarily related to declining amortization amounts for customer relationships acquired in the Merix San Jose acquisition. Our identifiable intangible assets balance at February 28, 2009 was $7.4 million and current amortization is approximately $0.5 million per quarter.

Index

Severance and Impairment and Restructuring Charges

Total severance and impairment and restructuring charges were as follows (in thousands):

	Fiscal Quarter Ended				Nine Months Ended
	February 28, 2009		March 1, 2008		February 28, 2009			March 1, 2008
Hong Kong closure severance charges	$	7	$	180	$	60		$	1,289
Other severance charges – Merix Asia		151		85		219			85
Gain on sale of Merix Asia equipment		-		-		(567	)		-
Goodwill impairment – Merix Asia		20,500		-		20,500			-
Asset impairment – Merix Asia		-		92		-			187
Severance charges – Merix Oregon		1,413		1,117		1,719			1,117
Asset impairment– Merix Oregon		-		12,767		702			12,767
Lease termination charges – Merix Oregon		222		-		222			-
Executive severance		-		365		-			365
Other restructuring charges		49		34		49			51
	$	22,342	$	14,640	$	22,904		$	15,861

Due to a number of factors including: 1) the substantial variance between our market capitalization based on the current trading price range for our common stock and the net asset value reflected in our consolidated balance sheet, 2) continuing operating losses sustained in the first three quarters of fiscal 2009 and 3) the deterioration of general economic environment, we have undertaken quarterly assessments of potential impairment of our long-lived assets in the throughout fiscal 2009. Our analyses included assessments of current fair value based on an update of forecasted future cash flows used in our annual impairment test at the end of fiscal 2008. As a result of the deepening economic downturn and resulting reduction in demand for our products and net sales in the third quarter of fiscal 2009, we have reduced our forecast of net sales and future cash flows and believe that the recovery will occur later than initially anticipated. As a result, an impairment charge of $20.5 million has been recorded in the third quarter of fiscal 2009 to reduce the value of goodwill recorded in the acquisition of the Asia subsidiary to $0. We have also performed an assessment of potential impairment of other long-lived assets and have determined that no additional impairment charges are necessary as of February 28, 2009.

Due primarily to the deteriorating macroeconomic conditions, we have taken cost reduction actions to mitigate declines in our net sales. Most of the larger cost reductions were related to three major reductions-in-force that occurred in September 2008, December 2008 and January 2009. These headcount reductions resulted in severance and related charges paid totaling approximately $1.6 million in the third quarter of fiscal 2009 and $2.0 million for the nine months ended February 28, 2009. We have also significantly reduced our labor costs due to attrition within our labor force, particularly in the PRC. As of the end of February 2009, we reduced our labor force by approximately 25% compared to July 2008.

Additional actions taken in March 2009 to reduce management headcount are expected to reduce operating expenses by $1.6 annually and will result in severance and related charges of $0.8 million in the fourth quarter of fiscal 2009.

In the second quarter of fiscal 2009, we implemented a plan to dispose of certain surplus plant assets to streamline the utilization of equipment in our Merix Oregon factory and recorded $0.7 million in impairment charges on the assets to be disposed. The sale of the assets was finalized in the third quarter of fiscal 2009.

In the third quarter of fiscal 2008, we approved a plan to close our manufacturing facility located in Wood Village, Oregon, and relocated production to its Forest Grove facility. This restructuring action was completed in the fourth quarter of fiscal 2008. We recorded severance and impairment charges in the third quarter of fiscal 2008 totaling $13.9 million, comprising approximately $12.8 million in asset impairments and adjustments to the asset retirement obligation accrual for the Wood Village lease and $1.1 million in severance and related charges. In the third quarter of fiscal 2009, we recorded $0.2 million in additional lease termination costs related to the closure of the Wood Village factory due to a revised agreement with the sub lessee regarding the amount to be charged for property taxes during the term of the sublease.

Index

In the third quarter of fiscal 2008, we terminated our Executive Vice President of Global Operations. In accordance with the executive employment agreement related to this termination, we recorded $0.4 million of severance and related costs.

In the first quarter of fiscal 2008, we committed to phasing out operations at our Hong Kong facility, closing the facility and relocating production to other manufacturing facilities. Closure of the facility was substantially complete in the fourth quarter of fiscal 2008. This closure was a part of our actions to consolidate our Asian operations at the lower-cost facilities in China and expand the facilities at our Huiyang plant. We recorded $0.2 million, in severance and related costs in the third quarter of fiscal 2008 in connection with the closure of the Hong Kong facility. We recorded approximately $0.1 and $1.3 million, respectively, in Hong Kong facility severance and other restructuring costs in the first nine months of fiscal 2009 and fiscal 2008. In the first quarter of fiscal 2009, we recorded a gain of $0.6 million related to the sale of equipment previously used at the Hong Kong facility.

Interest Income

Interest income was $27,000 and $0.1 million, respectively, for the three- and nine-month periods ended February 28, 2009 compared to $0.2 million and $0.7 million in the same periods in fiscal 2008 due to reduced average cash-on-hand balances in the current fiscal year.

Interest Expense

Interest expense was $1.1 million and $2.9 million, respectively, in the three- and nine-month periods ended February 28, 2009 compared to $0.9 million and $3.1 million, respectively, in the comparable periods of the prior fiscal year. The increase in interest expense in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 is primarily due to increased borrowings outstanding on our revolving line of credit in the current quarter.

In the third quarter of fiscal 2008, we repaid $2.5 million on the subordinated promissory note in connection with the reduction in the purchase price of Merix Asia and the remaining $5.1 million of outstanding debt was eliminated as further discussed below. The resulting reduction in interest expense in the nine months ended February 28, 2009 compared to the same period in fiscal 2008 was partially offset by increased interest expense related to average outstanding borrowings on our revolving line of credit during fiscal 2009.

Gain on Settlement of Debt

Under the terms of the subordinated note payable related to the Merix Asia acquisition, a principal payment of approximately $2.1 million would ordinarily have been due December 1, 2007. However, we exercised our rights under the subordinated note to not make this payment due to Merix’ claims against the seller. On January 25, 2008, we settled these claims and made a payment of $2.5 million to settle all remaining obligations under the subordinated promissory note. The remaining balance of $5.1 million outstanding on the subordinated note payable, plus $53,000 of accrued interest, was eliminated in exchange for us releasing the seller from all past and any future claims relating to the Merix Asia acquisition. The $53,000 of accrued interest that was eliminated was included as a component of the $5.1 million gain on settlement of debt on our statement of operations during the quarter ended March 1, 2008.

Other Income (Expense), net

There was no material other income or expense in the third quarter of fiscal 2009, compared to $0.4 million in the third quarter of fiscal 2008, comprised primarily of foreign currency losses. On a fiscal year to date basis, net other expense decreased by $0.5 million to $0.5 million in the nine months ended February 28, 2009 due to reduced foreign currency losses resulting from the strengthening of the U.S. dollar when compared to average exchange rates in nine months ended March 1, 2008.

Index

Income Tax Expense

On a quarterly basis, we estimate our provision for income taxes based on our projected results of operations for the full year. Income tax is provided for entities expected to generate profits that are not offset by losses generated by entities in other tax jurisdictions. As a result, our effective income tax rate was negative 5.3% in the nine months ended February 28, 2009 and negative 2.1% in the comparable period of the prior fiscal year. In the third quarter of fiscal 2008, we reversed $1.5 million of valuation allowance against certain Merix Asia deferred tax assets. This reversal was recorded as a $1.5 million increase in deferred tax assets, a $0.5 million decrease to goodwill and a $1.0 million decrease to tax expense in the third quarter of fiscal 2008.

Our effective income tax rate differs from tax computed at the federal statutory rate primarily as a result of our mix of earnings in various tax jurisdictions, the diversity in income tax rates, and our continuous assessment of the realization of our uncertain tax positions and deferred tax assets. The effective tax rate reflects current taxes expected to be paid in profitable jurisdictions, provision for taxes and interest accrued on uncertain tax positions and maintenance of valuation allowances in jurisdictions with cumulative losses or profitability risks.

Liquidity and Capital Resources

Our sources of liquidity and capital resources as of February 28, 2009 consisted of $19.1 million of cash and cash equivalents and $31.1 million unused availability under our revolving bank credit agreement, described below. Based on management’s forecast for results of operations and cash flow subject to various scenarios, we expect our capital resources, together with the borrowing capacity under our credit agreement, to be sufficient to fund our operations and known capital requirements for at least one year from February 28, 2009, although we may seek additional sources of funds.

We have a Loan and Security Agreement with Bank of America, N.A. (the Credit Agreement) which provides a revolving line of credit of up to $55.0 million on a borrowing based calculated with respect to the value of accounts receivable, equipment and real property. The Credit Agreement expires in February 2013. The obligations under the Credit Agreement are secured by substantially all of our U.S. assets. The borrowings bear interest based, at the Company’s election, on either the prime rate announced by Bank of America or LIBOR plus an applicable margin. As of February 28, 2009, the unused borrowing base was $31.1 million, with an outstanding balance of $8.0 million. The Credit Agreement contains usual and customary covenants for credit facilities of this type, all of which we were in compliance with as of February 28, 2009. In addition, the Credit Agreement also includes a financial covenant requiring a minimum fixed charge coverage ratio of 1.1:1 if Excess Availability, defined in the Credit Facility agreement as a function of the unused borrowing base and cash held in certain U.S. bank accounts, falls below $20.0 million. Excess Availability at February 28, 2009 was $36.2 million and as such, this covenant is not currently in effect. We would not be in compliance if this covenant was currently applicable. Based on management forecasts, we do not expect that Excess Availability will fall below $20.0 million for at least one year from February 28, 2009.

In the first nine months of fiscal 2009, cash and cash equivalents increased $13.4 million to $19.1 million as of February 28, 2009 from $5.7 million as of May 31, 2008 primarily as a result of $23.3 million provided by operations (as described in more detail below) and net borrowings on our revolving line of credit totaling $8.0 million, offset by the use of $18.1 million for the purchase of property, plant and equipment.

Cash flows from operating activities totaled $23.3 million. Cash totaling $1.7 million was provided by net loss of $32.6 million, adjusted for $39.2 million in non-cash charges, primarily $21.2 million of impairment charges, $16.8 million for depreciation and amortization and $1.3 million in share-based compensation expense. As discussed in more detail below, other significant changes in working capital generating $25.0 million in cash from operations in the first nine months of fiscal 2009 include $27.5 million from reductions in accounts receivable, $7.4 million from reductions in inventory, a $1.1 million increase in amounts due to affiliate, and $8.5 million from decreases in other assets, primarily related to a VAT refund received from the Chinese tax authorities. These cash inflows were offset by the use of $19.4 million in cash for settlement of accounts payable and other accrued liabilities. Note that changes in working capital balances vary from cash flows from operations due to the impact of non-cash transactions on amounts reported in the consolidated balance sheets.

Index

Accounts receivable, net of allowances for bad debts, decreased $27.5 million to $45.7 million at February 28, 2009 from $73.2 million as of May 31, 2008. The decrease is primarily due to the reduced revenue base in the third quarter of fiscal 2009. Due to the global economic slowdown, our customers have been seeking to extend payment terms. However, we have increased collections staff and implemented improved collection programs and as a result days sales outstanding, calculated on a quarterly basis, was 68 days at February 28, 2009 and 76 days at May 31, 2008.

Inventories, net of reserves, decreased by $7.4 million to $16.2 million at February 28, 2009 compared to $23.6 million at May 31, 2008. The variance is comprised of a net decrease of $3.0 million in finished goods and consignment inventories and a $4.4 million reduction in raw materials and work-in-process inventories as a result of reductions to support currently expected net sales volumes and the timing of purchases and production.

Prepaid and other current assets decreased $8.3 million to $4.7 million as of February 28, 2009 compared to $13.0 million as of May 30, 2008, primarily due to VAT refunds received during the first and third quarters of fiscal 2009 as well as decreases in prepaid employee insurance benefits and receivables for scrapped commodity materials. Other non-current assets decreased by $1.1 million to $4.7 million as of February 28, 2009 due to amortization of deferred financing costs and minor reductions in various other assets.

Accounts payable and other current liabilities, exclusive of the $0.9 million net intercompany payable recorded due to the one-month reporting lag for Asia, totaled $51.1 million at February 28, 2009, a decrease of $24.5 million compared to $75.6 million at May 31, 2008. The decrease is due primarily to a $22.5 million reduction in accounts payable resulting from decreased purchases to support the lower revenue base. Additionally, accrued warranty decreased by $1.1 million due to the decrease in net sales as well as improved quality and a transition from a three-year warranty provision to a 12-month warranty provision for our Asia operations, and other accrued liabilities decreased by $0.8 million primarily due to accruals for professional services related to fiscal year end and the refinancing of our revolving line of credit included in current liabilities at May 31, 2008.

Amounts due to affiliate increased to a $0.9 million payable balance at February 28, 2009 from a $0.2 million receivable balance at May 31, 2008. The increase is due to the timing of payments for intercompany purchases, which impact our balance sheet as a result of the one-month reporting lag for our Asia subsidiary.

Expenditures for property, plant and equipment of $18.1 million in the first nine months of fiscal 2009 primarily consisted of expenditures for the expansion and improvement of the process technology at our China-based Huiyang facility, improvement of the process technology and increasing the processing speed of our North American facility and the implementation of a company-wide ERP system. Most of the capital expenditure associated with the recent expansion of our Huiyang, China facility and ERP implementation was completed in the first quarter of fiscal 2009. In response to the economic downturn and the resulting reduction in demand for our products, discretionary capital expenditures have been substantially curtailed. We believe our facilities and equipment are in good condition and do not require significant investments in the near term. It is management’s intent to minimize capital spending until market conditions and cash flows improve. Remaining capital expenditures in fiscal 2009 are currently estimated at approximately $1 million.

We are currently marketing for sale the facility formerly housing our Hong Kong manufacturing operation. Although a transaction is not imminent, we estimate proceeds on sale in the range of $10 million to $15 million.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS Nos. 141(R) and 160 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both statements are effective for annual reporting periods beginning on or after December 15, 2008 and earlier adoption is prohibited. SFAS No. 141(R) will be applied to business combinations occurring after the effective date and SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The adoption of SFAS Nos. 141(R) and 160 is not expected to have a significant impact on our current financial position and results of operations.

Index

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Use of Estimates

We reaffirm the information included under the heading “Critical Accounting Policies and Use of Estimates” appearing at page 45 of our Annual Report on Form 10-K for the year ended May 31, 2008, which was filed with the Securities and Exchange Commission on August 7, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks and risk management policies since the filing of our Annual Report on Form 10-K for the year ended May 31, 2008, which was filed with the Securities and Exchange Commission on August 7, 2008.

Item 4. Controls and Procedures

Attached to this quarterly report as exhibits 31.1 and 31.2 are the certifications of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) required by section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This portion of our quarterly report on Form 10-Q is our disclosure of the conclusions of our principal executive officer and principal financial officer regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report based on management’s evaluation of those disclosure controls and procedures. This disclosure should be read in conjunction with the Section 302 Certifications for a complete understanding of the topics presented.

Material Weakness

In connection with management’s assessment of our internal control over financial reporting as of February 28, 2009, we determined that the material weakness in our internal control continued to exist as a result of the control deficiency previously identified with respect to our Merix Asia operations.

Background

Merix Asia was acquired in September 2005. Upon acquisition, Merix Asia had weak internal controls over financial reporting and needed to develop processes to strengthen its accounting systems and control environment management. We have devoted significant time and resources to improving the internal controls over financial reporting since the acquisition. However, Merix management did not maintain sufficient controls to adequately monitor the accounting and financial reporting of our Merix Asia operations. This control deficiency could result in a material misstatement to the interim or annual consolidated financial statements that would not be prevented or detected in a timely manner. Accordingly, management has determined that this control deficiency constitutes a material weakness.

Index

Remediation Steps to Address Material Weakness

Because of the material weakness identified in our evaluation of internal control over financial reporting, we performed and plan to perform additional steps to enhance internal control over financial reporting. Our procedures include, but were not limited to, the following:

In August 2008, we implemented our global ERP system for our Asia operations. The new ERP system allows for greater consistency of accounting processes and internal controls between our U.S. and Asia operations and provides greater visibility into the accounting records and accounting practices in Merix Asia.

We continued to perform quarterly physical inventory counts at our Asia facilities.

We have devoted time and resources to implement and improve the cost accounting systems for Merix Asia and to strengthen our analytical procedures focused on trends and variance analysis to budgets and forecasts. In fiscal 2008, we implemented detailed periodic reviews of the results of Merix Asia with follow-up actions to improve the control currently in place. These reviews provide for more formal communication processes related to the financial statements adjustments and changes in the internal control environment.

We have invested significant amounts of time and expense on training for financial personnel in the U.S. and Asia. U.S. management has also commenced more frequent oversight trips to Asia.

We continue to reaffirm a message that compliance with our controls over financial reporting is extremely important and will continue to impress that throughout our Company.

We have realigned our organizational structure across the company along functional lines. We believe this has resulted in more accountability across the organization and allows for sharing of best practices across all functions, improving the internal control environment.

Despite the significant improvement of internal controls over financial reporting related to our Merix Asia operations, management believes that it cannot be determined that the material weakness is sufficiently remediated until the successful implementation of the global ERP system for our Asia operations along with related improvements in system reporting and restructuring of global finance staff responsibilities can be evaluated in the fourth quarter of fiscal 2009. The ERP system in Asia was implemented at the beginning of our Asia subsidiary’s second fiscal quarter in August 2008 and we are currently assessing the impact of the new ERP system on our internal controls at our Asia subsidiary.

Based on management’s evaluation of the effectiveness of our disclosure controls and procedures, our CEO and CFO concluded that as of the end of the period covered by the Form 10-Q, due to the need to evaluate the implementation of the global ERP system for our Asia operations, our disclosure controls and procedures were not effective in providing reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Index

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are, from time to time, made subject to various legal claims, actions and complaints in the ordinary course of its business. Except as disclosed below, management believes that the outcome of litigation should not have a material adverse effect on our consolidated results of operations, financial condition or liquidity.

Securities Class Action

Four purported class action complaints were filed against Merix and certain of its executive officers and directors in the first quarter of fiscal 2005. The complaints were consolidated in a single action entitled In re Merix Corporation Securities Litigation , Lead Case No. CV 04-826-MO, in the U.S. District Court for the District of Oregon. After the court granted our motion to dismiss without prejudice, the plaintiffs filed a second amended complaint. That complaint alleged that the defendants violated the federal securities laws by making certain inaccurate and misleading statements in the prospectus used in connection with the January 2004 public offering of approximately $103.4 million of our common stock. In September 2006, the Court dismissed that complaint with prejudice. The plaintiffs appealed to the Ninth Circuit Court of Appeals. In April 2008, the Ninth Circuit reversed the dismissal of the second amended complaint. We sought rehearing which was denied and rehearing en banc was also denied. We obtained a stay of the mandate from the Ninth Circuit and filed a certiorari petition with the United States Supreme Court on September 22, 2008. On December 15, 2008, the Supreme Court denied our certiorari petition. The case has been remanded back to the U.S. District Court for the District of Oregon. The plaintiffs seek unspecified damages. A potential loss or range of loss that could arise from these cases is not estimable or probable at this time.

Breach of Contract

In June 2008, a complaint was filed against Merix Caymans Trading Company Ltd. by Clark Sales, LLC, Case No. 2:08-CV-12551-MOR-VMM, in the United States District Court, Eastern District of Michigan. The complaint alleges breach of contract in relation to payment of post-termination commissions. The plaintiffs sought damages in excess of $4 million. The parties reached a settlement agreement on November 24, 2008 and the Company recorded an accrual of $0.4 million in the second quarter of fiscal 2009. The terms of the settlement included a lump sum payment of $0.4 million paid in December 2008, and monthly payments thereafter based on net sales of certain products through August 15, 2009, paid in accordance with our existing commission structure for outside sales representatives.

Item 1A. Risk Factors

RISK FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS

Investing in our securities involves a high degree of risk. If any of the following risks impact our business, the market pric e of our shares of common stock and other securities could decline and investors could lose all or part of their investment. In addition, the following risk factors and uncertainties could cause our actual results to differ materially from those projected in our forward-looking statements, whether made in this Quarterly Report on Form 10-Q or the other documents we file with the SEC, or in our annual or quarterly reports to shareholders, future press releases, or orally, whether in presentations, responses to questions or otherwise.

We are dependent upon the electronics industry, which is highly cyclical and suffers significant downturns in demand resulting in excess manufacturing capacity and increased price competition.

The electronics industry, on which a substantial portion of our business depends, is cyclical and subject to significant downturns characterized by diminished product demand, rapid declines in average selling prices and over-capacity. This industry has experienced periods characterized by relatively low demand and price depression and is likely to experience recessionary periods in the future. Economic conditions affecting the electronics industry in general, or specific customers in particular, have adversely affected our operating results in the past and may do so in the future. Currently, the global economy has been greatly impacted by the global recessionary conditions linked to a collapse of values in the U.S. home mortgage sector, volatile fuel prices, and a changing political and economic landscape. These factors have contributed to historically low consumer confidence levels which has resulted in a significantly intensified downturn in the demand for products incorporating PCBs, which has in turn adversely affected our results of operations for the first three quarters of fiscal 2009.

Index

The electronics industry is characterized by intense competition, rapid technological change, relatively short product life cycles and pricing and profitability pressures. These factors adversely affect our customers and we suffer similar effects. Our customers are primarily high-technology equipment manufacturers in the communications and networking, computing and peripherals, test, industrial and medical, defense and aerospace and automotive markets of the electronics industry. Due to the uncertainty in the markets served by most of our customers, we cannot accurately predict our future financial results or accurately anticipate future orders. At any time, our customers can discontinue or modify products containing components manufactured by us, adjust the timing of orders and shipments or affect our mix of consolidated net sales generated from quick-turn and premium services revenues versus standard lead time production, any of which could have a material adverse effect on our results of operations.

Competition in the printed circuit board market is intense and we could lose sales if we are unable to compete effectively.

The market for PCBs is intensely competitive, highly fragmented and rapidly changing. We expect competition to persist, which could result in continued reductions in pricing and profitability and loss of market share. We believe our major competitors are U.S., Asian and other international independent manufacturers of multi-layer printed circuit boards, backplanes and other electronic assemblies. Those competitors include Daeduck Electronics Co., DDi Corp., Elec and Eltek., Meadville Holdings, Ltd., LG Electronics, Multek Corporation (a division of Flextronics International Ltd.), Sanmina-SCI Corporation, TTM Technologies, Inc., WUS Printed Circuits Company Ltd., ViaSystems, Inc and Ibiden Co., Ltd.

Some of our competitors and potential competitors may have a number of advantages over us, including:

significantly greater financial, technical, marketing and manufacturing resources;

preferred vendor status with some of our existing and potential customers;

more focused production facilities that may allow them to produce and sell products at lower price points;

more capital; and

larger customer bases.

In addition, these competitors may have the ability to respond more quickly to new or emerging technologies, be more successful in entering or adapting to existing or new end markets, adapt more quickly to changes in customer requirements and devote greater resources to the development, promotion and sale of their products than we can. Consolidation in the PCB industry, which we expect to continue, could result in an increasing number of larger PCB companies with greater market power and resources. Such consolidation could in turn increase price competition and result in other competitive pressures for us. We must continually develop improved manufacturing processes to meet our customers’ needs for complex, high-technology products, and our basic interconnect technology is generally not subject to significant proprietary protection. We may not be able to maintain or expand our sales if competition increases and we are unable to respond effectively.

Other considerations that affect our ability to compete include providing manufacturing services that are competitively priced, providing continually evolving technical capabilities, having competitive lead times and meeting specified delivery dates.

Due to the severe downturn in the economic environment, coupled with our recent financial performance, we have noted and expect to see continuing concern from our customers about our ability to continue operations in the current environment. We have not had any major customer cease doing business with us as a result of concerns about our stability. However, if one or more major customers were to significantly reduce its purchases from us, it could have a material adverse effect on our results of operations.

Index

During recessionary periods in the electronics industry, our competitive advantages in providing an integrated manufacturing solution and responsive customer service may be less important to our customers than they are in more favorable economic climates.

If competitive production capabilities increase in Asia, where production costs are lower, we may lose market share in both North America and Asia and our profitability may be materially adversely affected by increased pricing pressure.

PCB manufacturers in Asia and other geographies often have significantly lower production costs than our North American operations and may even have cost advantages over Merix Asia. Production capability improvements by foreign and domestic competitors may play an increasing role in the PCB markets in which we compete, which may adversely affect our revenues and profitability. While PCB manufacturers in these locations have historically competed primarily in markets for less technologically advanced products, they are expanding their manufacturing capabilities to produce higher layer count, higher technology PCBs and could compete more directly with our North American operations.

If we are unable to respond to rapid technological change and process development, we may not be able to compete effectively.

The market for our products is characterized by rapidly changing technology and continual implementation of new production processes. The success of our business depends in large part upon our ability to maintain and enhance our technological capabilities, to manufacture products that meet changing customer needs, and to successfully anticipate or respond to technological changes on a cost-effective and timely basis. In addition, the PCB industry could encounter competition from new or revised manufacturing and production technologies that render existing manufacturing and production technology less competitive or obsolete. We may not be able to respond effectively to the technological requirements of the changing market. If we need new technologies and equipment to remain competitive, the development, acquisition and implementation of those technologies and equipment may require us to make significant capital investments. We may not be able to raise the necessary additional funds at all or as rapidly as necessary to respond to technological changes as quickly as our competitors.

During periods of excess global PCB manufacturing capacity, our profitability may decrease and/or we may have to incur additional restructuring charges if we choose to reduce the capacity of or close any of our facilities.

A significant portion of our factory costs of sales and operating expenses are relatively fixed in nature, and planned expenditures are based in part on anticipated orders. When we experience excess capacity, our sales revenues may not fully cover our fixed overhead expenses, and our gross margins will fall. In addition, we generally schedule our quick-turn production facilities at less than full capacity to retain our ability to respond to unexpected additional quick-turn orders. However, if these orders are not received, we may forego some production and could experience continued excess capacity.

If we conclude we have significant, long-term excess capacity, we may decide to permanently close one or more of our facilities, and lay off some of our employees. Closures or lay-offs could result in recording of restructuring charges such as severance, other exit costs, and asset impairments.

Damage to our manufacturing facilities or information systems due to fire, natural disaster, or other events could harm our financial results.

We have U.S. manufacturing and assembly facilities in Oregon, California and China. The destruction or closure of any of our facilities for a significant period of time as a result of fire, explosion, act of war or terrorism, or blizzard, flood, tornado, earthquake, lightning, or other natural disaster could harm us financially, increasing our costs of doing business and limiting our ability to deliver our manufacturing services on a timely basis. Additionally, we rely heavily upon information technology systems and high-technology equipment in our manufacturing processes and the management of our business. We have developed disaster recovery plans; however, disruption of these technologies as a result of natural disaster or other events could harm our business and have a material adverse effect on our results of operations.

Index

A small number of customers account for a substantial portion of our consolidated net sales and our consolidated net sales could decline significantly if we lose a major customer or if a major customer orders fewer of our products or cancels or delays orders.

Historically, we have derived a significant portion of our consolidated net sales from a limited number of customers. Our five largest OEM customers, which vary from period to period, comprised 37% of our consolidated net sales during the third quarter of fiscal 2009. Net sales to one customer represented 12% of consolidated net sales during the third quarter of fiscal 2009. We expect to continue to depend upon a small number of customers for a significant portion of our consolidated net sales for the foreseeable future. The loss of, or decline in, orders or backlog from one or more major customers could reduce our consolidated net sales and have a material adverse effect on our results of operations and financial condition. Further, as part of our plan to improve the profitability of our North American operations we have reduced our reliance on certain customers and certain products that have historically generated significant revenues for Merix. We anticipate retaining a meaningful portion of this business, but there can be no assurance we will be successful. An unplanned loss of a large portion of this revenue could adversely affect our financial results.

Some of our customers are relatively small companies, and our future business with them may be significantly affected by their ability to continue to obtain financing. If they are unable to obtain adequate financing, they will not be able to purchase products, which, in the aggregate, would adversely affect our consolidated net sales.

We are exposed to the credit risk of some of our customers and also as a result of a concentration of our customer base.

Most of our sales are on an “open credit” basis, with standard industry payment terms. We monitor individual customer payment capability in granting open credit arrangements, seek to limit open credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts. During periods of economic downturn in the global economy and the electronics and automotive industries, our exposure to credit risks from our customers increases. Although we have programs in place to monitor and mitigate the associated risk, those programs may not be effective in reducing our credit risks.

In total, five entities represented approximately 49% of the consolidated net trade accounts receivable balance at February 28, 2009, individually ranging from approximately 5% to approximately 21%. Our OEM customers direct our sales to a relatively limited number of electronic manufacturing service providers. Our contractual relationship is typically with the electronic manufacturing service providers, who are obligated to pay us for our products. Because we expect our OEM customers to continue to direct our sales to electronic manufacturing service providers, we expect to continue to be subject to the credit risk of a limited number of customers. This concentration of customers exposes us to increased credit risks. If one or more of our significant customers were to become insolvent or were otherwise unable to pay us, our financial condition and results of operations would be adversely affected.

Because we do not generally have long-term contracts with our customers, we are subject to uncertainties and variability in demand by our customers, which could decrease consolidated net sales and negatively affect our operating results.

We generally do not have long-term purchase commitments from our customers, and, consequently, our consolidated net sales are subject to short-term variability in demand by our customers. Customers generally have no obligation to order from us and may cancel, reduce or delay orders for a variety of reasons. The level and timing of orders placed by our customers vary due to:

fluctuation in demand for our customers’ products;

changes in customers’ manufacturing strategies, such as a decision by a customer to either diversify or consolidate the number of PCB manufacturers used;

customers’ inventory management;

our own operational performance, such as missed delivery dates and repeated rescheduling; and

changes in new product introductions.

Index

We have experienced terminations, reductions and delays in our customers’ orders. Future terminations, reductions or delays in our customers’ orders could lower our production asset utilization, which would lower our gross profits, decrease our consolidated net sales and negatively affect our business and results of operations.

The increasing prominence of EMS providers in the PCB industry could reduce our gross margins, potential sales, and customers.

Sales to EMS providers represented approximately 47% of our net sales in the third quarter of fiscal 2009. Sales to EMS providers include sales directed by OEMs as well as orders placed with us at the EMS providers’ discretion. EMS providers source on a global basis to a greater extent than OEMs. The growth and concentration of EMS providers increases the purchasing power of such providers and could result in increased price competition or the loss of existing OEM customers. In addition, some EMS providers, including some of our customers, have the ability to directly manufacture PCBs within their own businesses. If a significant number of our other EMS customers were to acquire these abilities, our customer base might shrink, and our sales might decline substantially. Moreover, if any of our OEM customers outsource the production of PCBs to these EMS providers, our business, results of operations and financial condition may be harmed.

Automotive customers have higher quality requirements and long qualification times and, if we do not meet these requirements, our business could be materially adversely affected.

For safety reasons, our automotive customers have strict quality standards that generally exceed the quality requirements of our other customers. Because a significant portion of Merix Asia’s products are sold to customers in the automotive industry, if our manufacturing facilities in Asia do not meet these quality standards, our results of operations may be materially and adversely affected. These automotive customers may require long periods of time to evaluate whether our manufacturing processes and facilities meet their quality standards. If we were to lose automotive customers due to quality control issues, we might not be able to regain those customers, or gain new automotive customers, for long periods of time, which could significantly decrease our consolidated net sales and profitability.

The cyclical nature of automotive production and sales could adversely affect Merix’ business.

A significant portion of Merix Asia’s products are sold to customers in the automotive industry. In the third quarter of fiscal 2009, net sales to the automotive market accounted for approximately 19% of our consolidated net sales. As a result, Merix Asia’s results of operations may be materially and adversely affected by market conditions in the automotive industry. Automotive production and sales are cyclical and depend on general economic conditions and other factors, including consumer spending and preferences. In addition, automotive production and sales can be affected by labor relations issues, regulatory requirements, trade agreements and other factors. Any significant economic decline that results in a reduction in automotive production and sales by Merix Asia’s customers could have a material adverse effect on Merix’ business, results of operations and financial condition.

We have experienced significant decreases in demand from our automotive customers who have been affected by the significant economic difficulties facing the automotive industry. Recent public liquidity concerns of certain companies in the automotive supply chain could impact our future demand levels and the collectibility of outstanding receivables with those customers. We have approximately $11.6 million in outstanding receivables and consigned inventory with this customer base. A prolonged downturn or the failure of one or more of our automotive customers could result in the impairment of assets invested in this end market, including our Huizhou, China facility, which is heavily reliant on the automotive industry for sales of its products.

Index

Products we manufacture may contain manufacturing defects, which could result in reduced demand for our products and liability claims against us.

We manufacture highly complex products to our customers’ specifications. These products may contain manufacturing errors or failures despite our quality control and quality assurance efforts. Further, our technology expansion efforts including the major expansion in our Huiyang factory increase the risk related to unanticipated yield issues, as well as to uncertainties related to future warranty claims. Defects in the products we manufacture, whether caused by a design, manufacturing or materials failure or error, may result in delayed shipments, increased warranty costs, customer dissatisfaction, or a reduction in or cancellation of purchase orders. If these defects occur either in large quantities or too frequently, our business reputation may be impaired. Since our products are used in products that are integral to our customers’ businesses, errors, defects or other performance problems could result in financial or other damages to our customers beyond the cost of the PCB, for which we may be liable in some cases. Although we generally attempt to sell our products on terms designed to limit our exposure to warranty, product liability and related claims, in certain cases, the terms of our agreements allocate to Merix substantial exposure for product defects. In addition, even if we can contractually limit our exposure, existing or future laws or unfavorable judicial decisions could negate these limitation of liability provisions. Product liability litigation against us, even if it were unsuccessful, would be time consuming and costly to defend. Although we maintain a warranty reserve, this reserve may not be sufficient to cover our warranty or other expenses that could arise as a result of defects in our products.

We may incur material losses and costs as a result of product liability and warranty claims that may be brought against us.

We face an inherent business risk of exposure to warranty and product liability claims in the event that our products, particularly those supplied by Merix Asia to the automotive industry, fail to perform as expected or such failure results, or is alleged to result, in bodily injury and/or property damage. In addition, if any of our products are or are alleged to be defective, we may be required to participate in a recall of such products. As suppliers become more integral to the vehicle design process and assume more of the vehicle assembly functions, vehicle manufacturers are increasingly looking to their suppliers for contributions when faced with product liability claims or recalls. In addition, vehicle manufacturers, who have traditionally borne the cost associated with warranty programs offered on their vehicles, are increasingly requiring suppliers to guarantee or warrant their products and may seek to hold us responsible for some or all of the costs related to the repair and replacement of parts supplied by us to the vehicle manufacturer. A successful warranty or product liability claim against us in excess of our available insurance coverage or established warranty and legal reserves or a requirement that we participate in a product recall may have a material adverse effect on our business, financial condition and results of operations.

We rely on suppliers for the timely delivery of materials used in manufacturing our PCBs, and an increase in industry demand, a shortage of supply or an increase in the price of raw materials may increase the cost of the raw materials we use and may limit our ability to manufacture certain products and adversely impact our profitability.

To manufacture our PCBs, we use materials such as laminated layers of fiberglass, copper foil and chemical solutions which we order from our suppliers. Suppliers of laminates and other raw materials that we use may from time to time extend lead times, limit supplies or increase prices due to capacity constraints or other factors, which could adversely affect our profitability and our ability to deliver our products on a timely basis. We have experienced in the past, and may experience in the future, significant increases in the cost of laminate materials, copper products and petroleum-based raw materials. These cost increases have had an adverse impact on our profitability and the impact has been particularly significant on our Asian operations which have fixed price arrangements with a number of large automotive customers. Some of our products use types of laminates that are only available from a single supplier that holds a patent on the material. Although other manufacturers of advanced PCBs also must use the single supplier and our OEM customers generally determine the type of laminates used, a failure to obtain the material from the single supplier for any reason may cause a disruption, and possible cancellation, of orders for PCBs using that type of laminate, which in turn would cause a decrease in our consolidated net sales.

Additionally, a significant portion of our raw material purchases is obtained from one supplier. Due to customer requalification requirements and a lack of competitive alternate suppliers, we could experience a material adverse effect on our business and results of operations if this supplier were not able to provide the materials required to fulfill customer orders.

Index

If we lose key management, operations, engineering or sales and marketing personnel, we could experience reduced sales, delayed product development and diversion of management resources.

Our success depends largely on the continued contributions of our key management, administration, operations, engineering and sales and marketing personnel, many of whom would be difficult to replace. We generally do not have employment or non-compete agreements with our key personnel. If one or more members of our senior management or key professionals were to resign, the loss of personnel could result in loss of sales, delays in new product development and diversion of management resources, which would have a negative effect on our business. We do not maintain “key man” insurance policies on any of our personnel.

Due to the global economic downturn, the Company has made substantial reductions-in-force, including a number of significant management personnel. The Company does not anticipate the loss of any of the personnel will have a material impact on its operation and has attempted to mitigate the impact of the change in personnel. However, there can be no assurance that these risks are fully mitigated.

Successful execution of our day-to-day business operations, including our manufacturing process, depends on the collective experience of our employees and we have experienced periods of high employee turnover. If high employee turnover persists, our business may suffer and we may not be able to compete effectively.

We rely on the collective experience of our employees, particularly in the manufacturing process, to ensure we continuously evaluate and adopt new technologies and remain competitive. Although we are not generally dependent on any one employee or a small number of employees involved in our manufacturing process, we have experienced periods of high employee turnover generally and continue to experience significantly high employee turnover at our Asian facilities. If we are not able to replace these people with new employees with comparable capabilities, our operations could suffer as we may be unable to keep up with innovations in the industry or the demands of our customers. As a result, we may not be able to continue to compete effectively.

We export products from the United States to other countries. If we fail to comply with export laws, we could be subject to additional taxes, duties, fines and other punitive actions.

Exports from the United States are regulated by the U.S. Department of Commerce. Failure to comply with these regulations can result in significant fines and penalties. Additionally, violations of these laws can result in punitive penalties, which would restrict or prohibit us from exporting certain products, resulting in significant harm to our business.

Because we have significant foreign sales and presence, we are subject to political, economic and other risks we do not face in the domestic market.

As a result of increased Asian operations, we expect sales in, and product shipments to, non-U.S. markets to represent an increasingly significant portion of our total sales in future periods. Our exposure to the business risks presented by foreign economies includes:

logistical, communications and other operational difficulties in managing a global enterprise;

potentially adverse tax consequences;

restrictions on the transfer of funds into or out of a country;

longer sales and collection cycles;

potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws;

protectionist and trade laws and business practices that favor local companies;

restrictive governmental actions;

burdens and costs of compliance with a variety of foreign laws;

political, social and economic instability impacting our foreign labor force, including terrorist activities;

natural disaster or outbreaks of infectious diseases affecting the regions in which we operate or sell products; and

difficulties in collecting accounts receivable.

Index

Any one, or a combination, of these risks may materially adversely affect our business operations, our results of operations and/or our financial position.

We must comply with the Foreign Corrupt Practices Act.

We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in many jurisdictions, including mainland China. If our competitors engage in these practices they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Although we inform our personnel that such practices are illegal, we cannot assure that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.

We are subject to risks associated with currency fluctuations, which could have a material adverse effect on our results of operations and financial condition.

A significant portion of our costs is denominated in foreign currencies, primarily the Chinese renminbi. Substantially all of our consolidated net sales are denominated in U.S. dollars. As a result, changes in the exchange rates of these foreign currencies to the U.S. dollar will affect our cost of sales and operating margins and could result in exchange losses. The exchange rate of the Chinese renminbi to the U.S. dollar is closely monitored by the Chinese government. Recent increases in the value of the renminbi relative to the U.S. dollar have caused the costs of our Chinese operations to increase relative to related dollar-denominated sales. The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted. We may enter into exchange rate hedging programs from time to time in an effort to mitigate the impact of exchange rate fluctuations. However, hedging transactions may not be effective and may result in foreign exchange hedging losses.

Our operations in the People’s Republic of China subject us to risks and uncertainties relating to the laws and regulations of the PRC.

Under its current leadership, the Chinese government has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. However, the government of the PRC may not continue to pursue such policies. Despite progress in developing its legal system, the PRC does not have a comprehensive and highly developed system of laws, particularly with respect to foreign investment activities and foreign trade. Enforcement of existing and future laws and contracts is uncertain, and implementation and interpretation thereof may be inconsistent. As the Chinese legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect foreign investors. For example, the PRC recently passed a unified enterprise income tax law, which changes and increases the income tax on foreign-owned facilities. The PRC also enacted new labor laws that became effective January 1, 2008 that make it more difficult and expensive for companies to make changes in their workforce. In addition, some government policies and rules are not published or communicated in local districts in a timely manner, if they are published at all. As a result, we may operate our business in violation of new rules and policies without having any knowledge of their existence. These uncertainties could limit the legal protections available to us. Any litigation in the PRC may be protracted and result in substantial costs and diversion of resources and management attention.

Our Chinese manufacturing operations subject us to a number of risks we have not faced in the past.

A substantial portion of our current manufacturing operations is located in the PRC. The geographical distances between these facilities and our U.S. headquarters create a number of logistical and communications challenges. We are also subject to a highly competitive market for labor in the PRC, which may require us to increase employee wages and benefits to attract and retain employees and spend significant resources to train new employees due to high employee turnover, either of which could cause our labor costs to exceed our expectations.

Index

In addition, because of the location of these facilities, we could be affected by economic and political instability in the PRC, including:

lack of developed infrastructure;

currency fluctuations;

overlapping taxes and multiple taxation issues;

employment and severance taxes;

the burdens of cost, compliance and interpretation of a variety of foreign laws;

difficulty in attracting and training workers in foreign markets and problems caused by labor unrest; and

less protection of our proprietary processes and know-how.

Moreover, inadequate development or maintenance of infrastructure in the PRC, including inadequate power and water supplies, transportation or raw materials availability, communications infrastructure or the deterioration in the general political, economic or social environment, could make it difficult and more expensive, and possibly prohibitive, to continue to operate our manufacturing facilities in the PRC.

New labor laws in the PRC may adversely affect our results of operations.

Approximately two-thirds of our workforce is located in the PRC. Effective on January 1, 2008, the PRC government enacted a new labor law that significantly impacts the cost of a company’s decision to reduce its workforce. Further, the law requires certain terminations to be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce in the PRC, the new labor law could adversely affect our ability to enact such changes in a manner that is most advantageous to our circumstances or that is timely and cost effective. Additionally, in response to inflationary concerns, wages in certain provinces in China have increased in the past and may continue to do so in the future. In the current economic environment, these concerns are not as significant, but could arise in the future due to improving demand for products or services produced in the region. Significant increases in wages paid to employees in our Merix Asia facilities could reduce our profitability.

Success in Asia may adversely affect our U.S. operations.

To the extent Asian PCB manufacturers, including Merix Asia, are able to compete effectively with products historically manufactured in the United States, our facilities in the United States may not be able to compete as effectively and parts of our North American operations may not remain viable.

If we do not effectively manage the expansion of our operations, our business may be harmed, and the increased costs associated with the expansion may not be offset by increased consolidated net sales.

In the first half of fiscal 2009, we substantially completed efforts to significantly expand the Huiyang, China-based facility and any other future capacity expansion with respect to our facilities will expose us to significant start-up risks including:

delays in receiving and installing required manufacturing equipment;

inability to retain management personnel and skilled employees, or labor shortages in general;

difficulties scaling up production, including producing products at competitive costs, yields and quality standards at our expanded facilities;

challenges in coordinating management of operations and order fulfillment between our U.S. and Asian facilities;

a need to improve and expand our management information systems and financial controls to accommodate our expanded operations;

additional unanticipated costs; and

shortfalls in production volumes as a result of unanticipated start-up or expansion delays that could prevent us from meeting our customers’ delivery schedules or production needs.

Our forward-looking statements depend upon a number of assumptions and include our ability to execute tactical changes that may adversely impact both short-term and long-term financial performance. The success of our expansion efforts will depend upon our ability to expand, train, retain and manage our employee base in both Asia and North America. In connection with our expansion efforts in Asia, we expect to require additional employees throughout the company. If we are unable to attract, train and retain new workers, or manage our employee base effectively, our ability to fully utilize our Asian assets will likely be impaired. If we are unable to effectively expand, train and manage our employee base, our business and results of operations could be adversely affected.

Index

In addition, if our consolidated net sales do not increase sufficiently to offset the additional fixed operating expenses associated with our Asian operations, our consolidated results of operations may be adversely affected. If demand for our products does not meet anticipated levels, the value of the expanded operations could be significantly impaired, which would adversely affect our results of operations and financial condition.

Electrical power shortages in certain areas of southern China have, in the past, caused the government to impose a power rationing program and additional or extended power rationings could adversely affect our China operations.

In the winter months of fiscal 2008, certain areas of Southern China faced electrical power constraints which resulted from extreme winter weather in the area. In order to deal with the power constraints, the Southern China Province Government initiated a power rationing plan. This rationing program affected our Huizhou and Huiyang facilities. In order to minimize the effect on our operations, we realigned our routine equipment maintenance program to coincide with the power rationing schedule. The power rationing program was terminated in May 2008. Although power rationing did not impact our Asia operations during the recent winter months, we may experience issues in the future with obtaining power or other key services due to infrastructure weaknesses in China that may impair our ability to compete effectively as well as adversely affect revenues and production costs.

Failure to maintain good relations with minority investors in our China manufacturing facilities could materially adversely affect our ability to manage our Asian operations.

Currently, we have two PCB manufacturing plants in the PRC that are each partially owned by a separate Chinese company. While we are the majority interest holder in both of these companies, there is a minority interest holder in each subsidiary, owning a 5% and 15% share, respectively. These minority holders are local investors with close ties to local economic development and other government agencies. The investors are the leaseholders for the land on which the plants owned by our Chinese operating companies are located. In connection with the negotiation of their investments, the local investors secured certain rights to be consulted and consent to certain operating and investment matters concerning the plants and to board representation. Failure to maintain good relations with the investors in either China joint venture could materially adversely affect our ability to manage the operations of one or more of the plants and our ability to realize the anticipated benefits of the Asian acquisition.

We do not currently have options to renew our leased manufacturing facility in the PRC and failure to renew such lease could adversely affect our ability to realize the anticipated benefits of the Asian acquisition.

Our Huizhou manufacturing facility is leased from a Chinese company under an operating lease that expires in 2010 and does not contain a lease renewal option. Although the landlord also has a minority interest in our subsidiary that operates the facility, this minority interest holder may choose to not renew our lease. Failure to maintain good relations with this investor could materially adversely affect our ability to negotiate the renewal of our operating lease or to continue to operate the plant. Although we have renewed this lease in the past, failure to successfully renew such lease in the future could materially adversely affect our ability to realize the anticipated benefits of the Asian acquisition. In addition, the lease renewal allows early termination by either party, so failure to maintain good relations with this investor could materially impact our continued leasehold of the facility. Further, zoning and changes in laws in China could impair the ability of the landlord to extend or renew the lease.

Index

Our bank credit covenant that limits our incremental investment in Merix Asia may restrict our ability to adequately fund our Asian operations and our growth plans in Asia.

Merix has a bank credit agreement covenant that limits the incremental investment into Merix Asia to $40 million and provides that our investments cannot be made if a default exists under the credit agreement or the Excess Availability (defined in the credit agreement as a function of outstanding borrowings and available cash) is less than $20 million. As of February 28, 2009, we had advanced Merix Asia approximately $8.9 million against the incremental investment limit. The advance to Merix Asia was reduced significantly by an intercompany sale of accounts receivable from the Asia subsidiary to the U.S. parent company during the second quarter of fiscal 2009. If our Asian operations at any time require an amount of cash greater than our available capital resources, or than is permitted to be advanced under applicable credit agreements, there is risk that we will not be able to fund our Asian operations or achieve our growth plans in Asia.

Acquisitions may be costly and difficult to integrate, may divert and dilute management resources and may dilute shareholder value.

As part of our business strategy, we have made and may continue to make acquisitions of, or investments in, companies, products or technologies that complement our current products, augment our market coverage, enhance our technical capabilities or production capacity or that may otherwise offer growth opportunities. In any future acquisitions or investments, we could potentially experience:

problems integrating the purchased operations, technologies or products;

failure to achieve potential sales, materials costs and other synergies;

inability to retain existing customers of acquired entities when we desire to do so;

the need to restructure, modify or terminate customer relationships of the acquired company;

increased concentration of business from existing or new customers;

unanticipated expenses and working capital requirements;

diversion of management’s attention and loss of key employees;

asset impairments related to the acquisitions; or

fewer resources available for our legacy businesses as they are being redirected to the acquired entities to integrate their business processes.

In addition, in connection with any future acquisitions or investments, we could:

enter lines of business and/or markets in which we have limited or no prior experience;

issue stock that would dilute our current shareholders’ percentage ownership;

incur debt and assume liabilities that could impair our liquidity;

record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges;

incur amortization expenses related to intangible assets;

uncover previously unknown liabilities;

become subject to litigation and environmental remediation issues;

incur large and immediate write-offs that would reduce net income; or

incur substantial transaction-related costs, whether or not a proposed acquisition is consummated.

Any of these factors could prevent us from realizing anticipated benefits of an acquisition or investment, including operational synergies, economies of scale and increased profit margins and revenue. Acquisitions are inherently risky, and any acquisition may not be successful. Failure to manage and successfully integrate acquisitions could harm our business and operating results in a material way. Even when an acquired company has already developed and marketed products, product enhancements may not be made in a timely fashion. In addition, unforeseen issues might arise with respect to such products after the acquisition.

We face a risk that capital needed for our business and to repay our debt obligations will not be available when we need it or may not be available to us on favorable terms, if at all . Additionally, our leverage and our debt service obligations may adversely affect our cash flow , results of operations and financial position .

Recent turmoil in global financial markets has limited access to capital for many companies. We are not currently experiencing any limitation of access to our revolving line of credit and management is not aware of any issues currently impacting our lender’s ability to honor its commitment to extend credit. However, if we were unable to borrow on our revolving line of credit in the future due to the global credit crisis, our business and results of operations could be adversely affected. Furthermore, additional capital may not be available to us on favorable terms or at all. To the extent that additional capital is raised through the sale of equity, or securities convertible into equity, current shareholders may experience dilution of their proportionate ownership.

Index

As of February 28, 2009, we had total indebtedness of approximately $78.0 million, which represented approximately 45% of our total capitalization. We also have $31.1 million unused availability under a secured bank revolving line of credit that would increase our leverage if utilized.

Our indebtedness could have significant negative consequences, including:

·	increasing our vulnerability to general adverse economic and industry conditions;

·	limiting our ability to obtain additional financing;

·	requiring the use of a substantial portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;

·	limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

·	placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources.

Additionally, we are exposed to interest rate risk relating to our revolving credit facility which bears interest based, at our election, on either the prime rate or LIBOR plus an additional margin based on our use of the credit facility. At February 28, 2009, there was $8.0 million outstanding under the revolving line of credit. When we utilize our revolving credit facility to meet our capital requirements, we are subject to market interest rate risk that could increase our interest expense beyond expected levels and decrease our profitability.

Restructuring efforts have required both restructuring and impairment charges and we may be required to record asset impairment charges in the future, which would adversely affect our results of operations and financial condition.

We have recorded impairment charges against certain assets in fiscal 2009, fiscal 2008 and fiscal 2007. As our strategy evolves and due to the cyclicality of our business, rapid technological change and the migration of business to Asia, we might conclude in the future that some of our manufacturing facilities are surplus to our needs or will not generate sufficient future cash flows to cover the net book value and, thus, we may be required to record an impairment charge. Such an impairment charge would adversely affect our results of operations and financial condition.

Due to the substantial variance between our market capitalization based on the current trading price range for our common stock and the net asset value reflected in our consolidated balance sheet, as well as other factors regarding our results of operations and the current economic environment, management has undertaken quarterly assessments of potential impairment of the company’s long-lived assets in fiscal 2009. In the third quarter of fiscal 2009, an impairment charge was recorded to reduce the value of goodwill recorded in the acquisition of our Asia operations to $0. We have also performed an assessment for potential impairment of other long-lived assets and determine that no further impairment charges are required as of February 28, 2009. However, it is possible that further impairment charges may be recorded in the future, which would adversely affect our results of operations and financial condition.

As of February 28, 2009, our consolidated balance sheet reflected $18.7 million of goodwill and intangible assets. We periodically evaluate whether events and circumstances have occurred that indicate the remaining balance of goodwill and intangible assets may not be recoverable. If factors indicate that assets are impaired, we would be required to reduce the carrying value of our goodwill and intangible assets, which could adversely affect our results during the periods in which such a reduction is recognized. Our goodwill and intangible assets may increase in future periods if we consummate other acquisitions. Amortization or impairment of these additional intangibles would, in turn, adversely affect our earnings.

Index

As a result of the implementation of a global enterprise resource planning (ERP) system, unexpected problems and delays could occur and could cause disruption to the management of our business and significantly increase costs.

During fiscal 2008, we completed the implementation for our world-wide ERP system at our North American operations. The new ERP system is integral to our ability to accurately and efficiently maintain our books and records, record our transactions, provide critical information to our management and prepare our financial statements. We implemented the ERP system at our Asian operations in August 2008 and we are evaluating the success of that implementation as we use the system to report the results of operations for our Asia subsidiary in the remainder of fiscal 2009. These systems are new to us and we have not had extensive experience with them. Implementation of the new ERP system has required us to change certain internal business practices and training may be inadequate. We may encounter unexpected difficulties, delays, internal control issues, costs, unanticipated adverse effects or other challenges, any of which may disrupt our business. Corrections and improvements may be required as we continue to refine the implementation of our new system, procedures and controls, and could cause us to incur additional costs and require additional management attention, placing burdens on our internal resources. Any disruption in the transition to our new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our supply chain, achieve accuracy in the conversion of electronic data and records, compete effectively and report financial and management information on a timely and accurate basis. Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources and impact our ability to manage our business and our results of operations.

We have reported material weaknesses in our internal control over financial reporting and if additional material weaknesses are discovered in the future, our stock price and investor confidence in us may be adversely affected.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. In connection with management’s assessments of our internal control over financial reporting over the prior fiscal year, we identified material weaknesses in our internal control over financial reporting.

We have previously identified a material weakness in controls over financial reporting for our Merix Asia operations and have determined that this material weakness still exists at February 28, 2009. At the time of the acquisition in September 2005, Merix Asia had weak internal controls over financial reporting and needed to develop processes to strengthen its accounting systems and control environment management. We have devoted significant time and resources to improving the internal controls over financial reporting since the acquisition; however, as of February 28, 2009, we have determined that we did not maintain sufficient controls to adequately monitor the accounting and financial reporting related to our Merix Asia operations. See Item 4. “Controls and Procedures.”

We may, in the future, identify additional internal control deficiencies that could rise to the level of a material weakness or uncover errors in financial reporting. Material weaknesses in our internal control over financial reporting may cause investors to lose confidence in us, which could have an adverse effect on our business and stock price.

Index

Our failure to comply with environmental laws could adversely affect our business.

Our operations are regulated under a number of federal, state and municipal environmental and safety laws and regulations including laws in the U.S. and the PRC that govern, among other things, the discharge of hazardous and other materials into the air and water, as well as the handling, storage, labeling, and disposal of such materials. When violations of environmental laws occur, we can be held liable for damages, penalties and costs of investigation and remedial actions. Violations of environmental laws and regulations may occur as a result of our failure to have necessary permits, human error, equipment failure or other causes. Moreover, in connection with our acquisitions in San Jose, California and in Asia, we may be liable for any violations of environmental and safety laws at those facilities by prior owners. If we violate environmental laws, we may be held liable for damages and the costs of investigations and remedial actions and may be subject to fines and penalties, and revocation of permits necessary to conduct our business. Any permit revocations could require us to cease or limit production at one or more of our facilities, and harm our business, results of operations and financial condition. Even if we ultimately prevail, environmental lawsuits against us would be time consuming and costly to defend. Our failure to comply with applicable environmental laws and regulations could limit our ability to expand facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with these laws and regulations. In the future, environmental laws may become more stringent, imposing greater compliance costs and increasing risks and penalties associated with violations. We operate in environmentally sensitive locations and we are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes or restrictions on discharge limits, emissions levels, permitting requirements and material storage, handling or disposal might require a high level of unplanned capital investment, operating expenses or, depending on the severity of the impact of the foregoing factors, costly plant relocation. It is possible that environmental compliance costs and penalties from new or existing regulations may harm our business, results of operations and financial condition.

We are potentially liable for contamination at our current and former facilities as well as at sites where we have arranged for the disposal of hazardous wastes, if such sites become contaminated. These liabilities could include investigation and remediation activities. It is possible that remediation of these sites could adversely affect our business and operating results in the future.

Pending or future litigation could have a material adverse effect on our operating results and financial condition.

We are involved, from time to time, in litigation incidental to our business including complaints filed by investors. This litigation could result in substantial costs and could divert management’s attention and resources which could harm our business. Risks associated with legal liability are often difficult to assess or quantify, and their existence and magnitude can remain unknown for significant periods of time. In cases where we record a liability, the amount of our estimates could be wrong. In addition to the direct costs of litigation, pending or future litigation could divert management’s attention and resources from the operation of our business. While we maintain director and officer insurance, the amount of insurance coverage may not be sufficient to cover a claim and the continued availability of this insurance cannot be assured. As a result, there can be no assurance that the actual outcome of pending or future litigation will not have a material adverse effect on our results of operations or financial condition.

We may be subject to claims of intellectual property infringement.

Several of our competitors hold patents covering a variety of technologies, applications and methods of use similar to some of those used in our products. From time to time, we and our customers have received correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. Competitors or others have in the past and may in the future assert infringement claims against our customers or us with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. If claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.

If we become subject to infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our financial condition and results of operations could be materially and adversely affected.

Index

We may have exposure to income tax rate fluctuations as well as to additional tax liabilities, which would impact our financial position.

As a corporation with operations both in the United States and abroad, we are subject to taxes in the United States and various foreign jurisdictions. Our effective tax rate is subject to fluctuation as the income tax rates for each year are a function of the following factors, among others:

the effects of a mix of profits or losses earned by us and our subsidiaries in numerous tax jurisdictions with a broad range of income tax rates;

our ability to utilize net operating losses;

changes in contingencies related to taxes, interest or penalties resulting from tax audits; and

changes in tax laws or the interpretation of such laws.

Changes in the mix of these items and other items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our financial position.

We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions.

Significant judgment is required in determining our provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, we cannot provide assurance that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals.

RISKS RELATED TO OUR CORPORATE STRUCTURE AND STOCK

Our stock price has fluctuated significantly, and we expect the trading price of our common stock to remain highly volatile.

The closing trading price of our common stock has fluctuated from a low of less than $0.20 per share to a high of more than $70.00 per share over the past 14 years.

The market price of our common stock may fluctuate as a result of a number of factors including:

actual and anticipated variations in our operating results;

general economic and market conditions, including changes in demand in the PCB industry and the end markets which we serve;

interest rates;

geopolitical conditions throughout the world;

perceptions of the strengths and weaknesses of the PCB industry and the end markets which it serves;

our ability to pay principal and interest on our debt when due;

developments in our relationships with our lenders, customers, and/or suppliers;

announcements of alliances, mergers or other relationships by or between our competitors and/or our suppliers and customers;

announcements of plant closings, layoffs, restructurings or bankruptcies by our competitors; and

developments related to regulations, including environmental and wastewater regulations.

We expect volatility to continue in the future. The stock market in general has recently experienced extreme price and volume fluctuations that have affected the PCB industry and that may be unrelated to the operating performance of the companies within these industries. These broad market fluctuations may adversely affect the market price of our common stock and limit our ability to raise capital or finance transactions using equity instruments.

A large number of our outstanding shares and shares to be issued upon exercise of our outstanding options may be sold into the market in the future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

We may, in the future, sell additional shares of our common stock, or securities convertible into or exercisable for shares of our common stock, to raise capital. We may also issue additional shares of our common stock, or securities convertible into or exercisable for shares of our common stock, to finance future acquisitions. As of February 28, 2009, we had approximately 3.2 million outstanding options, each to purchase one share of our common stock, issued to employees, officers and directors under our equity incentive plans. The options have exercise prices ranging from $1.62 per share to $67.06 per share. These outstanding options could have a significant adverse effect on the trading price of our common stock, especially if a significant volume of the options was exercised and the stock issued was immediately sold into the public market. Further, the exercise of these options could have a dilutive impact on other shareholders by decreasing their ownership percentage of our outstanding common stock. If we attempt to raise additional capital through the issuance of equity or convertible debt securities, the terms upon which we will be able to obtain additional equity capital, if at all, may be negatively affected since the holders of outstanding options can be expected to exercise them, to the extent they are able, at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable than those provided in such options.

Index

Some provisions contained in our Articles of Incorporation, Bylaws and Shareholders Rights Agreement, as well as provisions of Oregon law, could inhibit an attempt by a third party to acquire or merge with Merix Corporation.

Some of the provisions of our Articles of Incorporation, Bylaws, Shareholders Rights Agreement and Oregon’s anti-takeover laws could delay or prevent a merger or acquisition between us and a third party, or make a merger or acquisition with us less desirable to a potential acquirer, even in circumstances in which our shareholders may consider the merger or acquisition favorable. Our Articles of Incorporation authorize our Board of Directors to issue series of preferred stock and determine the rights and preferences of each series of preferred stock to be issued. Our Shareholder Rights Agreement is designed to enhance the Board’s ability to protect shareholders against unsolicited attempts to acquire control of us that do not offer an adequate price to all shareholders or are otherwise not in the Company’s best interests and the best interests of our shareholders. The rights issued under the rights agreement will cause substantial dilution to any person or group who attempts to acquire a significant amount of common stock without approval of our Board of Directors. Any of these provisions that have the effect of delaying or deterring a merger or acquisition between us and a third party could limit the opportunity for our shareholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Item 6. Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MERIX CORPORATION


Dated: April 8, 2009	/s/ MICHAEL D. BURGER
	Michael D. Burger
	Director, President and
	Chief Executive Officer
	(Principal Executive Officer)

	/s/ KELLY E. LANG
	Kelly E. Lang
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

	/s/ ALLEN L. MUHICH
	Allen L. Muhich
	Vice President, Finance and Corporate Controller
	(Principal Accounting Officer)