Company Overview

We are a leading global manufacturing service provider of 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 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 we serve are primarily in commercial equipment in the communications and networking, computing and peripherals, test, 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.

Electronic equipment progresses through a product life cycle with stages that require differing manufacturing capabilities. In the design phase, the customer requires very compressed lead times to shorten their product's time to market. Ramping to volume, the customer requires flexibility and high quality production and as the product matures the customer requires high quality, reliable, low cost manufacturing. Historically, manufacturers procured PCBs from multiple vendors in various geographies to meet the requirements of a product's life cycle. Each PCB vendor transition introduces incremental time, cost and risk. Today, our strategy is to offer global PCB manufacturing to our customers with quick-turn and volume high-technology production in the United States as well as lower-cost production solutions in Asia. This capability is the foundation of our unique value proposition that provides a seamless interface for our customers as their products transition life cycles which minimizes their risk and cost and reduces time to market.

We fulfill our value proposition by leveraging the following manufacturing facilities:

North America
· Our Oregon manufacturing facility provides quality quick-turn and volume manufacturing services for mid- to high-technology PCBs.

· Our San Jose manufacturing facility provides quick-turn manufacturing services for design and prototype applications of mid- to high-technology PCBs.

Asia - our Asian manufacturing facilities give us access to the growing lower-cost Asian manufacturing environments.
· Our factory in Huizhou provides high quality lower technology PCBs primarily to automotive customers.

· Our Huiyang facility is targeted at mid- to high-technology production and is more closely aligned with our capabilities in the United States.

Operating Segments

Today, our business has two operating segments defined by geography: (1) North America and (2) 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.

Prior to fiscal 2009, we reported three operating segments: 1) Oregon, 2) San Jose and 3) Asia. This was deemed appropriate as the operations of San Jose and Asia were managed individually for a time after the acquisition of the San Jose subsidiary in fiscal 2005 and the acquisition of the Asia subsidiary in fiscal 2006. Subsequent to the hiring of our current Chief Executive Officer at the end of fiscal 2007 and the hiring of a Vice President of North American operations at the end of fiscal 2008, our management team and management reporting was restructured to focus on managing the businesses in North America and Asia as two cohesive business units. In the fourth quarter of fiscal 2009, an assessment of segment reporting requirements under Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," was undertaken. It was determined that the San Jose subsidiary did not meet the criteria of an operating segment under SFAS No. 131. As such, fiscal 2008 and fiscal 2007 financial information has been revised to present operating segment information consistently with the current year presentation.

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 in fiscal
2009, 2008 or 2007:

                                 Cisco                 Motorola
                          2009   2008    2007   2009     2008     2007
North America              16%     20%    24%    12%        12%    16%
Asia                      *(1)    *(1)   *(1)    13%         8%   *(1)
Consolidated                8%     11%    15%    13%        10%    11%

(1) Less than 1%

Approximately 48%, 55% and 51%, respectively, of our OEM sales in fiscal 2009, 2008 and 2007 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 represents purchase orders received and, in some instances, forecast requirements released for production under customer contracts. Backlog shippable within the next 90 days totaled $27.6 million and $66.3 million at May 30, 2009 and May 31, 2008, respectively. The decrease in backlog is due to a decrease in demand experienced in fiscal 2009 as a result of the significant impact of the decline in general economic conditions, and also due to the reduction in lead times achieved during 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 customer to place orders over a longer-than-normal period of time. As the production lead times were shortened during 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.

Overview of Financial Results

The financial results of fiscal 2009 reflect the impact of a significant global economic contraction affecting many end markets, products and services. The deterioration in macroeconomic conditions has adversely affected the demand for most of Merix' customers and has significantly reduced our orders, backlog and net sales. Industry analysts have reported a decline of the North American PCB market of approximately 50% in the period comprising our fiscal year 2009. Current predictions for calendar 2009 project a contraction of approximately 20%-30% compared to calendar 2008. While analysts have indicated that visibility is limited, downward trends in industry bookings appeared to stabilize in spring 2009, and cautious estimates have been made that the industry could achieve a return to slow growth in calendar 2010.

Net sales of $287.1 million decreased by $91.5 million or 24% compared to fiscal 2008, resulting from a 33% decrease in net sales in our North American segment and a 15% decrease in net sales in our Asia segment. In response to falling demand in our customers' end markets, net sales decreased 11% to 33% in each of our end markets, with the exception of a 4% increase in defense & aerospace. The relative strength in defense & aerospace reflects the lesser impact of economic conditions on demand in that end market as well as the impact of our efforts to expand our market presence with defense & aerospace customers.

Consolidated gross margin decreased to 7.7% in fiscal 2009 compared to 10.0% in fiscal 2008. Our North American segment's gross margin decreased approximately 7 percentage points. Despite reductions in variable manufacturing costs consistent with the decrease in revenue and a reduction of approximately 20% 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 increased by 2 percentage points, reflecting an improvement in product mix, a 20% reduction in our labor force, temporary factory closures and the cost efficiencies from the closing of our Hong Kong facility in the fourth quarter of fiscal 2008.

Operating expense of $39.0 million, excluding severance, asset impairment and restructuring charges, decreased by $6.1 million compared to fiscal 2008 due to aggressive cost containment programs implemented in response to the demand decreases during fiscal 2009.

Restructuring charges of $24.9 million were primarily comprised of a $20.5 million impairment charge recorded to write-off the remaining carrying value of goodwill related to the acquisition of Merix Asia, as well as $3.1 million in severance charges related to reductions-in-force implemented during fiscal 2009 and $1.1 million in Wood Village lease termination charges.

Net non-operating expense of $4.3 million in fiscal 2009 is primarily comprised of interest expense and foreign exchange losses. Net loss for fiscal 2009 totaled $46.0 million, or $2.34 per basic and diluted share.

During normal cyclical downturns, management'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. Our cash position, net of outstanding borrowings on our revolving credit facility, increased to $9.6 million at May 30, 2009 compared to $5.7 million at May 31, 2008. The improvement in our cash position resulted from approximately $27.1 million in cost savings achieved primarily as a result of management's cost containment actions as well as continued improvements in the management of working capital. Accounts receivable as measured by days sales outstanding improved by 9 days to 67 days and inventory levels as measured by quarterly inventory turnover improved to 15 turns as of May 30, 2009 compared to 13 turns at the end of the prior fiscal year. These improvements were somewhat offset by a reduction in accounts payable as measured by days payable outstanding which shortened from 70 days to 57 days as we balanced our own cash needs with commitments to our vendors.

Results of Operations

Fiscal 2009 and fiscal 2007 consisted of 52 weeks, whereas fiscal 2008 consisted of 53 weeks. Accordingly, the results of operations for fiscal 2008 contain one additional week of activity as compared to fiscal 2009 and fiscal 2007. The following table sets forth our results of operations (in thousands).

                                                          2009          2008          2007
Net sales                                               $ 287,127     $ 378,637     $ 400,496
Cost of sales                                             264,941       340,778       334,925
Gross profit                                               22,186        37,859        65,571
Engineering                                                 2,121         1,810         1,705
Selling, general and
administrative                                             34,915        40,963        44,477
Amortization of intangible
assets                                                      1,981         2,305         2,745
Severance, asset impairment and restructuring charges      24,895        15,686        81,414
Operating loss                                            (41,726 )     (22,905 )     (64,770 )
Other income (expense),
net                                                        (4,317 )          21        (4,994 )
Loss from continuing operations before income taxes
and minority interests                                    (46,043 )     (22,884 )     (69,764 )
Provision for income
taxes                                                       2,628         1,502         1,412
Minority interest in net income of consolidated
subsidiaries                                                  593         1,165           739
Loss from continuing
operations                                              $ (49,264 )   $ (25,551 )   $ (71,915 )

The following table sets forth our results of operations data as a percentage of net sales.

                                                          2009           2008           2007
Net sales                                                   100.0 %        100.0 %        100.0 %
Cost of sales                                                92.3           90.0           83.6
Gross profit                                                  7.7           10.0           16.4
Engineering                                                   0.7            0.5            0.4
Selling, general and
administrative                                               12.2           10.8           11.1
Amortization of intangible
assets                                                        0.7            0.6            0.7
Severance, asset impairment and restructuring charges         8.7            4.1           20.3
Operating loss                                              (14.5 )         (6.0 )        (16.2 )
Other income (expense),
net                                                          (1.5 )          0.0           (1.2 )
Loss from continuing operations before income taxes
and minority interests                                      (16.0 )         (6.0 )        (17.4 )
Provision for income
taxes                                                         0.9            0.4            0.4
Minority interest in net income of consolidated
subsidiaries                                                  0.2            0.3            0.2
Loss from continuing operations
(1)                                                         (17.2 )%        (6.7 )%       (18.0 )%

(1) Percentages may not subtotal due to rounding.

Net sales

Net sales decreased $91.5 million, or 24%, to $287.1 million in fiscal 2009 compared to $378.6 million in fiscal 2008, and decreased $21.9 million, or 5% in fiscal 2008 compared to $400.5 million in fiscal 2007.

Segment and Per Unit Information

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

                                         2009          2008          2007
North America                          $ 137,149     $ 203,202     $ 245,347
Asia                                     149,978       175,435       155,149
                                       $ 287,127     $ 378,637     $ 400,496

Selected statistical information is summarized below. We define the term "unit" as a panel produced. Percentage increases (decreases) in unit volume and pricing were as follows:

                                                                 Fiscal          Fiscal
                                                                  2009            2008
                                                                Compared        Compared
                                                               to Fiscal       to Fiscal
                                                                  2008            2007
North America:
Unit volume                                                           (37 %)          (14 %)
Average unit pricing                                                    8 %            (4 %)

Asia:
Unit volume                                                           (23 %)           (3 %)
Average unit pricing                                                   10 %            16 %

Consolidated:
Unit volume                                                           (24 %)           (4 %)
Average unit pricing                                                    0 %            (1 %)

Merix Consolidated

Consolidated unit sales volume decreased 24% in fiscal 2009 compared to fiscal 2008, driven primarily by decreases in demand from customers in each of our segments as further discussed below. Consolidated average unit pricing remained stable compared to fiscal 2008, despite increases recorded in both of our operating segments. This is primarily due to 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. The Asia segment's average price per unit is significantly lower than the North American segment and Asia net sales increased to 52% of total net sales in fiscal 2009, compared to 46% in fiscal 2008.

Consolidated unit sales volume decreased by 4% in fiscal 2008 compared to fiscal 2007, primarily due to a 14% decrease in North America as further discussed below, while consolidated average unit price decreased by 1% reflecting both a 4% decrease in North America due to a reduced mix of quick turn and premium services revenue and a higher mix of lower-priced Asia net sales as a percent of total net sales.

North America

Fiscal 2009 North America net sales of $137.1 million decreased by $66.1 million or 33% compared to net sales of $203.2 million in fiscal 2008. The reduction is primarily due to a 37% decrease in unit volume resulting from:

· demand decreases resulting from the deterioration of macroeconomic conditions;

· a strategic decision to rationalize our production and sales to select markets with a focus on more profitable parts;

· strategic efforts assist our customers in the transition of 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

· impact to customer relationships of the extended lead time issues experienced in the fourth quarter of fiscal 2008.

The volume decrease was partially offset by an 8% increase in average unit pricing compared to fiscal 2008, due primarily to our strategic efforts to utilize plant capacity for more profitable parts as well as increase higher-technology production, such as high density interconnect (HDI) panels, which generate higher average prices.

In fiscal 2008, North American segment net sales decreased by $42.1 million or 17% compared to $245.3 million in fiscal 2007. A 14% decrease in unit sales volume from fiscal 2007 to fiscal 2008 was primarily due to lower North American demand caused by cyclicality that is inherent in the PCB industry as fiscal 2007 represented a peak in cyclical demand. To a lesser extent, the decrease was related to the transitioning of production to either Merix Asia or other lower-cost offshore competitors and capacity constraints in the fourth quarter of fiscal 2008 as a result of the closure of the Wood Village facility. The

4% decrease in average unit pricing was due to reduced quick-turn and premium services revenue that typically carries a higher market price when compared to full lead time. Quick-turn and premium services generally represent a higher percentage of net sales during peak periods of cyclical demand, such as that experienced in fiscal 2007. Deteriorating global economic conditions result in excess North American production capacity. As such, customers can receive shorter lead-time deliveries at either full lead-time prices or at discounted prices.

Asia

Fiscal 2009 Asia net sales of $150.0 million decreased by $25.5 million or 15% compared to net sales of $175.4 million in fiscal 2008. The decrease is primarily due to a 23% reduction in unit sales volumes resulting from a drop in demand due to deteriorating global economic conditions. This decrease was partially offset by a 10% increase in average unit pricing as we continued successful efforts to improve our product mix through enhanced technology offerings from our Asia manufacturing operations.

Fiscal 2008 net sales for Asia increased by $20.3 million or 13% compared to $155.1 million in fiscal 2007. Despite a 3% drop in unit sales volumes, net sales increased due to a 16% increase in average unit pricing as a result of targeted growth in sales of higher-priced, higher-technology, higher-layer count panels that were enabled by increasing the technological capabilities of our Asia factories and generating increased awareness within our customer base about our manufacturing capabilities.

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 their percentage of our consolidated
net sales (dollars in thousands):

                                 2009                        2008                        2007
Communications &
Networking              $ 116,482          40.6 %   $ 159,535          42.1 %   $ 176,756          44.1 %
Automotive                 58,423          20.4 %      79,838          21.1 %      73,677          18.4 %
Computing &
Peripherals                21,368           7.4 %      32,111           8.5 %      54,132          13.5 %
Test, Industrial and
Medical                    36,238          12.6 %      40,866          10.8 %      34,140           8.5 %
Defense & Aerospace        27,401           9.5 %      26,468           7.0 %      19,827           5.0 %
Other                      27,215           9.5 %      39,819          10.5 %      41,964          10.5 %
                        $ 287,127         100.0 %   $ 378,637         100.0 %   $ 400,496         100.0 %

Net sales into the defense & aerospace end market increased by $0.9 million or 4% as a result of our strategic efforts in the North America segment to pursue growth opportunities in this sector. During fiscal 2009, we achieved key military certifications at both of our North American factories and have focused sales and marketing efforts on key defense & aerospace customers to leverage our North American manufacturing capabilities in this end market. The net sales increase in the defense & aerospace end market continues the trend commenced in fiscal 2008, in which net sales to this end market increased by $6.6 million and 33%.

The $43.1 million or 27% decrease in communications & networking in fiscal 2009 compared to fiscal 2008 was due primarily to the deterioration in global economic conditions and the related impact on end customer demand, as well as reductions in capacity resulting from the closure of the Wood Village facility in the fourth quarter of fiscal 2008.

The $21.4 million or 27% decrease in automotive in fiscal 2009 compared to fiscal 2008 was due primarily to the substantial reduction in global automobile sales experienced during fiscal 2009.

The $10.7 million or 34% decrease in computing & peripherals during fiscal 2009 compared to fiscal 2008 was due to reductions in end consumer demand for these products resulting from the global recession experienced during fiscal 2009. Substantial fluctuations in net sales to this end market can be experienced as it represents a relatively small portion of net sales and is comprised of a small number of significant customers.

Net sales to the test, industrial and medical end market decreased by $4.6 million or 11% in during fiscal 2009 compared to fiscal 2008. The decrease in net sales to this end market was not as significant as other markets due to our efforts to penetrate this market to diversify our customer base, and to a lesser extent, the fact that end user demand in this market has not decreased as substantially as markets serving consumer end users.

The $12.6 million or 32% decrease in net sales to Other end markets in fiscal 2009 compared to fiscal 2008 was primarily driven by demand decreases in response to deteriorating global economic conditions.

Compared to fiscal 2007, in fiscal 2008 we achieved net sales increases of $6.7 million (20%), in the test, industrial & medical end market and $6.6 million (33%) in the defense & aerospace market as a result of strategic efforts to penetrate these markets. Additionally, automotive end market net sales increased by $6.2 million and 8% due to management's fiscal 2007 decision to disengage from certain unprofitable automotive programs, which were replaced by more profitable automotive revenue in fiscal 2008. Those net sales increases were offset by a reduction in demand resulting in decreases of $17.2 million (10%) in communications & networking, $22.0 million (41%) in computing & peripherals and $2.1 million (5%) in other end markets. These demand decreases were due primarily to the cyclicality of the North American PCB market and the loss of certain North American business to Asian competitors.

Net Sales by Geographic Region

In fiscal 2009, 2008 and 2007, net sales to customers outside the United States totaled 46%, 36% and 37% of net sales, respectively. There were no other countries outside of the United States to which sales totaled 10% or more of net sales in fiscal 2009, 2008 or 2007.

Cost of Sales and Gross Margin

Cost of sales includes manufacturing costs, such as materials, labor (both direct and indirect) and factory overhead. Cost of sales decreased $75.8 million, or 22%, to $264.9 million in fiscal 2009 compared to $340.8 million in fiscal 2008 and increased $5.9 million, or 2%, in fiscal 2008 compared to $334.9 million in fiscal 2007.

Beginning in fiscal 2009, we recorded an allocation of certain costs attributable to costs of sales in the Asia segment that were previously charged to the North America segment. Gross margin by segment for fiscal 2008 and fiscal 2007 has been revised to present comparable results using the same allocation methodology. Additionally, certain engineering costs which are directly related to the production of goods for sale have been reclassified into cost of sales in the fiscal 2008 and fiscal 2007 consolidated statements of operations.

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

                                  2009         2008         2007
North America                   $  4,739     $ 21,489     $ 54,037
Asia                              17,447       16,370       11,534
                                $ 22,186     $ 37,859     $ 65,571

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

                                 2009       2008       2007
North America                      3.5 %     10.6 %     22.0 %
. . .