The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated condensed financial statements and the related notes and the other financial information included in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of specified factors, including those set forth in Item 1A "Risk Factors" of Part II below and elsewhere in this Quarterly Report on Form 10-Q.
This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our annual report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission. Overview
We are a one-stop provider of time-critical and technologically complex printed circuit boards (PCBs) and backplane assemblies, which serve as the foundation of sophisticated electronic products. We serve high-end commercial and aerospace/defense markets - including the networking/communications infrastructure, defense, high-end computing, and industrial/medical markets - which are characterized by high levels of complexity and moderate production volumes. Our customers include original equipment manufacturers (OEMs), electronic manufacturing services (EMS) providers, and aerospace/defense companies. Our time-to-market and high technology focused manufacturing services enable our customers to reduce the time required to develop new products and bring them to market.
We measure customers as those companies that have placed at least two orders in the preceding 12-month period. As of September 28, 2009, we had approximately 715 customers and approximately 900 as of September 29, 2008. Sales to our 10 largest customers accounted for 54% of our net sales in the third quarter ended September 28, 2009 and 51% of our net sales in the third quarter ended September 29, 2008. Sales to our 10 largest customers for the three quarters ended September 28, 2009 and September 29, 2008 were 53% and 50% of our net sales, respectively. We sell to OEMs both directly and indirectly through EMS companies. Sales attributable to our five largest OEM customers accounted for approximately 35% and 30% of our net sales in the quarters ended September 28, 2009 and September 29, 2008, respectively.
The following table shows the percentage of our net sales attributable to each of the principal end markets we served for the periods indicated.

                                                      Quarter Ended                         Three Quarters Ended
                                            September 28,        September 29,       September 28,         September 29,
End Markets(1)                                  2009                 2008                2009                  2008
Aerospace/Defense                                       44 %                 39 %                45 %                  36 %
Networking/Communications                               35                   39                  35                    41
Computing/Storage/Peripherals                           12                   11                  11                    11
Medical/Industrial/Instrumentation/Other                 9                   11                   9                    12

Total                                                  100 %                100 %               100 %                 100 %

(1) Sales to EMS companies are classified by the end markets of their OEM customers.

For PCBs, we measure the time sensitivity of our products by tracking the quick-turn percentage of our work. We define quick-turn orders as those with delivery times of 10 days or less, which typically captures research and development, prototype, and new product introduction work, in addition to unexpected short-term demand among our customers. Generally, we quote prices after we receive the design specifications and the time and volume requirements from our customers. Our quick-turn services command a premium price as compared to standard lead-time products. Quick-turn orders were consistent at 11% of PCB revenue in both third quarters of 2008 and 2009. We also deliver a significant percentage of compressed lead-time work with lead times of 11 to 20 days. We receive a premium price for this work as well. Purchase orders may be cancelled prior to shipment. We charge customers a fee, based on percentage completed, if an order is cancelled once it has entered production.
We derive revenues primarily from the sale of printed circuit boards and backplane assemblies using customer-supplied engineering and design plans. We recognize revenues when persuasive evidence of a sales arrangement exists, the sales terms are fixed and determinable, title and risk of loss have transferred, and collectibility is reasonably assured - generally when products are shipped to the customer. Net sales consist of gross sales less an allowance for returns, which typically has been less than 2% of gross sales. We provide our customers a limited right of return for defective printed circuit boards and backplane assemblies. We record an estimated amount for sales returns and allowances at the time of sale based on historical information.

Cost of goods sold consists of materials, labor, outside services, and overhead expenses incurred in the manufacture and testing of our products as well as stock-based compensation expense. Many factors affect our gross margin, including capacity utilization, product mix, production volume, and yield. We do not participate in any significant long-term contracts with suppliers, and we believe there are a number of potential suppliers for the raw materials we use. Selling and marketing expenses consist primarily of salaries and commissions paid to our internal sales force and independent sales representatives, salaries paid to our sales support staff, stock-based compensation expense as well as costs associated with marketing materials and trade shows. We generally pay higher commissions to our independent sales representatives for quick-turn work, which generally has a higher gross profit component than standard lead-time work.
General and administrative costs primarily include the salaries for executive, finance, accounting, information technology, facilities and human resources personnel, as well as insurance expenses, expenses for accounting and legal assistance, incentive compensation expense, stock-based compensation expense, bad debt expense, and gains or losses on the sale or disposal of property, plant and equipment.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated condensed financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities.
A critical accounting policy is defined as one that is both material to the presentation of our consolidated condensed financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations. These policies require us to make assumptions about matters that are highly uncertain at the time of the estimate. Different estimates we could reasonably have used, or changes in the estimates that are reasonably likely to occur, would have a material effect on our financial condition or results of operations. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management has discussed the development, selection and disclosure of these estimates with the audit committee of our board of directors. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies include asset valuation related to bad debts and inventory obsolescence; sales returns and allowances; impairment of long-lived assets, including goodwill and intangible assets; realizability of deferred tax assets; and determining self-insured reserves, asset retirement obligations and environmental liabilities. Allowance for Doubtful Accounts
We provide customary credit terms to our customers and generally do not require collateral. We perform ongoing credit evaluations of the financial condition of our customers and maintain an allowance for doubtful accounts based upon historical collections experience and expected collectibility of accounts. Our actual bad debts may differ from our estimates. Inventories
In assessing the realization of inventories, we are required to make judgments as to future demand requirements and compare these with current and committed inventory levels. Provision is made to reduce excess and obsolete inventories to their estimated net realizable value. Our inventory requirements may change based on our projected customer demand, market conditions, technological and product life cycle changes, longer or shorter than expected usage periods, and other factors that could affect the valuation of our inventories. We maintain certain finished goods inventories near certain key customer locations in accordance with agreements with those customers. Although this inventory is typically supported by valid purchase orders, should these customers ultimately not purchase these inventories, our results of operations and financial condition would be adversely affected.

Revenue Recognition
We derive revenues primarily from the sale of printed circuit boards and backplane assemblies using customer-supplied engineering and design plans and recognize revenues when persuasive evidence of a sales arrangement exists, the sales terms are fixed and determinable, title and risk of loss have transferred, and collectibility is reasonably assured - generally when products are shipped to the customer. We provide our customers a limited right of return for defective printed circuit boards and backplane assemblies. We accrue an estimated amount for sales returns and allowances at the time of sale based on historical information. To the extent actual experience varies from our historical experience, revisions to these allowances may be required. Long-lived Assets
We have significant long-lived tangible and intangible assets consisting of property, plant and equipment, definite-lived intangibles, and goodwill. We review these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In addition, we perform an impairment test related to goodwill at least annually. Our goodwill and intangibles are largely attributable to our acquisitions of other businesses. We have two reporting units, which are also our operating segments, and both contained goodwill prior to our 2008 annual impairment testing.
During the fourth quarter 2008, we performed our annual impairment assessment of goodwill, which requires the use of a fair-value based analysis. We determined the fair value of our operating segments based on discounted cash flows and market approach analyses and considered factors such as a weakening economy, reduced expectations for future cash flows coupled with a decline in the market price of our stock and market capitalization for a sustained period, as indicators for potential goodwill impairment. In conjunction with our annual assessment of goodwill, we also assessed other long-lived assets, specifically definite-lived intangibles and property, plant and equipment, for potential impairment given similar impairment indicators. The completion of our impairment assessment determined that the carrying value of our goodwill and certain long-lived assets at production facilities exceeded their fair value. As a result, charges were recorded to adjust goodwill and long-lived assets to their fair value as of December 31, 2008. There were no events or changes in circumstances during the three quarters ended September 28, 2009 to indicate that the carrying amount of such assets may not be recoverable, with the exception of assets related to the closure of our Redmond, Washington and Hayward and Los Angeles, California production facilities and an asset held for sale. We recorded the impairment of certain long-lived assets for our Redmond, Washington, and two California facilities in the amount of $8.1 million and $8.4 million for the quarter and three quarters ended September 28, 2009, respectively, and this is directly related to our facility closures. Additionally, in the third quarter of 2009, we reduced the value of the Dallas, Oregon facility, which is classified as an asset held for sale, by $2.2 million to record the estimated fair value less cost to sell given current market conditions.
We use an estimate of the future undiscounted net cash flows in measuring whether our long-lived tangible assets and definite-lived intangible assets are recoverable. If forecasts and assumptions used to support the realizability of our goodwill and other long-lived assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.
Income Taxes
Deferred income tax assets are reviewed for recoverability, and valuation allowances are provided, when necessary, to reduce deferred tax assets to the amounts expected to be realized. At September 28, 2009 and December 31, 2008, we had net deferred income tax assets of $40.9 million and $39.8 million, respectively, and no valuation allowance. Should our expectations of taxable income change in future periods, it may be necessary to establish a valuation allowance, which could affect our results of operations in the period such a determination is made. In addition, we record income tax provision or benefit during interim periods at a rate that is based on expected results for the full year. If we were to establish a valuation allowance subsequent to September 28, 2009, and then determine that it is more likely than not that some or all of our deferred income tax assets would be realizable in an amount greater than what already is recorded, we would reverse all or a portion of the valuation allowance in the period the determination is made. If future changes in market conditions cause actual results for the year to be more or less favorable than those expected, adjustments to the effective income tax rate could be required.

Self Insurance
We are self-insured for group health insurance and worker's compensation benefits provided to our employees, and we purchase insurance to protect against claims at the individual and aggregate level. The insurance carrier adjudicates and processes employee claims and is paid a fee for these services. We reimburse our insurance carriers for paid claims subject to variable monthly limitations. We estimate our exposure for claims incurred but not reported at the end of each reporting period and use our judgment with the assistance of actuarial and claim advisors, in determining the number of claims and related claim amounts outstanding as well as historical information supplied by our insurance carriers and brokers on an annual basis to estimate our liability for these claims. This liability is subject to an aggregate stop-loss that ranges between $100,000 and $250,000 per individual. Our actual claims experience may differ from our estimates.
Asset Retirement Obligations and Environmental Liabilities We establish liabilities for the costs of asset retirement obligations when a legal or contractual obligation exists to dispose of or restore an asset upon its retirement and the timing and cost of such work can be reasonably estimated. In addition, we accrue an estimate of the costs of environmental remediation for work at identified sites where an assessment has indicated it is probable that cleanup costs are or will be required and may be reasonably estimated. In making these estimates, we consider information that is currently available, existing technology, enacted laws and regulations, and our estimates of the timing of the required remedial actions, and we discount these estimates at 8%. We also are required to estimate the amount of any probable recoveries, including insurance recoveries. We recorded an adjustment to our estimate for asset retirement obligations in the amount of $0.7 million during the third quarter ended September 28, 2009 related to changes in the estimated timing and amount of cash flows to restore our leased Hayward and Los Angeles, California manufacturing facilities to shell condition.
Results of Operations
Quarter and Three Quarters Ended September 28, 2009 Compared to the Quarter and Three Quarters Ended September 29, 2008
There were 91 days in both of the third quarters ended September 28, 2009 and September 29, 2008 and 271 and 273 days in the three quarters ended September 28, 2009 and September 29, 2008, respectively.
On January 1, 2009, we adopted the new authoritative guidance regarding convertible debt instruments, including those that may be settled in cash upon conversion. Issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The new authoritative guidance requires retrospective application back to the issuance date of the convertible debt, which for us was May 2008. The financial data for the comparative quarter and three quarters of 2008 discussed below in our results of operations has been adjusted retrospectively to conform to the new authoritative guidance. Also see Note 2 in the notes to the consolidated condensed financial statements.

The following table sets forth statement of operations data expressed as a percentage of net sales for the periods indicated:

                                                   Quarter Ended                          Three Quarters Ended
                                                               As Adjusted                               As Adjusted
                                         September 28,        September 29,        September 28,        September 29,
                                             2009                  2008                2009                  2008
Net sales                                         100.0 %              100.0 %              100.0 %              100.0 %
Cost of goods sold                                 82.6                 81.0                 82.5                 79.4

Gross profit                                       17.4                 19.0                 17.5                 20.6

Operating (income) expenses:
Selling and marketing                               4.7                  4.5                  4.6                  4.5
General and administrative                          6.8                  4.8                  5.9                  4.9
Amortization of definite-lived
intangibles                                         0.6                  0.5                  0.6                  0.5
Restructuring charges                               1.8                    -                  1.2                    -
Impairment of long-lived assets                     7.4                    -                  2.5                    -
Metal reclamation                                     -                    -                    -                 (0.7 )

Total operating expenses                           21.3                  9.8                 14.8                  9.2

Operating (loss) income                            (3.9 )                9.2                  2.7                 11.4
Other income (expense):
Interest expense                                   (2.1 )               (1.6 )               (1.9 )               (1.6 )
Interest income                                     0.1                  0.4                  0.1                  0.2
Other, net                                          0.1                 (0.2 )                  -                 (0.2 )

Total other expense, net                           (1.9 )               (1.4 )               (1.8 )               (1.6 )

Income (loss) before income taxes                  (5.8 )                7.8                  0.9                  9.8
Income tax benefit (provision)                      2.3                 (2.6 )               (0.3 )               (3.5 )

Net (loss) income                                  (3.5 )%               5.2 %                0.6 %                6.3 %

We have two reportable segments: PCB Manufacturing and Backplane Assembly. These reportable segments are managed separately because they distribute and manufacture distinct products with different production processes. PCB Manufacturing fabricates printed circuit boards. Backplane Assembly is a contract manufacturing business that specializes in assembling backplanes into sub-assemblies and other complete electronic devices. PCB Manufacturing customers are either EMS or OEM companies, while Backplane Assembly customers are usually OEMs. Our Backplane Assembly segment includes our Hayward, California and Shanghai, China plants and our Ireland sales and distribution infrastructure. Our PCB Manufacturing segment is composed of seven domestic PCB fabrication plants, and a facility which provides follow-on value-added services primarily for one of the PCB Manufacturing plants. The following table compares net sales by reportable segment for the quarters ended September 28, 2009 and September 29, 2008 and the three quarters ended September 28, 2009 and September 29, 2008:

                                                  Quarter Ended                          Three Quarters Ended
                                        September 28,        September 29,        September 28,        September 29,
                                            2009                 2008                 2009                 2008
                                                                       (In thousands)
Net sales:
PCB Manufacturing                      $       123,171      $       148,003      $       378,065      $       446,304
Backplane Assembly                              23,950               29,254               77,975               92,984

Total sales                                    147,121              177,257              456,040              539,288
Inter-company sales                             (8,046 )             (8,238 )            (23,488 )            (23,223 )

Total net sales                        $       139,075      $       169,019      $       432,552      $       516,065

Net Sales
Net sales decreased $29.9 million, or 17.7%, from $169.0 million in the third quarter 2008 to $139.1 million in the third quarter 2009 due to reduced demand at most of our production facilities resulting from a downturn in the global economy and the shutdown of our Redmond, Washington production facility at the end of March 2009. The $29.9 million revenue decline reflects lower demand, mainly in our PCB Manufacturing commercial end markets, partially offset by increased pricing, and compounded by the closure of our Redmond, Washington facility. PCB volume declined approximately 25% due to reduced demand while prices rose approximately 7% due to a shift in production mix toward more high-technology production. Our quick-turn production, which we measure as orders placed and shipped within 10 days, remained consistent at 11% of PCB sales in the third quarters ended 2008 and 2009.

Net sales decreased $83.5 million, or 16.2%, from $516.1 million for the three quarters ended September 29, 2008 to $432.6 million for the three quarters ended September 28, 2009 due to reduced demand at most of our production facilities resulting from a downturn in the global economy and the shutdown of our Redmond, Washington production facility at the end of March 2009. The $83.5 million revenue decline reflects lower demand mainly in the commercial end markets of both our Backplane Assembly operations and our PCB Manufacturing facilities and the closure of our Redmond, Washington facility. PCB volume declined approximately 27% due to reduced demand while prices rose approximately 13% due to a shift in production mix toward more high-technology production. Our quick-turn production, which we measure as orders placed and shipped within 10 days, decreased from 12% of PCB sales for the three quarters ended September 29, 2008 to 11% of PCB sales for the three quarters ended September 28, 2009. The increasingly complex nature of our quick-turn work requires more time to manufacture, thereby extending some of these orders beyond the 10-day delivery window.
Cost of Goods Sold
Cost of goods sold decreased $22.0 million, or 16.1%, from $136.9 million for the third quarter 2008 to $114.9 million for the third quarter 2009 due primarily to the decline in PCB volume discussed above. The decrease in cost of goods sold was mostly driven by lower labor, direct material costs and supplies associated with lower production volume. As a percentage of net sales, cost of goods sold increased from 81.0% for the third quarter 2008 to 82.6% for the third quarter 2009, primarily due to lower absorption of fixed costs on lower revenue and costs related to the closure of our Hayward and Los Angeles, California facilities.
Cost of goods sold decreased $52.6 million, or 12.8%, from $409.6 million for the three quarters ended September 29, 2008 to $357.0 million for the three quarters ended September 28, 2009. Cost of goods sold decreased mainly due to lower labor, direct material costs and supplies associated with lower production volume. As a percentage of net sales, cost of goods sold increased from 79.4% for the three quarters ended September 29, 2008 to 82.5% for the three quarters ended September 28, 2009, primarily due to lower absorption of fixed costs on lower revenue and costs related to the closure of our Redmond, Washington and Hayward and Los Angeles, California production facilities. Gross Profit
As a result of the foregoing, gross profit decreased $7.9 million, or 24.6%, from $32.1 million for the third quarter 2008 to $24.2 million for the third quarter 2009. Our gross margin decreased from 19.0% in the third quarter 2008 to 17.4% in the third quarter 2009. Additionally, gross profit decreased $31.0 million, or 29.1%, from $106.5 million for the three quarters ended September 29, 2008 to $75.5 million for the three quarters ended September 28, 2009. Gross margin decreased from 20.6% for the three quarters ended September 29, 2008 to 17.5% for the three quarters ended September 28, 2009. The decrease in our gross margin was due primarily to lower fixed cost absorption and costs related to the closure of our Redmond, Washington and Hayward and Los Angeles, California facilities.
Selling and Marketing Expenses
Selling and marketing expenses decreased $1.1 million, or 14.5%, from $7.6 million for the third quarter 2008 to $6.5 million for the third quarter . . .