- Quarterly Report (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 29, 2009

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 incorporation or 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 October 5, 2009 was 21,880,366 shares.

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MERIX CORPORATION

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION		Page

Item 1.	Consolidated Financial Statements (Unaudited)

	Consolidated Balance Sheets – August 29, 2009 and May 30, 2009	2

	Consolidated Statements of Operations – Fiscal Quarters Ended August 29, 2009 and August 30, 2008	3

	Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) – Fiscal Quarters Ended August 29, 2009 and August 30, 2008	4

	Consolidated Statements of Cash Flows – Fiscal Quarters Ended August 29, 2009 and August 30, 2008	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 6.	Exhibits	41

Signatures		41

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PART I – FINANCIAL INFORMATION

M ERIX CORPORATION AND SUBSIDIARIES
C ONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
	August 29,			May 30,
	2009			2009
Assets
Current assets:
Cash and cash equivalents	$	21,353		$	16,141
Accounts receivable, net of allowances for doubtful
accounts of $1,478 and $1,503		42,219			43,290
Inventories, net		14,941			14,593
Assets held for sale		112			3
Deferred income taxes		160			160
Prepaid and other current assets		6,928			5,437
Total current assets		85,713			79,624

Property, plant and equipment, net of accumulated
depreciation of $141,809 and $138,482		89,458			95,170
Goodwill		11,392			11,392
Definite-lived intangible assets, net of accumulated
amortization of $10,849 and $10,380		6,359			6,828
Deferred income taxes, net		521			521
Assets held for sale		1,146			1,146
Other assets		4,328			4,470
Total assets	$	198,917		$	199,151

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	34,514		$	33,371
Accrued liabilities		14,547			13,088
Total current liabilities		49,061			46,459

Long-term debt		83,000			78,000
Other long-term liabilities		4,582			4,374
Total liabilities		136,643			128,833

Commitments and Contingencies (Note 14)

Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized;
none issued		-			-
Common stock, no par value; 50,000 shares authorized;
21,881 and 21,781 issued and outstanding		217,579			217,112
Accumulated deficit		(159,047	)		(150,813	)
Accumulated other comprehensive income		33			34
Total Merix shareholders' controlling interest		58,565			66,333
Noncontrolling interest		3,709			3,985
Total shareholders' equity		62,274			70,318
Total liabilities and shareholders' equity	$	198,917		$	199,151


See accompanying Notes to Consolidated Financial Statements.

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MERIX CORPORATION AND SUBSIDIARIES
C ONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

	Fiscal quarter ended

	August 29,			August 30,
	2009			2008

Net sales	$	57,797		$	90,627
Cost of sales		54,283			80,353
Gross profit		3,514			10,274

Operating expenses:
Engineering		261			563
Selling, general and administration		7,966			9,702
Amortization of intangible assets		469			520
Impairment of fixed assets (Note 16)		642			-
Severance charges and other restructuring costs (Note 16)		314			(527	)
Total operating expenses		9,652			10,258

Operating income (loss)		(6,138	)		16

Other income (expense):
Interest income		6			51
Interest expense		(1,041	)		(876	)
Other income (expense), net		(53	)		(364	)
Total other expense, net		(1,088	)		(1,189	)

Loss before income taxes and minority interests		(7,226	)		(1,173	)
Provision for income taxes		909			728
Net loss		(8,135	)		(1,901	)
Net income attributable to noncontrolling interest		99			246
Net loss attributable to controlling interest	$	(8,234	)	$	(2,147	)

Basic and diluted loss per share attributable to
Merix common shareholders	$	(0.38	)	$	(0.10	)

Weighted average number of shares - basic and diluted		21,614			20,794


See accompanying Notes to Consolidated Financial Statements.

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MERIX CORPORATION AND SUBSIDIARIES
C ONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
For the fiscal quarters ended August 29, 2009 and August 30, 2008
(in thousands)

													Accumulated
													Other
	Non-												Comprehensive			Total
	controlling			Common Stock						Accumulated			Income			Shareholders'
	Interest			Shares			Amount			Deficit			(Loss)			Equity

Balance at May 31, 2008	$	4,573			21,073		$	215,085		$	(101,358	)	$	47		$	118,347
Dividend declared for distribution to non-controlling interest		(297	)		-			-			-			-			(297	)
Stock Plans:
Issuance of restricted stock to employees		-			26			-			-			-			-
Issuance of stock under employee stock purchase plan		-			147			262			-			-			262
Share-based compensation expense		-			-			566			-			-			566
Shares repurchased, surrendered or cancelled		-			(8	)		(18	)		-			-			(18	)
Comprehensive loss:
Net income (loss)		246			-			-			(2,147	)		-			(1,901	)
Foreign currency translation adjustment, net of tax		-			-			-			-			(2	)		(2	)
Quarterly comprehensive loss																	(1,903	)
Balance at August 30, 2008	$	4,522			21,238		$	215,895		$	(103,505	)	$	45		$	116,957

Balance at May 30, 2009	$	3,935			21,781		$	217,112		$	(150,622	)	$	33		$	70,458
Elimination of one-month reporting lag for Asia subsidiary		50			-			-			(191	)		1			(140	)
Dividend declared for distribution to non-controlling interest		(375	)		-			-			-			-			(375	)
Stock Plans:
Issuance of restricted stock to employees		-			108			-			-			-			-
Share-based compensation expense		-			-			475			-			-			475
Shares repurchased, surrendered or cancelled		-			(8	)		(8	)		-			-			(8	)
Comprehensive loss:
Net income (loss)		99			-			-			(8,234	)		-			(8,135	)
Foreign currency translation adjustment, net of tax		-			-			-			-			(1	)		(1	)
Quarterly comprehensive loss																	(8,136	)
Balance at August 29, 2009	$	3,709			21,881		$	217,579		$	(159,047	)	$	33		$	62,274




See accompanying Notes to Consolidated Financial Statements.

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MERIX CORPORATION AND SUBSIDIARIES
C ONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Fiscal quarter ended
CASH FLOWS FROM OPERATING ACTIVITIES	August 29, 2009			August 30, 2008
Net loss	$	(8,135	)	$	(1,901	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		5,833			5,457
Share-based compensation expense		475			566
Impairment of fixed assets		642			-
Gain on disposition of assets		(9	)		(567	)
Changes in operating accounts:
Decrease in accounts receivable, net		959			2,818
(Increase) decrease in inventories, net		(348	)		5
(Increase) decrease in other assets		(1,481	)		3,246
Increase (decrease) in accounts payable		1,377			(1,734	)
Increase in other accrued liabilities		1,306			1,310
Increase (decrease) in due to affiliate, net		-			(67	)
Net cash provided by operating activities		619			9,133

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(422	)		(9,421	)
Proceeds from disposal of property, plant and equipment		23			555
Net cash used in investing activities		(399	)		(8,866	)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing on revolving line of credit		5,000			6,000
Borrowing on long-term notes payable		1,500			-
Principal payments on revolving line of credit		(1,500	)		(6,000	)
Proceeds from exercise of stock options and stock plan transactions		-			262
Reacquisition of common stock		(8	)		(18	)
Dividend distribution to non-controlling interest					(297	)
Other financing activities		-			(4	)
Net cash provided by (used in) financing activities		4,992			(57	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		5,212			210

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		16,141			5,728

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	21,353		$	5,938

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes, net	$	356		$	480
Cash paid for interest		38			174




See accompanying Notes to Consolidated Financial Statements.

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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 AND CONSOLIDATION

The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). 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 our 2009 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 2010 is a 52 week fiscal year ending on May 29, 2010. The first quarter of fiscal 2010 ended August 29, 2009 and the first quarter of fiscal 2009 ended August 30, 2008 and included thirteen weeks, respectively.

The consolidated financial statements include the accounts of Merix Corporation and its wholly-owned and majority-owned subsidiaries. Beginning in the first quarter of fiscal 2010, all intercompany accounts, transactions and profits have been eliminated in consolidation. Prior to May 30, 2009 certain intercompany amounts related to Merix Asia could not be eliminated, as discussed in Note 4.

The functional currency for all subsidiaries is the U.S. dollar. Foreign exchange losses for the fiscal quarters ended August 29, 2009 and August 30, 2008 totaled $0.1 million and $0.3 million, respectively, and are included in net other expense in the consolidated statements of operations.

Events subsequent to August 29, 2009 were evaluated through October 7, 2009, the date on which the financial statements were issued.

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NOTE 3. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

We estimate the fair value of our monetary assets and liabilities based upon comparison of such assets and liabilities to the current market values for instruments of a similar nature and degree of risk. Our monetary assets and liabilities include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt. Due to their short-term nature, we estimated that the recorded value of our monetary assets and liabilities, except long-term debt as disclosed below, approximated fair value as of August 29, 2009 and May 30, 2009.

The fair market value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise; however, the quoted market price for the Company’s debt is currently reflecting a significant risk premium. The Company’s debt trades infrequently in the open market and as such, the quoted market price is considered a Level II input in the assessment of fair value. At August 29, 2009 and May 30, 2009, respectively, the book value of our fixed rate debt and the fair value, based on open market trades proximate to the fair value measurement date, was as follows:

	August 29,		May 30,
	2009		2009
Book value of fixed rate debt	$	70,000	$	70,000
Fair value of fixed rate debt	$	35,000	$	28,000

NOTE 4. ELIMINATION OF ONE MONTH REPORTING LAG FOR MERIX ASIA

The Company implemented an enterprise resource planning (ERP) system during the first quarter of fiscal 2009 for Merix Asia. Prior to that implementation, the Company’s financial reporting systems at Merix Asia were predominantly manual in nature, and required significant time to process and review the transactions in order to assure the financial information was properly stated. Additionally, Merix Asia performs a complex regional 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 required the use of a one-month lag in consolidating the financial statements for Merix Asia with Merix Corporation through the end of fiscal 2009. Intercompany balances resulting from transactions with Merix Asia during the one-month lag period were netted and presented as a current asset or liability on the consolidated balance sheet.

As a result of the implementation of the new ERP system for Merix Asia and the related streamlining of business processes the Company has been able to eliminate the one-month reporting lag for Merix Asia as of the commencement of the first quarter of fiscal 2010.

The elimination of the one-month reporting lag resulted in an increase to accumulated deficit as of May 30, 2009 of $0.2 million, representing the operating results for Merix Asia for the four weeks ended May 30, 2009 as presented below:

Net Sales	$	8,182
Cost of Sales		7,389
Gross Profit		793
Gross margin		9.7	%
Engineering expense		56
Selling, general and administration		510
Amortization of intangible assets		56
Severance, asset impairment and restructuring charges		197
Loss from operations		(26	)
Other expense, net		16
Provision for income taxes		99
Net loss		(141	)
Net income attributable to noncontrolling interest		50
Net increase to accumulated deficit	$	(191	)

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The amounts presented on the consolidated balance sheet as of May 30, 2009 have been revised from those previously reported to reflect the consolidation of Merix Asia after the elimination of the one-month reporting lag as shown below:

	May 30,			May 30,
	2009			2009
Assets	(as reported)			(as revised)
Cash	$	17,571		$	16,141
Accounts receivable, net		43,285			43,290
Inventories, net		14,367			14,593
Other current assets		5,059			5,600
Total current assets		80,282			79,624
Property, plant and equipment, net		95,883			95,170
Other assets		24,505			24,357
Total assets	$	200,670		$	199,151

Liabilities and Shareholder’s Equity
Accounts payable	$	33,263		$	33,371
Accrued liabilities		14,715			13,088
Total current liabilities		47,978			46,459
Long-term debt		78,000			78,000
Other long-term liabilities		4,234			4,374
Total liabilities		130,212			128,833

Noncontrolling interest		3,935			3,985
Common stock		217,112			217,112
Accumulated other comprehensive income		33			34
Accumulated deficit		(150,622	)		(150,813	)
Total shareholder’s equity		70,458			70,318
Total liabilities and shareholder’s equity	$	200,670		$	199,151

Prior period consolidated results of operations and cash flows have not been restated to conform with the new Merix Asia fiscal reporting period since the results, as previously presented, are considered comparable to the current year consolidated financial statements in all material respects.

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NOTE 5. INVENTORIES

Inventories are valued at the lower of cost or market and include materials, labor and manufacturing overhead. Inventory cost is determined by standard cost, which approximates the first-in, first-out (FIFO) basis.

Provisions for inventories are made to reduce excess inventories to their estimated net realizable values, as necessary. A change in customer demand for inventory is the primary indicator for reductions 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 and current and forecasted demand for the inventory. The net decrease to inventory valuation reserves was $0.2 million and $0.8 million, respectively, during the first quarters of fiscal 2010 and 2009. As of August 29, 2009 and May 30, 2009, our inventory reserves totaled $3.4 million and $3.6 million, respectively.

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

Abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) are recognized as current-period charges and the allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. The Company is required to estimate the amount of idle capacity and expense amounts in the current period. During the first quarter of fiscal 2010, the Company expensed $0.1 million related to abnormally low production volumes as a component of cost of sales. There were no amounts expensed related to abnormally low production volumes and related excess capacity in the first quarter of fiscal 2009.

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

	August 29,		May 30,
	2009		2009
Raw materials	$	2,791	$	2,910
Work-in-process		4,735		3,967
Finished goods		3,415		3,930
Consignment finished goods		4,000		3,786
	$	14,941	$	14,593

NOTE 6. PREPAID AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following at August 29, 2009 and May 30, 2009 (in thousands):

	August 29,		May 30,
	2009		2009
Prepaid expenses	$	1,666	$	1,578
Income taxes receivable		368		328
Value-added tax receivable		3,178		2,009
Other assets		1,716		1,522
	$	6,928	$	5,437

NOTE 7. DEFINITE-LIVED INTANGIBLE ASSETS

At August 29, 2009 and May 30, 2009, 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	August 29,			May 30,
	Period	2009			2009
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			(10,849	)		(10,380	)
		$	6,359		$	6,828

Amortization expense was as follows (in thousands):

	Fiscal Quarter Ended August 29, 2009		Fiscal Quarter Ended August 30, 2008
Customer relationships	$	467	$	518
Manufacturing sales representatives network		2		2
	$	469	$	520

Amortization is as follows over the next five fiscal years and thereafter (in thousands):

Remainder of fiscal 2010	$	1,296
2011		1,553
2012		1,120
2013		727
2014		727
Thereafter		936
	$	6,359

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NOTE 8. OTHER ASSETS

Other assets consisted of the following at August 29, 2009 and May 30, 2009 (in thousands):

	August 29,		May 30,
	2009		2009
Leasehold land use rights, net	$	1,190	$	1,197
Deferred financing costs, net		2,826		3,022
Other assets		312		251
	$	4,328	$	4,470

NOTE 9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at August 29, 2009 and May 30, 2009 (in thousands):

	August 29,		May 30,
	2009		2009
Accrued compensation	$	7,167	$	6,602
Accrued warranty (Note 10)		701		986
Income taxes payable		606		321
Other liabilities		6,073		5,179
	$	14,547	$	13,088

NOTE 10. ACCRUED WARRANTY

The Company generally warrants its products for a period of up to twelve months from the point of sale. However, in selected circumstances, the Company grants longer warranty periods to certain customers of up to three years. 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 goods sold upon 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 August 29, 2009			Fiscal Quarter Ended August 30, 2008
Balance, beginning of period	$	986		$	2,147
Provision for warranty charges		458			982
Warranty charges incurred		(743	)		(809	)
Balance, end of period	$	701		$	2,320

NOTE 11. EARNINGS PER SHARE AND ANTIDILUTIVE SHARES

For the fiscal quarters ended August 29, 2009 and August 30, 2008, the following potentially dilutive shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive.

	Fiscal Quarter Ended August 29, 2009		Fiscal Quarter Ended August 30, 2008
Stock options		2,865		3,364
Restricted stock awards		253		334
Convertible notes		4,608		4,608

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NOTE 12. SEGMENT INFORMATION

The Company has two reportable business segments defined by geographic location: North America and 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 August 29, 2009		Fiscal Quarter Ended August 30, 2008
North America	$	26,297	$	44,917
Asia		31,500		45,710
	$	57,797	$	90,627

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

	Fiscal Quarter Ended August 29, 2009			Fiscal Quarter Ended August 30, 2008
North America	$	(771	)	$	5,164
Asia		4,285			5,110
	$	3,514		$	10,274

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

	August 29, 2009		May 30, 2009
North America	$	132,467	$	131,535
Asia		66,450		67,616
	$	198,917	$	199,151

NOTE 13. SIGNIFICANT CUSTOMERS

There were no customers individually accounting for 10% or more of the Company’s net sales in the first quarter of fiscal 2010. Two customers exceeded 10% of net sales in the first quarter of fiscal 2009, accounting for 15% and 10%, respectively, of net sales.

At August 29, 2009, five entities represented approximately 44% of the Company’s consolidated net trade accounts receivable balance, individually ranging from approximately 5% to approximately 19%.

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NOTE 14. 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 seeking an unspecified amount of damages. 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 and the case was remanded back to the U.S. District Court for the District of Oregon. On May 15, 2009, the plaintiffs moved to certify a class of all investors who purchased in the public offering and who were damaged thereby. The Court has not yet ruled on that motion. The case is currently in the discovery phase. A potential loss or range of loss that could arise from these cases is not estimable or probable at this time.

Commitments

As of August 29, 2009, the Company had capital commitments of approximately $0.7 million, primarily relating to the purchase of machinery and equipment.

NOTE 15. RELATED PARTY TRANSACTIONS

The Company recorded the following amounts for transactions with Huizhou Desay Holdings Co. Ltd., a minority shareholder in two Merix Asia manufacturing facilities, during the periods indicated (in thousands):

	Fiscal Quarter Ended August 29, 2009		Fiscal Quarter Ended August 30, 2008
Consulting fees	$	53	$	53
Operating lease rental fees		82		81
Management fees		36		22
Capitalized construction costs		-		246
Other fees		65		96
	$	236	$	498

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NOTE 16. SEVERANCE, IMPAIRMENT AND RESTRUCTURING CHARGES

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

	Fiscal Quarter Ended August 29, 2009		Fiscal Quarter Ended August 30, 2008
Severance charges	$	245	$	40
Hong Kong office closure charges		56		-
Legal and other restructuring charges		13		-
Impairment of fixed assets		642		-
Gain on sale of Merix Asia equipment		-		(567	)
	$	956	$	(527	)

In the first quarter of fiscal 2010, the Company recorded $0.1 million in restructuring costs related to the relocation of its Asia administrative offices from Hong Kong to the People’s Republic of China (PRC), comprised of severance and relocation freight costs.

The Company also recorded $0.2 million in other severance charges during the first quarter of fiscal 2010 due to minor reductions-in-force in both North America and Asia in order to mitigate costs in response to ongoing softness in demand for the Company’s products.

The Company determined in the first quarter of fiscal 2010 that it would decommission certain manufacturing equipment at its Forest Grove facility with a net book value of $0.6 million. An impairment charge was recorded to write off the net book value of this equipment.

In the first quarter of fiscal 2009, the Company recorded approximately $40,000 in severance and related costs in connection with closure of the Hong Kong manufacturing facility as 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 to increase its manufacturing capacity in China, which was completed in the fourth quarter of fiscal 2008. Additionally, the Company recorded a gain of $0.6 million in the first quarter of fiscal 2009 related to the sale of equipment previously used at the Hong Kong facility.

A roll-forward of the Company’s severance accrual for the first quarter of fiscal 2010 was as follows (in thousands):

		May 30, 2009				Charged to Expense				Expenditures				August 29, 2009
Severance costs		$	435			$	245			$	(572	)		$	108

NOTE 17. NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R), “Business Combinations,” which replaces SFAS No. 141, “Business Combinations .” SFAS No. 141(R) establishes principles and requirements for how an acquiring company (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations occurring on or after December 15, 2008, and applies to all transactions or other events in which the Company obtains control in one or more businesses. The impact of adopting SFAS No. 141(R) did not have a material impact on the Company’s consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51,” which requires the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of

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financial position within equity, but separate from the parent’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and early adoption is prohibited. SFAS No. 160 shall be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The impact of adopting SFAS No. 160 did not have a material impact on the Company’s consolidated financial position or results of operations. The adoption of SFAS No. 160 did result in a reclassification of minority interest into total consolidated equity thereby increasing total equity by $4.0 million at May 30, 2009.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which requires certain disclosures related to derivative instruments. SFAS No. 161 is effective prospectively for interim periods and fiscal years beginning after November 15, 2008. The Company currently has no derivative instruments and does not currently engage in hedging activity and as such, the adoption of SFA No. 161 did not have a significant impact on its consolidated financial position and results of operations.

In April 2008, the FASB issued Staff Position No. FAS 142-3 "Determination of the Useful Life of Intangible Assets" (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” The intent of this Staff Position is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP 142-3 did not have a significant impact on the Company’s consolidated financial position or results of operations.

In May 2008, the FASB issued Staff Position No. APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP APB 14-1). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of such instruments 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. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company currently has no convertible debt instruments that may be settled in cash upon conversion and, as such, the adoption did not have a significant impact on its consolidated financial position and results of operations.

In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1 “Interim Disclosures About Fair Value of Financial Instruments” (FSP FAS 107-1 & APB 28-1) which requires disclosure about the method and significant assumptions used to establish the fair value of financial instruments for interim reporting periods as well as annual reporting periods. FSP FAS 107-1 & APB 28-1 is effective for interim reporting periods ending after June 15, 2009 and the adoption of this FSP did not have a material impact on the Company’s consolidated financial position and results of operations.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the standard requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, which will alert users of the financial statements that the Company has not evaluated subsequent events occurring after that date. SFAS No.165 is effective for interim or annual reporting periods ending after June 15, 2009 and the adoption of SFAS No. 165 did not have a material impact on the Company’s consolidated financial position and results of operations.

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Recently Issued Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets - An Amendment to Statement No. 140,” to simplify guidance for transfers of financial assets in SFAS No. 140. The guidance removes the concept of a qualified special purpose entity (QSPE), which will result in securitization and other asset-backed financing vehicles, to be evaluated for consolidation under SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 166 also expands legal isolation analysis, limits when a portion of a financial asset can be derecognized, and clarifies that an entity must consider all arrangements or agreements made contemporaneously with, or in contemplation of, a transfer when applying the derecognition criteria. SFAS No. 166 is effective for first annual reporting periods beginning after November 15, 2009, and is to be applied prospectively. The Company does not maintain any QSPEs and as such, the adoption of SFAS No. 166 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which addresses the primary beneficiary (PB) assessment criteria for determining whether an entity is to consolidate a variable interest entity (VIE). An entity is considered the PB and shall consolidate a VIE if it meets both the following characteristics: (1) the power to direct the activities of the VIE that most significantly affects economic performance and (2) the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE. The statement also provides guidance in relation to the elimination of the QSPE concept from SFAS No. 166. This statement is effective for annual reporting periods beginning after November 15, 2009. The Company does not maintain any VIEs and as such, the adoption of SFAS No. 167 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, A Replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles ,” to establish the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP in the United States (“the GAAP hierarchy”). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The impact of adopting SFAS No. 168 will not have a material impact on the Company’s consolidated financial condition or results of operations.

NOTE 18. Subsequent Events

New Borrowing

In September 2009, the Company entered into a $2.7 million Loan Contract under its credit facility with Industrial and Commercial Bank of China, Ltd. The proceeds borrowed under this loan contract were used for working capital and operating expenses. The Company also reduced its borrowings under its revolving line of credit with Bank of America, N.A. by $2.7 million.

Merger Agreement

On October 6, 2009, the Company announced that it entered into a merger agreement to be acquired by ViaSystems, Inc, (ViaSystems) a leading worldwide provider of complex multi-layer printed circuit boards and electro-mechanical solutions. Under the terms of the merger agreement, ViaSystems will acquire all of the outstanding common stock of Merix Corporation.

Each Merix share will be converted into approximately 0.11 newly issued shares of ViaSystems, subject to adjustment, which will be publicly traded on the NASDAQ upon completion of the transaction. Approximately 98 percent of the holders of Merix $70 million 4% Convertible Senior Subordinated Notes due 2013 have agreed to enter into an exchange agreement where their notes will be exchanged for approximately 1.4 million newly issued ViaSystems shares plus a total cash payment of approximately $36 million.

Following the merger transaction and note exchange, approximately 20 million shares will be outstanding. Existing ViaSystems shareholders will own approximately 80.5 percent of the combined company, existing Merix shareholders will own approximately 12.5 percent and Merix convertible bond holders will own approximately 7 percent.

The Company’s Board of Directors has unanimously approved the merger, which must also be approved by a vote of the Company’s shareholders.

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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 30, 2009.

Business

We are a leading global manufacturing service provider of technologically advanced printed circuit boards (PCBs) used in the design and development of complex electronic applications by 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. Our principal markets include automotive, defense & aerospace, communications, computing, industrial, networking, peripherals and test end markets in the worldwide electronics industry. The markets served by Merix 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 and introduced to the global marketplace.

Operating Segments

Our business has two operating segments defined by geographic location: North America and 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 operating decision-maker for both of our operating segments is our Chief Executive Officer.

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 $31.5 million and $27.6 million at August 29, 2009 and May 30, 2009, respectively. The increase in backlog reflects strengthening demand in our markets near the end of the first quarter of fiscal 2010 as customers begin rebuilding inventory levels in anticipation of global economic recovery.

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.

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Summary of Sequential Quarterly Results and Outlook for Second Quarter of Fiscal 2010

Net sales of $57.8 million in the current quarter decreased $1.1 million or 2% compared to net sales in the fourth quarter of fiscal 2009, primarily due to a 4% net sales decrease in our North American operating segment, reflecting continued soft demand for our products. Although we experienced increasing demand in the latter half of the quarter, it was generally not reflected in current quarter net sales as many of the orders had shipment dates scheduled for the Company’s second fiscal quarter. Gross margin decreased to 6.1% in the current quarter compared to 8.5% in the fourth quarter of fiscal 2009 due primarily to reduced variable contribution margins on lower production volumes, primarily in our North American operating segment. Operating expenses of $9.7 million decreased $2.0 million compared to the prior quarter due primarily to reduced restructuring costs and legal charges in the current quarter. Net loss attributable to Merix shareholders for the quarter totaled $8.2 million or $0.38 per diluted share, compared to $8.4 million or $0.39 per diluted share in the fourth 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 recent economic decline and reduced customer demand we have focused principally on maximizing cash flow, maintaining and improving customer service and retaining factory capacity and flexibility. As we begin to see increases in demand in response to improving global economic conditions, management is carefully evaluating our manufacturing capacity to ensure we meet customers’ requirements while at the same time maximizing Merix’ financial returns.

Customer demand strengthened in the Company’s markets in the final weeks of the first quarter. While visibility to a protracted improvement remains limited, we expect orders to continue at this higher level, particularly in our Asian factories, resulting in improved net sales and gross margin in the second quarter. We expect operating and non-operating costs to remain relatively stable compared to the first quarter of fiscal 2010.

Results of Operations Compared to Prior Year

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)
	August 29, 2009					August 30, 2008
Net sales	$	57,797		100.0	%	$	90,627		100.0	%
Cost of sales		54,283		93.9			80,353		88.7
Gross profit		3,514		6.1			10,274		11.3
Engineering		261		0.5			563		0.6
Selling, general and administrative		7,966		13.8			9,702		10.7
Amortization of identifiable intangible assets		469		0.8			520		0.6
Severance, impairment and restructuring charges		956		1.7			(527	)	(0.6	)
Operating income (loss)		(6,138	)	(10.6	)		16		0.0
Other expense, net		(1,088	)	(1.9	)		(1,189	)	(1.3	)
Loss before income taxes		(7,226	)	(12.5	)		(1,173	)	(1.3	)
Provision for income taxes		909		1.6			728		0.8
Net loss		(8,135	)	(14.1	)		(1,901	)	(2.1	)
Net income attributable to non-controlling interests		99		0.2			246		0.3
Net loss attributable to Merix common shareholders	$	(8,234	)	(14.2	)%	$	(2,147	)	(2.4	)%

(1) Percentages may not add due to rounding.

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Net Sales

Net sales decreased by $32.8 million, or 36%, to $57.8 million, in the first quarter of fiscal 2010 compared to $90.6 million in the first quarter of fiscal 2009. The decline in net sales is directly related to the deterioration in global economic conditions, which reduced demand for our products. Net sales in our North America and Asia segments decreased by 41% and 31%, respectively, in the current quarter compared to the first quarter of the prior fiscal year.

Segment and Per Unit Information

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

	Fiscal Quarter Ended August 29, 2009		Fiscal Quarter Ended August 30, 2008
North America	$	26,297	$	44,917
Asia		31,500		45,710
	$	57,797	$	90,627

Per Unit Information

We define “unit” as the number of panels shipped to customers during the fiscal quarter. Percentage increases (decreases) in unit volume and pricing for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 were as follows:

North America:
Unit volume		(40)%
Average unit pricing		(2)%

Asia:
Unit volume		(33)%
Average unit pricing		3%

Consolidated:
Unit volume		(34)%
Average unit pricing		(4)%

Consolidated

Consolidated unit sales volume decreased 34%, driven primarily by decreases in demand from customers in each of our segments as discussed further below. Consolidated average unit pricing decreased by 4%, despite a 3% increase in average unit pricing for our Asia segment and only a 2% decrease in our North America operating segment, as further discussed below. 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 55% of total net sales in the first quarter of fiscal 2010, compared to 50% in the first quarter of the prior fiscal year. This overall shift in product mix from higher-technology, higher-priced PCBs produced by our North American facilities to lower-technology, lower-priced PCBs produced by our facilities in Asia results in a lower consolidated average unit price.

North America

North America net sales of $26.3 million decreased by $18.6 million or 41% compared to the first quarter of fiscal 2009. This reduction is primarily due to a 40% decrease in unit volume resulting from demand decreases associated with the deterioration of macroeconomic conditions.

In addition to the volume decrease, average unit pricing decreased by 2%, which resulted primarily from product mix impact due to lower-technology boards being produced during the current quarter compared to the prior year. In particular, the end market showing the sharpest decline since the first quarter of fiscal 2009 is the communications & networking market. The products sold in this end market are generally some of the highest technology and highest average priced products we produce.

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Asia

Asia net sales of $31.5 million in the first quarter of fiscal 2010 decreased by $14.2 million or 31% compared to the first quarter of fiscal 2009. Panel unit volumes decreased by 33% compared to the same quarter in the prior year, due primarily to the global economic recession. Efforts to improve our product mix through higher priced enhanced technology offerings from our Asia manufacturing operations over the past year resulted in a 3% increase in average unit pricing.

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 August 29, 2009			Fiscal Quarter Ended August 30, 2008
Communications & Networking	$	19,529	33.8%	$	38,776	42.8%
Automotive		12,773	22.1%		19,413	21.4%
Computing & Peripherals		4,039	7.0%		6,585	7.3%
Test, Industrial & Medical		8,274	14.3%		10,419	11.5%
Defense & Aerospace		7,157	12.4%		7,223	8.0%
Other		6,025	10.4%		8,211	9.0%
	$	57,797	100.0%	$	90,627	100.0%

As mentioned earlier, demand has been severely affected by the global economic slow-down, which has especially affected orders and revenue for products sold into the commercial and consumer end market segments. Overall market demand from the defense & aerospace market has not been affected to the same extent. Further, over the last 12 to 18 months the Company has specifically targeted key customers in the defense & aerospace market and made significant investments in its factories and support infrastructure to serve this market. As a result, defense & aerospace net sales have remained stable at $7.2 million in both the first quarter of fiscal 2010 and the first quarter of the prior year and are expected to show growth in the future.

The $6.6 million or 34% decrease in automotive net sales is due primarily to the substantial reduction in global automotive sales experienced over the past 12 months. We have, however, seen a meaningful improvement in demand from this segment since the middle of the first quarter of fiscal 2010. The improvement in demand is due in part to several national programs used to stimulate sales of automobiles in the U.S. and abroad.

The $19.2 million or 50% decrease in net sales to the communications & networking market is primarily due to the deterioration in global economic conditions and the related impact on end customer demand. We also experienced decreases in net sales to our smaller markets, including the computing & peripherals market ($2.5 million or 39%), the test, industrial & medical market ($2.1 million or 21%), and our other products end market ($2.2 million or 27%) primarily attributable to demand decreases resulting from the global recession. We have experienced demand increases in these broader customer segments in July and August 2009 and believe this is due in part to recent improvements in global economic conditions. These demand improvements will not substantially impact net sales until the second quarter of fiscal 2010.

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Net Sales by Geographic Region

Net sales to customers outside the United States totaled 53% and 38% of net sales in the first quarters of fiscal 2010 and fiscal 2009, respectively. In the first quarter of fiscal 2010, 14% of total net sales were made to customers in China. There were no other countries outside of the United States to which sales totaled 10% of net sales in the first quarters of fiscal 2010 and fiscal 2009.

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 $26.1 million, or 32%, to $54.3 million (93.9% of net sales) in the first quarter of fiscal 2010 compared to $80.4 million (88.7% of net sales) in the first quarter of fiscal 2009.

Our gross profit by segment was as follows (in thousands):

	Fiscal Quarter Ended August 29, 2009			Fiscal Quarter Ended August 30, 2008
North America	$	(771	)	$	5,164
Asia		4,285			5,110
	$	3,514		$	10,274

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

	Fiscal Quarter Ended August 29, 2009			Fiscal Quarter Ended August 30, 2008
North America		(2.9	)%		11.5	%
Asia		13.6	%		11.2	%
Consolidated		6.1	%		11.3	%

North America

Gross margin for our North American segment decreased to negative 2.9% of net sales in the first quarter of fiscal 2010 from 11.5% in the first quarter of fiscal 2009 primarily due to volume decreases in net sales as a result of the deterioration in global economic conditions and, to a lesser extent, a lower-technology product mix. Factory margins are heavily influenced by factory utilization rates because the cost structure needed to produce printed circuit boards is heavily weighted to fixed or step-variable costs. Our fixed cost levels have been mitigated over the past 12 months as a result of cost reduction programs that resulted in a decrease of approximately 32% in labor and other fixed costs in the first quarter of fiscal 2010 compared to the first quarter of the prior fiscal year. Despite these cost reductions, reduced variable contribution margins on lower production volumes resulted in lower gross margin.

Merix Asia

Gross margin for our Asia segment increased to 13.6% in the current quarter compared to 11.2% in the first quarter of fiscal 2009. The increase reflects the benefit of the cost containment actions and improved higher-technology product mix enabled by the expanded technology capabilities at our Huiyang, China facility, more than offsetting the impact of a decrease in net sales that resulted from the deterioration in the global economic conditions.

Engineering Costs

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

Engineering costs decreased $0.3 million, or 54%, to $0.3 million in the first quarter of fiscal 2010 compared to $0.6 million in the first quarter of fiscal 2009. The decrease is primarily due to decreased compensation expense resulting from reductions-in-force implemented over the past 12 months.

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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 $1.7 million, or 18%, to $8.0 million in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009. The decrease is primarily due to lower labor costs resulting from headcount reductions and salary and benefit curtailments, reduced commission expense on the lower revenue base and reduced overall expense levels due to aggressive cost management programs. Included in SG&A costs for the first quarter of fiscal 2010 was $0.7 million in legal costs primarily associated with the ongoing securities litigation, compared to $0.1 million in the first quarter of fiscal 2009.

Amortization of Identifiable Intangible Assets

Amortization of identifiable intangible assets was $0.5 million in the first quarter of fiscal 2010 and the first quarter of fiscal 2009, respectively. Our identifiable intangible assets balance at August 29, 2009 was $6.4 million and current amortization is approximately $0.5 million per quarter.

Severance and Restructuring Charges

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

	Fiscal Quarter Ended August 29, 2009		Fiscal Quarter Ended August 30, 2008
Severance charges	$	245	$	40
Hong Kong office closure charges		56		-
Legal and other restructuring charges		13		-
Impairment of fixed assets		642		-
Gain on sale of Merix Asia equipment		-		(567	)
	$	956	$	(527	)

In the first quarter of fiscal 2010, we recorded $0.1 million in restructuring costs related to the relocation of our Asia administrative offices from Hong Kong to the PRC, comprised of severance and relocation freight costs.

We also recorded $0.2 million in other severance charges during the first quarter of fiscal 2010 due to minor reductions-in-force in both North America and Asia in order to mitigate costs in response to ongoing softness in demand for our products.

We determined in the first quarter of fiscal 2010 that certain manufacturing equipment at our Forest Grove facility with a net book value of $0.6 million will be decommissioned. An impairment charge was recorded to write off the net book value of this equipment.

In the first quarter of fiscal 2009, we recorded approximately $40,000 in severance and related costs in connection with closure of the Hong Kong manufacturing facility as part of the actions to consolidate our Asian manufacturing operations at our lower-cost facilities in China and expand the facilities at our Huiyang plant to increase our manufacturing capacity in China, which was completed in the fourth quarter of fiscal 2008. Additionally, we recorded a gain of $0.6 million in the first quarter of fiscal 2009 related to the sale of equipment previously used at the Hong Kong facility.

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 12.6% in the first quarter of fiscal 2010 and negative 62.1% in the first quarter of fiscal 2009. The variance in effective tax rates is primarily due to the ratio of pre-tax foreign subsidiary pre-tax income to consolidated net loss.

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

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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, interest accrued on uncertain tax positions, foreign withholding taxes for which tax credits are not anticipated 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 August 29, 2009 consisted of $21.4 million of cash and cash equivalents and $38.1 million unused availability under our revolving bank credit agreement, described below. We also have an agreement with Industrial and Commercial Bank of China, Limited that provides for borrowings up to 36 million renminbi (approximately US$5.3 million) secured by the building and land lease rights at our Huiyang manufacturing facility. The borrowing limit under this agreement is expected to increase to 50 million renminbi (approximately US$7.3 million) upon perfection of the security interest in the building pending removal of a contractor’s lien currently in negotiation. At August 29, 2009, amounts outstanding under this China facility totaled $1.5 million. We expect our capital resources to be sufficient to fund operations and known capital requirements for at least one year from August 29, 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 base 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 and certain accounts receivable from foreign customers. 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 August 29, 2009, the unused borrowing base was $38.1 million, with an outstanding balance of $11.5 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 August 29, 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 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 August 29, 2009 was $44.2 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 forecast, we do not expect that Excess Availability will fall below $20.0 million for at least one year from August 29, 2009.

In the first quarter of fiscal 2010, cash and cash equivalents increased $5.2 million to $21.4 million as of August 29, 2009 from $16.1 million as of May 30, 2009 primarily as a result of $0.6 million provided by operations (as described in more detail below) and $5.0 million in net borrowings on our credit facilities. Additionally, as a result of the elimination of the one month reporting lag, the balance of cash and cash equivalents at May 30, 2009 was reduced by $1.4 million, which represents cash used primarily to fund working capital requirements for our Asia subsidiary in the month of May 2009 and is not reported in the statement of cash flows for the first quarter of fiscal 2009. The net increase in cash and cash equivalents at August 29, 2009 is $3.8 million compared to the balance of $17.6 million reported in our Annual Report on Form 10-K for fiscal 2009.

Cash provided by operating activities totaled $0.6 million. Cash totaling $1.2 million was consumed by net loss of $8.1 million, adjusted for $6.9 million in non-cash charges, primarily $5.8 million for depreciation and amortization. As discussed in more detail below, changes in working capital provided a net $1.8 million increase in cash from operations in the first quarter of fiscal 2010, primarily comprised of inflows of $1.0 million from reductions in accounts receivable and $2.7 million from increases in accounts payable and other liabilities, offset by a $1.5 million increase in other assets. 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.

Accounts receivable, net of allowances for bad debts, decreased $1.1 million to $42.2 million at August 29, 2009 from $43.3 million as of May 30, 2009 due to collection programs implemented to optimize cash management. Our days sales outstanding, calculated on a quarterly basis, was decreased to 66 days at August 29, 2009 from 67 days at May 30, 2009.

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Prepaid and other current assets increased $1.5 million to $6.9 million as of August 29, 2009 compared to $5.4 million as of May 30, 2009, primarily due to an increase of $1.2 million in value-added taxes (VAT) receivable from the PRC government for taxes paid to PRC local vendors for the purchase of materials. The timing of payments and refunds is heavily influenced by production levels and the PRC government’s variable schedule of providing VAT refund payments.

Accounts payable of $34.5 million at August 29, 2009 increased $1.1 million compared to $33.4 million due to the timing of purchases and payments. Other current liabilities of $14.5 million at August 29, 2009 increased by $1.4 million compared to $13.1 million at May 30, 2009, primarily due to the timing of employee pay dates compared to the fiscal period end and the timing of annual property tax payments.

Expenditures for property, plant and equipment of $0.4 million in the first quarter of fiscal 2010 primarily consisted of minor expenditures for improvements to our manufacturing equipment base. 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 2010 are currently estimated at approximately $5 million. Additional capital expenditures may be approved in fiscal 2010, but are dependent upon achievement of financial objectives.

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 June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets - An Amendment to Statement No. 140,” to simplify guidance for transfers of financial assets in SFAS No. 140. The guidance removes the concept of a qualified special purpose entity (QSPE), which will result in securitization and other asset-backed financing vehicles, to be evaluated for consolidation under SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 166 also expands legal isolation analysis, limits when a portion of a financial asset can be derecognized, and clarifies that an entity must consider all arrangements or agreements made contemporaneously with, or in contemplation of, a transfer when applying the derecognition criteria. SFAS No. 166 is effective for first annual reporting periods beginning after November 15, 2009, and is to be applied prospectively. We do not maintain any QSPEs and as such, the adoption of SFAS No. 166 is not expected to have a material impact on our consolidated financial position and results of operations.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which addresses the primary beneficiary (PB) assessment criteria for determining whether an entity is to consolidate a variable interest entity (VIE). An entity is considered the PB and shall consolidate a VIE if it meets both the following characteristics: (1) the power to direct the activities of the VIE that most significantly affects economic performance and (2) the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE. The statement also provides guidance in relation to the elimination of the QSPE concept from SFAS No. 166. This statement is effective for annual reporting periods beginning after November 15, 2009. We do not maintain any VIEs and as such, the adoption of SFAS No. 167 is not expected to have a material impact on our consolidated financial position and results of operations.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, A Replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles ,” to establish the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP in the United States (“the GAAP hierarchy”). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The impact of adopting SFAS No. 168 will not have a material impact on our consolidated financial condition or results of operations.

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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 30, 2009, which was filed with the Securities and Exchange Commission on July 30, 2009.

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 30, 2009, which was filed with the Securities and Exchange Commission on July 30, 2009.

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 “Controls and Procedures” portion of our quarterly report on Form 10-Q is our disclosure of the conclusions of our management, including our CEO and CFO, 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.

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation and under the supervision of our CEO and CFO, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our CEO and CFO concluded that as of the end of the period covered by the Form 10-Q, our disclosure controls and procedures were 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.

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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 business. Except as disclosed below, we believe 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 our 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 the 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. 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.

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 price 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.

Current conditions in the global economy and the major industry sectors that we serve may materially and adversely affect our business and results of operations.

Our business and operating results will continue to be affected by worldwide economic conditions and, in particular, conditions in the communications & networking, automotive, computing & peripherals, and test, industrial & medical, and defense & aerospace markets that we serve. As a result of slowing global economic growth, the credit market crisis, declining consumer and business confidence, increased unemployment, reduced levels of capital expenditures, fluctuating commodity prices, bankruptcies and other challenges currently affecting the global economy, our customers may experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing. As a result, existing or potential customers may delay or cancel plans to purchase products produced by our customers which would have a material adverse effect on us. Further, our vendors may be experiencing similar conditions, which may impact their ability to fulfill their obligations to us. Although the United States government and the governments of other countries have enacted, and may enact further, various economic stimulus programs, there can be no assurance as to the effectiveness of these programs, and with respect to future programs, the timing and effectiveness of such programs. Recent economic indicators and demand trends for our products indicate that the deterioration in global economic conditions may have reached a bottom. If there is significant further deterioration in the global economy or the economic recovery is delayed or protracted, our results of operations, financial position and cash flows could be materially adversely affected.

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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. Over the past year, 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 resulting in a significantly intensified downturn in demand for products incorporating PCBs, which in turn has adversely affected our results of operations.

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 & networking, computing & peripherals, test, industrial & medical, defense & 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 and highly fragmented. 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.

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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. In order to minimize reductions to net sales that could result from customer concerns about our financial health, we are actively engaging with our significant customers to allay their concerns. We have not had any major customer cease doing business with us as a result of concerns about our stability, although it is possible that orders have been reduced as customers seek to secure an alternate vendor of our products. 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.

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 the recording of restructuring charges such as severance, other exit costs, and asset impairments.

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

We have 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.

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 34% of our consolidated net sales during the first quarter of fiscal 2010. 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 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 44% of the consolidated net trade accounts receivable balance at August 29, 2009, individually ranging from approximately 5% to approximately 19%. 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

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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.

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 first quarter of fiscal 2010. 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. Net sales to the automotive market accounted for approximately 22% of our consolidated net sales in the first quarter of fiscal 2010 and 23% of our consolidated net trade accounts receivable at August 29, 2009. As a result, 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 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 bankruptcies and liquidity concerns of certain companies in the automotive supply chain could impact our future demand

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levels and the collectibility of 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.

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.

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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.

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 and professional personnel. We do not anticipate the loss of any of the personnel will have a material impact on our operations and have 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 generally experienced periods of 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.

If we do not align our manufacturing capacity with customer demand, we could experience difficulties meeting our customers’ expectations or, conversely, incur excess costs to maintain unneeded capacity.

In the latter half of the first quarter of fiscal 2010, we noted increasing demand for our products as customers began to rebuild inventory levels, which were severely curtailed in response to the deterioration in global economic conditions. If we fail to recruit, train and retain sufficient staff to meet customer demand, particularly in the PRC, we may experience extended lead times leading to the loss of customer orders. Conversely, if we restore manufacturing capacity and order levels do not remain stable or increase, our business, operating results and financial condition could be adversely impacted.

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.

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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.

Any one, or a combination, of these risks may have a material adverse effect on our business 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 (PRC) 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, investment and greater economic decentralization. However, the

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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. 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.

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.

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. For example, 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 through May 2008. 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. Any additional or extended power supply rationing could adversely affect our China operations.

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 completed efforts to significantly expand the Huiyang, China-based facility. This expansion 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;

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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 affect 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. If we are unable to effectively do so, our business and results of operations could be adversely affected.

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.

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 in our Huiyang and Huizhou plants, 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, which could in turn have a material adverse effect on our business, operating results and financial condition.

We lease land for all of our owned and leased manufacturing facilities in China from the Chinese government under land use rights agreements that may be terminated by the Chinese government.

We lease from the Chinese government, through land use rights agreements, the land where our Chinese manufacturing facilities are located. Although we believe our relationship with the Chinese government is sound, if the Chinese government decided to terminate our land use rights agreements, our assets could become impaired and our ability to meet our customers’ orders could be impacted. This could have a material adverse effect on our financial condition, operating results and cash flows.

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 operations in Asia.

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. We have renewed this lease in the past and in July 2009, the lessor indicated that it will extend the lease by one year, although no lease amendment has been finalized. 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. 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.

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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 August 29, 2009, we had advanced Asia approximately $3.5 million against the incremental investment limit. 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 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

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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.

As of August 29, 2009, we had total indebtedness of approximately $83 million, which represented approximately 57% of our total capitalization. We also have $38.1 million unused availability under a secured bank revolving line of credit that if utilized would increase our leverage.

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 August 29, 2009, there was $11.5 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. An impairment charge was recorded in fiscal 2009 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 determined that no further impairment charges are necessary as of August 29, 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 August 29, 2009, our consolidated balance sheet reflected $17.8 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.

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As a result of the implementation of a global 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. We completed implementation of the ERP system at our Asian operations during the first quarter of fiscal 2009. The 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. These systems are complex and we have not had extensive experience with them. Implementation of the 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 ERP 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 operation or effectiveness of our 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.

We have previously identified a material weakness in controls over financial reporting for our Merix Asia operations and determined that this material weakness was remediated as of May 30, 2009. 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.

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 the acquisitions of our San Jose, California and Asia facilities , 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

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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.

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.

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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 15 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. Further, a substantial number of shares of our common stock are reserved for issuance pursuant to stock options. As of May 30, 2009, we had approximately 2.6 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 $1.60 per share to $67.06 per share. Our shareholders will vote in October 2009 on a proposal to approve the availability of an additional three million shares to grant stock options or restricted stock awards and terminate additional grants from available shares under our existing equity compensation plans. Currently outstanding options, as well as any issued in the future, 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.

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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 2. Unregistered Sales of Equity Securities and Use of Proceeds

We repurchased the following shares of our common stock during the first quarter of fiscal 2010:

	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
May 31, 2009 to July 4, 2009		-	$	-		-		-
July 5, 2009 to August 1, 2009		3,875		1.14		-		-
August 2, 2009 to August 29, 2009		2,369		1.72		-		-
Total		6,244		1.36		-		-

Purchases during the first quarter of fiscal 2010 represented shares purchased by the Company from employees from which the proceeds are remitted to pay the employees’ withholding taxes due at the time the employees’ restricted stock awards vest under our equity-based compensation plans.

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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.

+ furnished herewith.

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: October 7, 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)

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