This Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking statements that involve a number of risks and uncertainties. These forward-looking statements include, but are not limited to, statements and predictions as to our expectations regarding our revenues, net sales, sales, net income, operating expenses, research and development expenses, earnings, operations, gross margins, including without limitation, our targeted gross margin range, achievement of margins within or outside of such range and factors that could affect gross margins, yields, anticipated cash needs and uses of cash, capital requirements and capital expenditures, payment terms, expected tax rates, results of audits of us in China and the U.S., needs for additional financing, use of working capital, the benefits and risks of our China operations, anticipated growth strategies, ability to attract customers and diversify our customer base, including without limitation the relative size of each customer to us, sources of net sales, anticipated trends and challenges in our business and the markets in which we operate, the adequacy and expansion of our facilities, capability, capacity and equipment, the impact of economic and industry conditions on our customers and our business, current and upcoming programs and product mix and the learning curves associated with our programs, market opportunities and the utilizations of flex and flex assemblies, customer demand, our competitive position, critical accounting policies and the impact of recent accounting pronouncements. Additional forward-looking statements include, but are not limited to, statements pertaining to other financial items, plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact, including any statement which is preceded by the word "may," "might," "will," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "aim," "potential," "plan," or similar words. For all of the foregoing forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, the impact of changes in demand for our products, our success with new and current customers, our ability to develop and deliver new technologies, our ability to diversify our customer base, our effectiveness in managing manufacturing processes and costs and expansion of our operations, the degree to which we are able to utilize available manufacturing capacity, achieve expected yields and obtain expected gross margins, the impact of competition, the economy and technological advances, and the risks set forth below under "Item 1A. - Risk Factors." These forward-looking statements represent our judgment as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements.

Overview

We are a global provider of high-quality, technologically advanced flexible printed circuits and value-added component assembly solutions to the electronics industry. We believe that we are one of a limited number of manufacturers that provide a seamless, integrated flexible printed circuit and assembly solution from design and application engineering and prototyping through high-volume fabrication, component assembly and testing. We target our solutions within the electronics market and, in particular, we focus on applications where flexible printed circuits facilitate human interaction with an electronic device and are the enabling technology in achieving a desired size, shape, weight or functionality of the device. Current applications for our products include mobile phones, smart mobile devices, consumer products, portable bar code scanners, personal digital assistants, computer/storage devices and medical devices. We provide our solutions to original equipment manufacturers ("OEMs") such as Motorola, Inc. and Sony Ericsson Mobile Communications and to electronic manufacturing services ("EMS") providers such as Foxconn Electronics, Inc., Tech Full, and Flextronics International Ltd.

Critical Accounting Policies

Information with respect to our critical accounting policies which we believe have the most significant effect on our reported results and require subjective or complex judgments of management are contained on pages 26-28 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended September 30, 2008.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is assigned to reporting units, which may be one level below the Company's operating segments. Goodwill is assigned to the reporting units that benefit from the synergies arising from each particular business combination. We consider this to be one of the critical accounting estimates used in the preparation of its financial statements, and believe the current assumptions and other considerations used to value goodwill and long-lived intangible assets to be appropriate. However, if actual experience differs from the assumptions and considerations used in our analysis, the resulting change could have a material adverse impact on our consolidated results of operations and statement of position. Goodwill and long-lived intangible assets are reviewed annually, or more frequently, if changes in circumstances indicate the carrying value may not be recoverable. To test for recoverability, we typically utilize valuations, discounted estimated future cash flows or other acceptable methods to measure fair value for each asset value. During the quarter ended December 31, 2008, our stock price, along with that of our competitors and the stock market in general, declined, resulting in our market capitalization falling below our book

value. We consider this decline temporary and based on general economic conditions, and not based on any events or conditions specific to us. As such, we determined that no goodwill impairment was required. However, we will consider goodwill impairment in the future if our stock price falls again, an action which could have a material impact on our results of operations.

Comparison of the Three Months Ended December 31, 2008 and 2007

The following table sets forth our Statement of Operations data expressed as a
percentage of net sales for the periods indicated:



                                                       Three
                                                   Months Ended
                                                   December 31,
                                                  2008      2007
                  Net sales                       100.0 %   100.0 %
                  Cost of sales                    84.7      83.3

                  Gross profit                     15.3      16.7

                  Operating expenses:
                  Research and development          0.5       0.3
                  Sales and marketing               2.5       2.5
                  General and administrative        3.3       3.7
                  Restructuring Expenses            0.1       0.0

                  Total operating expenses          6.4       6.5

                  Operating income                  8.9      10.2
                  Interest income                   0.2       0.2
                  Interest expense                  0.0       0.0
                  Other income / (expense), net    (0.7 )     0.2

                  Income before income taxes        8.4      10.6
                  Provision for income taxes        1.9       3.2

                  Net income                        6.5 %     7.4 %

Net Sales. Net sales increased to $216.6 million for the three months ended December 31, 2008, from $184.1 million in the three months ended December 31, 2007. The increase of $32.5 million, or 18%, was primarily attributable to an increase in overall average unit prices resulting from added material content, and increased sales to the consumer products sector of $55.6 million, driven primarily by the ramp up in unit volume shipments to one of our key customers related to several programs that were started in fiscal 2008. This sector accounted for approximately 27% and 1% of total net sales for the three months ended December 31, 2008 and 2007, respectively, and is a result of our on-going efforts to diversify both our customers and market sectors.

Net sales to the wireless sector decreased to $149.5 million for the three months ended December 31, 2008, from $173.7 million in the three months ended December 31, 2007. The decrease of $24.2 million or 14% versus the comparable period of the prior year was primarily due to the end of life of a high volume program begun during the prior year for one customer and reduced unit volume shipments to another customer. Sales to the wireless sector comprised 69% and 94% of total net sales for the three months ended December 31, 2008 and 2007, respectively. Net sales to the industrial sector were $3.8 million for the three months ended December 31, 2008, a decrease of $1.0 million, or 20%, as compared to the comparable period in the prior year, primarily due to order volume decreases.

Sales to three customers exceeded 10% of total net sales, with two of such customers exceeding 25% during the three months ended December 31, 2008 and 2007.

Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to 85% for the three months ended December 31, 2008, versus 83% for the comparable period in the prior year. The increase in cost of sales as a percentage of net sales was driven by several factors. The main driver related to higher material content on new programs and increased labor and overhead spending on the higher business volumes. These increases were partially offset by cost reductions from improved manufacturing yields resulting from operational improvement initiatives and the benefit of operating at optimum capacity levels during the quarter.

Gross profit increased to $33.1 million for the three months ended December 31, 2008, versus $30.8 million in the comparable period in the prior year, an increase of 7% as a result of the leveraging impact on the higher net sales volume. As a percentage of net sales, gross profit decreased to 15% for the three months ended December 31, 2008, from 17% in the comparable period in the prior year.

Research and Development. Research and development expenses increased to $1.2 million for the three months ended December 31, 2008, from $493,000 in the comparable period in the prior year, an increase of 138%. The increase was primarily due to an increase in compensation and benefits expenses related to increased headcount and bonus accruals. Our research and development activities focus on new technologies, primarily those which are expected to provide for additional miniaturization and cost reduction of our products, and also allow us to further differentiate ourselves from our competition. We expect these expenses to continue to grow as we focus on expanding our product development activities.

Sales and Marketing Expense. Sales and marketing expenses increased by $718,000 to $5.4 million in the three months ended December 31, 2008, from $4.6 million in the comparable period in the prior year, an increase of 17%. As a percentage of net sales, sales and marketing expense was consistent with the comparable period of the prior year at 2.5%. The absolute dollar increase is primarily attributable to an $897,000 increase in compensation and benefit expense due to headcount, salary and bonus increases, offset by a $428,000 decrease in commission expense related to a lower average commission rates on new programs. As a percentage of net sales, we expect sales and marketing expenses to increase in our next fiscal quarter.

General and Administrative Expense. General and administrative expense increased to $7.0 million during the three months ended December 31, 2008, from $6.8 million for the comparable period in the prior year, an increase of $200,000 or 4%. As a percentage of net sales, general and administrative expense declined to 3.3% versus 3.7% for the comparable period of the prior year. The absolute dollar increase was primarily attributable to an increase in compensation and benefits expense of approximately $508,000 as a result of headcount and salary increases and increased stock compensation expense, offset by reductions in other expense categories. As a percentage of net sales, we expect our general and administrative expense to increase in our next fiscal quarter.

Restructuring Cost. During the three months ended December 31, 2008, we recorded a restructuring charge of $311,000 related to the restructuring of our wholly owned subsidiary, Aurora Optical in Tucson, Arizona. No charges were recorded during the comparable period of the prior fiscal year. Going forward, we believe that we can achieve approximately $2 to $3 million dollars per year in cost savings resulting from reduced compensation and benefit cost, reduced overhead and other operating expenses.

Interest Income. Interest income increased to $386,000 for the three months ended December 31, 2008, from $359,000 for the three months ended December 31, 2007. The increase is primarily attributable to an increase in the average amounts available for investment offset by a decline in interest rates.

Interest Expense. Interest expense decreased to $18,000 for the three months ended December 31, 2008, from $59,000 for the three months ended December 31, 2007.

Other Income (Expense), Net. Other income (expense), net changed to an expense of $1.5 million for the three months ended December 31, 2008, from income of $349,000 for the comparable period in the prior year. This change from income to expense is attributable primarily to $1.1 million recorded in the current period related to the impairment of our auction rate securities. During the three months ended December 31, 2007 there were no impairments of our auction rate securities. The remaining change is attributable to foreign exchange losses as a result of the weakening of the U.S. dollar against foreign currencies.

Income Taxes. The effective tax rate for the three months ended December 31, 2008, was 22% versus 31% for the comparable period in the prior year. The tax rate declined as a result of our international restructuring efforts and the migration of technology to further strengthen our Asian operations and enhance our operational efficiencies.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations and borrowings under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions and other capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future. Global financial and credit markets recently have been, and continue to be, extremely unstable and unpredictable. Worldwide economic conditions have been weak and may be further deteriorating. Continued, and potentially increased, volatility, instability and weakness in the financial and credit markets could affect our ability to sell our investment securities and other financial assets, which in turn could adversely affect our liquidity and financial position. This instability also could affect the prices at which we could make any such sales, which could also adversely affect our earnings and financial condition. These conditions could also negatively affect our ability to secure funds or raise capital at a reasonable cost, if needed.

It is our policy to carefully monitor the state of our business, cash requirements and capital structure. We believe that funds generated from our operations and available from our borrowing facilities will be sufficient to fund current business operations as well as anticipated growth over at least the next 12 months. We also believe we will have sufficient capital to fund our operations without the need to derive cash from the sale of our auction rate securities; however, there can be no assurance that any growth will occur and unexpected events may result in our need to raise additional capital. The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities, as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, market interest rates, discount rates and ongoing strength. Market variables utilized in developing the valuation model for these securities include relative yields on federal student loan securities, average 90 day T-Bill rates, 90 day LIBOR rates, interest rate spreads as determined by the changing credit market environment and quality of market credit and liquidity.

During the three months ended December 31, 2008, net income of $14.1 million, adjusted for depreciation and amortization, loss on equipment disposal, stock-based compensation expense, deferred taxes and provision for doubtful accounts, generated $25.6 million of operating cash. This amount was decreased by $5.4 million used to meet working capital requirements.

Changes in the principal components of working capital for the three months ended December 31, 2008 were as follows:

• Net accounts receivable decreased eight percent to $149.3 million at December 31, 2008 from $162.4 million at September 30, 2008. The decrease in outstanding accounts receivable was primarily attributable to improved collections experience during the three months ended December 31, 2008.

• Inventory decreased 25% to $45.0 million at December 31, 2008, from $59.8 million at September 30, 2008. The principal reason for the decrease relates to reduced inventory deliveries at the end of the quarter related to scheduled holidays, improvement in throughput for several high-volume programs for key customers and the implementation of just-in-time delivery arrangements with raw material vendors during the three months ended December 31, 2008.

• Accounts payable decreased 25% to $97.1 million at December 31, 2008, from $128.6 million at September 30, 2008, as a result of vendor payments made for the increased purchases made in the prior quarter in support of first fiscal quarter shipment levels anticipated during the three months ended December 31, 2008, and reduced inventory deliveries at the end of the quarter.

• Depreciation and amortization expense was $9.7 million for the three months ended December 31, 2008, versus $6.3 million in the comparable period in the prior year due to the increased fixed asset base, mainly at MFC2.

Our principal investing and financing activities for the three months ended December 31, 2008, were as follows:

• Net cash used in investing activities was $11.0 million for the three months ended December 31, 2008. Capital expenditures included $5.9 million of capital equipment, and $816,000 in deposits for fixed asset purchases, which were primarily related to manufacturing capacity expansion and research and development, $2.9 million for the purchase of land use rights in China, and $441,000 for purchased software. Cash used in investing activities also included $872,000 paid for the acquisition of Pelikon, net of cash received.

As of December 31, 2008, and September 30, 2008, we had outstanding purchase commitments related to expansion activities at various locations in Suzhou, China, and for research and development equipment-related purchases at our Anaheim, California facility which totaled $4.8 million and $9.2 million, respectively. In conjunction with the Company's acquisition of Pelikon, additional Contingent Consideration may be paid based on the net amount of sales for certain products, during calendar years 2009 and 2010. Any Contingent Consideration paid shall not exceed $2,190 in 2009 and $7,236 in 2010, and if one or both of the Earn-Out Targets are not achieved, the Contingent Consideration will not be paid for one or both of the Earn-Out Periods. During the month of January 2009, the Company repurchased a total of 120,386 shares for a total value of $2.0 million pursuant to a 10b5-1 plan.